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Analysis

Covid vaccine presents pharma with shot at redemption and profits

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In the early stages of the Covid-19 pandemic, there was a protracted silence as some of the world’s leading pharmaceutical companies reflected on a long and unprofitable history of responding to outbreaks of infectious disease. 

The first cases of coronavirus were identified in China in late December, reached the US on January 21 and Europe three days later. But it wasn’t until mid-March that some of the biggest pharma groups announced their intention to pursue a vaccine.

Pfizer and Merck were among those initially hesitant to get involved, according to Peter Hale, executive director of the Foundation for Vaccine Research in Washington, which regularly works with the industry’s biggest participants. Mr Hale described an atmosphere of “extreme reluctance” in the early weeks of the pandemic.

Faced with the need to develop a vaccine on an accelerated timeline, under immense public scrutiny and possibly at no profit, the road ahead looked fraught with risk.

Ten months later, 202 companies are developing inoculations, 47 products are in clinical trials, and the commercial benefits of what once seemed like a purely altruistic endeavour are clearer.

Pfizer ultimately announced it would work on a vaccine on April 9 in partnership with Mainz, Germany-based BioNTech — a collaboration that has gone on to great success. Shares in the two companies rose 7.7 per cent and 13.9 per respectively on Monday, on the news that their vaccine, using groundbreaking mRNA technology, had proved to be more than 90 per cent effective in clinical trials.

Staff member sets up an antibody production line at the Swiss facility where the Moderna vaccine will be produced © Denis Balibouse/Reuters

Pfizer declined to comment on its thinking in the early weeks of the pandemic but highlighted a statement in March from the company’s chief scientific officer when he called on pharma companies to work together to tackle the virus. Merck said it started to investigate potential antivirals in January, though it was not until late May that the company announced it was working on two vaccines.

While the commercial calculation to join the vaccine race was different for different companies, experts said two factors fundamentally heightened the allure after those early weeks: the sheer size of the pandemic and the unprecedented levels of public funding.

The market of the future

In previous viral outbreaks — such as Zika and Sars — the diseases retreated fairly rapidly, leaving corporations that had attempted to make a vaccine out of pocket.

“After companies had invested tens to hundreds of millions of dollars and had parked other high priority programs . . . they felt like brides left alone at the altar,” said Gary Nabel, who stepped down as chief scientific officer at Sanofi this month to form a new start-up.

In contrast, growing evidence in late January that Sars-Cov-2 could spread via person to person transmission, suggested a much bigger epidemic — and sales market — than previously suspected.

Many experts now believe that Covid-19 will become endemic and recur in the human population for years to come. It means that even for companies that have vowed not to make a profit during the pandemic, such as AstraZeneca and Johnson & Johnson, there may be a substantial market for vaccinations and booster shots from as early as mid-2021. Others, such as Pfizer and BioNTech, have not committed to a not-for-profit model during the pandemic, with analysts estimating $3.5bn in combined revenue for the two companies next year alone.

As a model for the potential Covid-19 market, analysts point to the influenza vaccine, with average global sales estimated at about $4bn-$5bn a year, shared largely between Sanofi, GlaxoSmithKline and Seqirus.

Geoffrey Porges, an analyst at SVB Leerink, projected there could be $9.56bn in global sales of Covid-19 vaccines in 2021, which would drop to $6.8bn by 2023. Although he conceded that any estimate of the endemic market at the moment was a “wild-ass guess” given that scientists do not know how long vaccine-generated immunity will last.

Breathtaking public investment

The second trigger was intense and unprecedented investments from public bodies, most notably the US government, which de-risked research and development, according to Mr Hale. “Hundreds of millions [of US dollars] were thrown at several of these companies in a way that took their breath away”.

To a lot of pharmaceutical companies, used to footing bills for high-risk investment in research, development and manufacturing, billions of dollars of government money was a game changer, he said.

AstraZeneca ($1.2bn), J&J ($1.5bn), Moderna ($2bn), Novavax ($1.6bn), Pfizer ($1.95bn) and Sanofi/GSK ($2bn) all received funding from the US government’s Operation Warp Speed, through both early stage investments and purchase agreements.

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David Mitchell, founder of Patients for Affordable Drugs, a US campaign group, said that for some companies, such as Boston-based biotech Moderna, the government seemed to be paying for everything. 

“That means anything over the cost of goods is pure gravy for these companies,” he said. “Their oft-made claim that they need to charge high prices because of the risks that are involved in developing new drugs is no longer valid.” 

