Steve Bleiberg:
Hello and welcome to Actively Speaking. I'm your host, Steve Bleiberg. Join us each episode as we discuss current issues concerning capital markets and portfolio management from the perspective of an active manager.
Steve Bleiberg:
Welcome back everybody to another episode Actively Speaking. Today, I'm joined by returning guest, Jérôme Van Der Ghinst who was here a number of months ago to talk about autonomous cars but today we're going to talk about a very different subject. We're going to talk about vaccines. Welcome Jérôme.
Jérôme Van Der Ghinst:
Thanks very much, Steve. Very happy to be back.
Steve Bleiberg:
Vaccines are obviously a topical subject right now because of COVID, the ongoing search for a COVID vaccine. And we are going to talk about that a little later in the podcast, but we thought this would actually be a good opportunity to talk more broadly about vaccines and the business, the economics of vaccines. They kind of suffer from a stereotype of being a bad business. One that is characterized by high capital intensity, a lot of investment required to come up with a vaccine and then it's a low margin business, you're dealing mostly with government buyers. And so that is the stereotype of the vaccine business. But Jérôme is going to challenge that and make a case for why vaccines are actually a good business for drug companies.
Steve Bleiberg:
But I thought it would be good to start with maybe a review, quickly, of sort of the history of vaccines. We take them for granted, people living today. I'm old enough to kind of have been young when polio vaccine was still relatively new and it was considered kind of a miracle. But I think today, everybody really does take vaccines for granted, to the extent that we actually have people who challenge them and they sort of don't realize what life was like without them. Jérôme, can you fill us in a bit on how we got to where we are today? When did vaccines first really come along? And how many lives do we think have been saved over the centuries by vaccines?
Jérôme Van Der Ghinst:
Yeah. Thanks, Steve. Vaccines have been around for a very, very long time. Inoculation against smallpox was practiced more than 2,000 years ago in both China and India, but really it's the British physician Edward Jenner that is generally credited with accelerating the modern concept of vaccination. In 1796, he used matter from cowpox pustules to inoculate patients against smallpox and did so successfully. The success of his discovery quickly spread across Europe and by 1801, his work had been translated into multiple languages and we had around a 100,000 people vaccinated. We started to see compulsory vaccination programs emerge in the mid 19th century in both Europe and North America. And initially I would say these were perceived as a source of national pride and prestige, but quickly became essential to public health.
Jérôme Van Der Ghinst:
If we move to the 1900s, there were two human viruses against smallpox and rabies and three bacterial vaccines against typhoid, cholera and the plague. And then during the 20th century, other vaccines were developed to protect against commonly fatal infections, such as pertussis, diptheria, tetanus, polio, measles and rubella, which we're quite familiar with. And really it was after the success of the smallpox program, which resulted in the disease being eradicated by 1979, a disease by the way, that had killed an estimated 300 million people in the 20th century, that the World Health Organization launched the EPI, which is the Expanded Program on Immunization. And the initial goals of the EPI were to ensure that every child received protection against six key childhood diseases, those were tuberculosis, polio, diptheria, pertussis, tetanus and measles, by the time they reached one year of age. And then by 1990, we saw really vaccinations were protecting more than 80% of the world's children from these six diseases and other vaccines that are continually being added to the EPI program in many countries.
Jérôme Van Der Ghinst:
And then in 1999, we saw the Global Alliance for Vaccines and Immunization, GAVI, was created to extend the reach of the EPI and to help some of the poorest countries introduce new and underused life saving vaccines into their national programs. And today, to bring it back to today, to do a very quick, 2,000 plus year history, the World Health Organization reports that vaccines are currently available for 25 preventable infections.
Jérôme Van Der Ghinst:
In terms of your question about lives saved. It's tens of millions, hundreds of millions potentially and the World Health Organization estimates that immunization currently prevents two to three million deaths every year.
Steve Bleiberg:
That's very impressive. Where do we stand in terms of, are there other vaccines in development right now? Are there other, you mentioned the 25 sort of vaccines that are out there for major diseases, are there still some big diseases that scientists feel can be vaccinated against that they're working on?
Jérôme Van Der Ghinst:
Absolutely. I think we've made significant progress across the board. You mentioned polio. We're near polio eradication globally. We've seen an 80% decline in measles deaths and most countries now have eliminated maternal and neonatal tetanus, but yet more than 1.5 million children still die each year due to a lack of vaccination. And about 30% of deaths from children under five are from vaccine preventable causes. Just on what we have alone, we have more room to go, certainly improving the vaccination programs. But in terms of conquerable diseases, there's numerous vaccine opportunities that still exist. We have much yet to conquer. While significant work has been done over many years, we've seen vaccines for malaria, tuberculosis and HIV just remain elusive. We haven't been able to find vaccines for them and these remain very, very serious public health challenges.
