COVID has been a huge and unpredictable shock to the world. In the United States alone, it has killed more people than the 1918 flu pandemic and the American Civil War. Losses of life and economic output would have been even greater without the rapid development of vaccines against the SARS-CoV2 virus. Timing was crucial, and new research by economists at the Federal Reserve Board of Governors estimates the substantial gains in lives saved and increased economic activity realized by “fast vaccinator” nations.

Small Pharma / Much criticism of the U.S. and global drug industries is targeted at the major drugmakers, often derisively called “Big Pharma.” Yet, the first two vaccines to receive approval for distribution in the United States were developed by startup firms that would be labeled “Small Pharma.” In both cases, the firms had been looking for opportunities to exploit novel mRNA technology, and their vaccines employ that innovation to induce immune system response to the spike-like feature of the virus.

BioNTech, based in Mainz, Germany, was started by husband-and-wife scientists Ugur Sahin and Ozlem Tureci, whose families migrated from Turkey to Germany. Once BioNTech had developed its vaccine, it partnered with pharmaceutical giant Pfizer to manufacture and distribute the medicine as well as manage the government approval process. Moderna, based in Cambridge, MA, was founded to commercialize the research of Harvard stem cell biologist Derrick Rossi. It partnered with the U.S. National Institute of Allergy and Infectious Diseases and the Biomedical Advanced Research and Development Authority to bring its vaccine to market. Neither firm had been profitable nor taken a product to market before the pandemic.

This technological response to COVID has been bottom-up, rather than top-down. The two startups were too obscure to borrow from banks or issue stock or bonds. They had to rely on venture capitalists for financing. Venture capital for BioNTech was provided by German brothers Thomas and Andreas Struengmann, and Moderna obtained funds from Noubar Afeyan, a Lebanese-born Canadian/​American investor. Their investments have yielded a tremendous return for humanity.

Populist threats / Populist forces have often decried the profits of successful drug innovator firms as excessive and have pushed policy proposals to curtail those profits.

One such push is being championed by the head of the World Health Organization, Tedros Adhanom Ghebreyesus, who has called for suspending the intellectual property rights of the COVID vaccine-makers in hopes of allocating more of the vaccines to low-income countries. Among the supporters of this idea are the governments of India and South Africa as well as President Joe Biden.

A different push is coming from a group of Democratic congressmen, including House Speaker Nancy Pelosi. They propose that the U.S. Government stipulate the price it will pay for pharmaceuticals for participants in government-operated health care programs, and if drugmakers decline that price then they would be subjected to heavy taxes.

A possible third push is the aggressive antitrust policy of Lina Khan, the new chair of the Federal Trade Commission, and others in the Biden administration. Khan has expressed her opposition to big and powerful firms such as Amazon, regardless of their benefit to consumers. It is an open question whether she would consider the arrangement between BioNTech and Pfizer to be an unlawful vertical monopoly.

Stifling innovation / A problem with these proposals is that they overlook the important incentive that potential high profits provide to a high-risk innovator industry. As already noted, neither BioNTech nor Moderna were profitable until their COVID vaccines reached the market. Industry observers have said that Moderna would not have attracted venture capital if the House drug pricing proposal had been U.S. law for the past decade.

If any of these proposals are implemented, the result would be less drug research and fewer innovations. (See “Why Are (Some) U.S. Drug Prices So High?” p. 18.) This would be especially costly today, as evolving viruses require changing vaccines. Recent research by Tomas Philipson, former chair of the President’s Council of Economic Advisers, finds medical innovation to be especially sensitive to profitability. Loss of medical innovation will result in more lives lost, more severe long-term health problems, and more forgone economic output. Blocking productive medical investments is myopic. Extracting profits from innovators today will result in avoidable deaths and suffering in the future.

Contributions of firms and governments / Pfizer/​BioNTech and Moderna are currently increasing their productive capacity. For instance, Pfizer and BioNTech have partnered with 13 companies — including industry heavyweights Merck, Novartis, and Sanofi — to produce and distribute their vaccine under license. Moderna likewise is partnering with Lonza, Catalent, Rovi, and others.

Scaling up production of such novel drugs is difficult. Europe’s Astra Zeneca and China’s Sinopharm and Sinovac experienced quality control issues when they ramped up production of their COVID vaccines. The Pfizer/​BioNTech vaccine must be stored at extremely cold temperatures, which places quality-control requirements not just on the drug’s manufacture but also its distribution. Diminishing innovator profits will not help overcome such challenges.

Other governments can provide incentives for research by opposing the Biden administration’s call to suspend drugmaker intellectual property rights. They can also contribute to an efficient global system of discovery, production, and distribution of vaccines by refraining from vaccine nationalism, including not restricting exports.

Incentives are important for all medical research. BioNTech was already studying how to use its mRNA technology to combat cancer when the pandemic arose. Punishing pharmaceutical companies after their impressive response to COVID would be especially short-sighted and costly in terms of future lives and economic prosperity.

Readings

  • “Antitrust and ‘Big Pharma,’ ” by Thomas Grennes. Regulation 44(2): 5–6 (Summer 2021).
  • “Issue Brief: The Evidence Base on the Impact of Price Controls,” by Tomas J. Philipson and Troy Durie. University of Chicago, September 14, 2021.
  • “What Did We Learn from 2 Billion Jabs? Early Cross-Country Evidence on the Effect of COVID-19 Vaccinations on Deaths, Mobility, and Economic Activity,” by Giuseppe Fiori and Matteo Iacoviello. FEDS Notes, September 1, 2021.