Jérôme Van Der Ghinst:
There are also several new vaccine indications that provide opportunities. I won't go into them in much detail, but they're important in RSV, COPD, dengue, CMV, strep B. Those are areas that are being looked at and clearly there are still potential improvements on some of the existing products, which will be incremental. And then there's importantly, the middle income countries and also some of the GAVI transitioning countries that will offer incremental opportunities as they continue to improve vaccination schedules and also new technologies. We've seen some of the mRNA vaccines, particularly related to COVID, have the potential to open up a range of new target pathogens, I should say.
Steve Bleiberg:
Thanks for that a quick, as you say, 2,000 year history of how we got here. Here we are today, we look around. What does the landscape look like? How many companies are involved in the vaccine world? Who are the big players?
Jérôme Van Der Ghinst:
Right. The vaccine market today is estimated to be over $30 billion and it's growing in the high single digits. There's several vaccines suppliers globally. Many are actually smaller players that are based in developing countries and they primarily supply these vaccines locally. These are generally known as developing country vaccine manufacturers or DCVMs for short. These DCVMs actually have the majority of today's global volume share with more than 65% in each region, excluding the EU. And they tend to offer vaccines at an average price that's nearly two thirds lower than the multinational corporations. Interestingly, and as a result, we have four major global pharma players, namely GSK, Sanofi, Merck and Pfizer, that account for 85% of the global value share. And the global pharma oligopoly has really been built through significant market consolidation over time and that's largely driven by manufacturing and supply chain complexities.
Jérôme Van Der Ghinst:
You have this bifurcation between the developing countries and the developed countries and a significant bifurcation between volume and value. I think it's also important while they represent a small part of the value share, but a very important part of the volume share, that the DCVMs have a major role to play in the vaccines market. For example, the Serum Institute of India, SII, is actually the world's largest manufacturer by number of doses produced and sold globally with more than one and a half billion doses. The company was actually established to ensure the adequate supply of the Indian market and it was making effectively copies of well known vaccines at huge discounts to the multinational corporations. However, SII is now expanding into more profitable regions via M and A, and it's worthy, it's certainly an important player to watch. I don't think this is an important competitive threat and I think that the stable oligopoly of the large major global pharma players that I mentioned, the Glaxo, Sanofi, Merck and Pfizer will remain, but it will be important to monitor the competitive threat in the longterm from the DCVMs.
Steve Bleiberg:
I'm kind of curious, where does the actual development of vaccines take place? Is it those big four drug companies you mentioned that the do the actual development work? Or does it take place in government research labs and then they just turn to those four big companies to manufacture the vaccines once they've been developed?
Jérôme Van Der Ghinst:
It's a great question, Steve. It really does take a village. I think it comes from a lot of different sources. You have both the private players and the large players that have significant development programs underway, from start to finish, from the research all the way through the development and the manufacturing, but there are also a lot of public efforts across the board and grants that are made available for public institutions to a given importance to public health. There are a lot of public efforts and also development efforts, as well as research efforts that go into vaccine production.
Steve Bleiberg:
Okay. Let's turn to the economics. And I mentioned upfront that there's a stereotype that vaccines do not have great economics attached to them. And I know that you want to challenge that. Tell us why vaccines are a more attractive business than people believe.
Jérôme Van Der Ghinst:
Right. There's a lingering perception I think among investors that vaccines are not an attractive business. And that's often due to some of the things you mentioned. The unappealing customer dynamics, you have governments or large healthcare organizations that negotiate pricing. You have lumpy contracts. The business has high capital intensity and lower margins. We've seen a lot of players exit the business because they have felt that it wasn't as attractive as traditional pharmaceuticals. I think some of it is also perhaps because the underlying economics of the vaccine business are a bit obfuscated by some of the limited disclosures we have today as well. When you look at and try to figure out the financials of these business, it's not as easy because they often reside as part of larger business segments within very, very large pharma companies. But I think we have enough data and understanding of the financials if you're willing to put more time and look more closely to appreciate, I think, that the vaccines business can be more attractive or certainly more attractive than investors perceive them to be. And in some instances, maybe even more attractive than the traditional pharma business.
Jérôme Van Der Ghinst:
I think it's important to remember, as I mentioned previously, that the vaccine industry operates under a stable oligopoly. It has appealing economics in a very strategically important healthcare area. And let's unpack that maybe a little bit. The vaccine business enjoys high barriers to entry largely because it's highly capital intensive. A lot of players are not so interested in coming in and putting in that much money. The incumbents have put significant money over the years and have remained in the business and through consolidation have gotten significant scale. I think the manufacturing is complex. The supply chain, if you look at both the procurement side, as well as the pricing side is complex. The technology involved is complex and the IP is complex. Across the board, you have a lot of things that make this not easy to begin with.
Jérôme Van Der Ghinst:
And if we take just vaccines at face value, these are complex biologics that are difficult to make, but they also don't have patent expirations and generally experience less regional pricing pressures. When you think about the dynamic between sort of the high and low income countries relative to traditional pharma businesses. I think the usual criticism is that gross margins for vaccine businesses are much lower relative to traditional pharma. That's absolutely true. In some instances it can be half the gross margin of traditional pharma. That's as I mentioned, largely due to the complex procurement and costly manufacturing process. The vaccines also don't require significant ongoing sales and marketing investments like traditional pharma products. When you walk down the P and L a little bit further and you go from gross margin to operating margins, you realize that the vaccine business' operating margins can be in line or in some instances, even higher than the traditional pharma business.
Jérôme Van Der Ghinst:
What's also, I think, nice is that the major global vaccine players have carved up the market in a way that they focus on their core areas of strength and expertise. And that has resulted in less direct competition among the existing players. I think also, as I mentioned, vaccines lack patent expirations and that with more limited competitive threats, results in much more predictable and durable cash flows, which given our investment philosophy here at Epoch, we find particularly attractive. Lastly, I would also note that the vaccines business provides very compelling ESG benefits due to the material health, public health contribution.
Steve Bleiberg:
You make a very interesting case. I think there's another angle on this that I think we should talk about, which is the, in the sense of quote, economics, you talk about the return on investment, of something like a vaccine and you just referred to the public health benefits, and clearly from a public health perspective, there's huge return on investment to vaccines because the reduced child mortality and just the increased health of the population, all of these are good things for their own sake, but obviously they also feed through to a healthier population. Just means better productivity, better economic growth, which lets everyone's standard of living, all that kind of good stuff.
Steve Bleiberg:
What I find interesting about it is normally when you talk about ROI, return on investment of a company's business, you don't worry about if there's an attractive ROI to be had, you don't generally be worried that a company is not going to take advantage of it. They have every incentive to do it. Do you think incentives are in place for when you've got governments making the spending decision on a vaccine program for example, clearly there is a high ROI, but the people in government who are spending the money, they're not necessarily going to benefit the way that corporate management say will benefit when a company does really well. And do you see a difference between how that decision making gets done in developing versus developed countries to spend government money on vaccine?
Jérôme Van Der Ghinst:
Those are great questions, Steve. As you noted, it's tough to argue with a significant ROI on vaccines, but just to put some numbers on it, there was a great Johns Hopkins study looking into vaccination programs in 94 low and middle income countries, which found that every dollar invested in vaccines over a decade is estimated to result in a return of 16 times the cost if you account for treatment costs, as well as productivity losses. If you expand that definition a bit more and you consider the broader economic and social benefits, the ROI for immunization was 44 times the cost. Very difficult to challenge that even if you maybe quibble with some of the methodology and the numbers, it's a very high ROI. But you're right, there always a question of incentive alignment. I think it's important to note that critical vaccination programs have existed for long periods of time in many developing countries and we're seeing a very strong push in developing countries.
Jérôme Van Der Ghinst:
What's difficult is there's quite a bit of inertia in terms of vaccination and the ROI has been made evident. I think it'd be very hard for politicians to fight vaccination programs on a cost argument alone, given the cost benefit analysis, which has discussed. I really think it depends on the disease and the required vaccination program. I think in some instances you could make that argument maybe for, let's say influenza, the flu, where you only would pay for the truly at risk population, the very young, the elderly, some of the individuals that may require it, but let's say for healthy individuals within certain age thresholds, you would not. I think that could be something you could argue. I would say that, the cost of a fairly old vaccine that you probably wouldn't save too much money, but you can make that argument.
Jérôme Van Der Ghinst:
However, I think it'd be very difficult for any politician to successfully argue not to pay for a pediatric vaccine because of the cost. Clearly there's always a cost benefit analysis for sure that needs to be made. But I think given that the benefit significantly exceed the cost, I think it's easier I think for there to be very strong support from constituents for vaccines. Clearly there's always certain areas or maybe certain parts of the population that are more reluctant, but I do think that there is sufficient inertia and the cost benefit analysis is sufficiently clear that politicians don't need significant incentives beyond what exists today to make those decisions and have broad support for them and ensure that they stay in office, maybe not long enough to see all the benefits, but that this is viewed as an asset rather than a liability for their political aspirations.
Steve Bleiberg:
Let's hope so. Okay. Well, let's turn now to COVID, which is on everybody's mind these days for obvious reasons. We're recording this in mid-October, where does the development process stand today as we're recording? And two aspects of that, in terms of how are we doing on developing a vaccine? But secondly, where do we stand in terms of do we have the supply chain in place once we find one that works? Are we going to have supply chain issues to get it manufactured in large enough amounts and distributed to where it needs to be quickly?
Jérôme Van Der Ghinst:
Right. This is obviously a very fluid situation and there's a very global dimension to all this. To keep things maybe somewhat simple, I will focus my comments here mainly on the US and the US market. While this has been clearly a highly unusual process due to significantly compressed development timelines. Usually vaccines take five to 10 years. We're measuring the progress here in months. I think we should still expect to see some of the front runners, which is Pfizer, BioNTech as well as Moderna, release clinical data in the next few weeks. And I think that will be the basis for approval of a COVID-19 vaccine under the FDA's recently updated emergency use authorization guidelines. Assuming that these vaccine candidates meet the FDA's safety and efficacy guidelines, we should see an approval on an emergency use basis prior to year end.
Jérôme Van Der Ghinst:
I think in terms of broader distribution of a COVID-19 vaccine, that will occur in the first half of 2021. The supply chain is an area where a lot of people have initially, we're a little bit concerned. Rightly so, given the number of doses that would be potentially required. I think in terms of the initial committed doses for the US market, the supply chain should be able to cover that. I think where we get into maybe more debate is if you start to think about much wider and broader immunization programs, then we sort of have to talk about the longer term supply chain dynamics. But in terms of the committed doses with the government, those should be, I believe the supply chain is sufficient to cover those.
Steve Bleiberg:
You mentioned this compressed timeframe and it's understandable, people want to rush this along and get something out there quickly, but there's real risks. There's downside risks to that, aren't there? Talk about that.
Jérôme Van Der Ghinst:
Right. Clearly the development and approval process has been compressed significantly. As a result, safety and efficacy hurdles have been lowered. I think unsurprisingly that carries incremental potential downside risks with it. I think the pharma industry leaders have made a clear commitment to providing a safe and efficacious vaccine. I think that commitment is genuine as the downside risks for the industry are simply too high, should they proceed without doing so. I think as we think about really rushing a COVID-19 vaccine that potentially would not be safe and or efficacious, I think could be a real issue. And the challenge here is that not only would it undermine vaccination for COVID-19, but it could undermine all vaccination programs.
Jérôme Van Der Ghinst:
That would be a material setback for public health on a global basis. I think that's the biggest potential downside. There could be clearly individual risks and issues occurring to patients that have received the vaccine. But I think that the broader impact on vaccination program and a loss of confidence in those programs as we've discussed, the contributions of vaccines to public health are enormous. If that were to be compromised because the COVID-19 vaccine doesn't prove to be safe or efficacious, I think that would be a very big concern.
Steve Bleiberg:
Yeah. Definitely. A fine balancing act there between speed and safety. One last question, so when we do get a vaccine, it seems like demand is likely too far outstrip supply in the beginning. We have so many people are going to want it and it's not going to be available immediately in massive quantities. How do you see that playing out? Where do you think who's likely to end up getting it first?
Jérôme Van Der Ghinst:
Right. Assuming we have a limited doses available, usual protocols would be that those most at risk or in areas that are most at risk would receive the COVID-19 vaccine first. Typically those most at risk are essential personnel, the doctors, first responders that are most likely to get exposed, among others obviously. I think one potential concern there is that if you provide those limited initial doses among others to essential workers and then safety signals emerge down the road, you do run the risk of undermining your ability to respond to the disease. I would always caution that as well, even in limited doses. And I say that because I suspect and this is my opinion, that we will not have very broad immunization programs until longer term safety data is available. And I think that's actually the prudent course of action at this point.
Steve Bleiberg:
Okay, I think we'll wrap it up there. Jérôme, thanks for joining me.
Jérôme Van Der Ghinst:
Wonderful. It was a pleasure. Thanks very much, Steve.
Steve Bleiberg:
And just a note to listeners. If you've been enjoying this and other podcasts we've done, please don't hesitate to give us a good review on whatever platform you're getting this podcast from and we will be back with another episode soon.
Steve Bleiberg:
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Speaker 3:
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