“We’re socialising all the risk and privatising all the profit,” he added. Moderna did not respond to a request for comment.

Validating new vaccine technologies

For smaller pharma companies the pandemic has also offered a once in a lifetime opportunity to prove the viability of their technologies.

“The hardest thing for you to do as a scientist is to break into new vaccines with new technologies,” said Mr Nabel, the former Sanofi chief scientific officer. “There are unknown risks and late-stage failures so for the small companies, an opportunity to have a vaccine move forward with a lot of subsidies, with a quick path into the clinic, is huge.”

Moderna has a pipeline of other respiratory vaccines. If their Covid vaccine is successful — it uses similar mRNA technology to the BioNTech-Pfizer shot — it could unlock investment and regulatory approvals for other parts of their vaccine portfolio, analysts predict. Moderna’s share price rose 7.3 per cent on Monday after the BioNTech-Pfizer announcement.

Line chart of share prices (rebased) showing Biotech's developing mRNA vaccines have seen steep gains

US biotech Novavax, too, has everything to gain, according to SVP’s Mr Porges. Novavax had spent years attempting to develop vaccines for respiratory illnesses, with little success.

In 2019 the company was almost delisted from the Nasdaq stock exchange after it announced a second vaccine trial was unsuccessful in less than three years and its share price fell below $1. But its Covid-19 vaccine looks like it may be best in class on some of the key measures, according to results from monkey and early human tests, and its stock is back up above $85.

Dr Gregory Glenn, president of research and development at Novavax, admitted the company had been “in bad shape”, but said he believed the Covid-19 vaccine would validate much of the company’s other work.

Line chart of share price ($) showing Novavax's meteoric rise

A shot at redemption

For the bigger corporations, many of which have had their reputations tarnished by scandals involving issues such as drug pricing and unethical marketing, Covid-19 may also offer a shot at redemption.

“Helping to bring the world out of this is a fantastic opportunity for them to make a difference,” said Bruce Aylward, an epidemiologist working on Covid-19 at the World Health Organization. 

The pharmaceuticals industry was found to be the most poorly regarded sector in the US last year, according to a Gallup survey, below oil and gas and advertising. Now pharma companies are being discussed over dinner tables and water coolers around the world, associated with the biggest global drive to save humanity from a deadly disease.

Bruce Aylward: ‘Helping to bring the world out of this is a fantastic opportunity for [pharma] to make a difference” © Fabrice Coffrini/AFP /Getty

An overlooked safety problem in a fast-tracked vaccine that caused death or severe illness would be catastrophic for a manufacturer but extremely unlikely — no significant safety problems have been identified with any of the vaccine candidates to date. “Losing the race” and ending up with a marginally less effective vaccine than other manufacturers would still be net positive.

“I think they get credit for at least having a go,” said Mr Porges. “So long as they’re transparent and ethical, they’ll be given a pass.”

Additional reporting by Hannah Kuchler



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Analysis

Covid paralyses Asia as western economies prepare for blast-off

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Throughout 2020, Asia’s success in controlling Covid-19 made it the champion of the world economy. While Europe and the US were mired in deep recessions, much of Asia escaped with a shallower downturn or even kept growing.

But as western economies gear up for a vaccine-induced rebound which is set to take their output back to its pre-pandemic scale by the end of this year, parts of Asia are still paralysed by coronavirus. As a result, although the region’s output is already above its pre-pandemic level, slower growth is expected in the coming months.

As it launched its new regional outlook last week, the Asian Development Bank said that the region’s economies were diverging and that more Covid-19 waves were a big risk.

“New outbreaks continue, in part due to new variants, and many Asian economies face challenges in procuring and administering vaccines,” said Yasuyuki Sawada, the ADB’s chief economist.

The ADB projected growth of 5.6 per cent across developing Asian economies in 2021, led by growth of 8.1 per cent in China and 11 per cent in India. But the continued threat of coronavirus means risks to that outlook are skewed to the downside.

“Six months ago, or eight months ago, I would have said Asia is going to be ahead of the game because Asia can control Covid,” said Steve Cochrane, chief Apac economist at Moody’s Analytics in Singapore.

But the picture has changed, with India suffering a severe wave of the virus, and cases still high in countries such as Indonesia, the Philippines and Thailand. Thailand is unable to reopen its crucial tourist industry.

More subtly, countries such as Japan are only controlling the virus with restrictions that keep parts of the economy in hibernation. “Some countries need vaccines to control Covid,” said Cochrane. “Others need it so they can open up to international travel and tourism.”

The promise of more than 6 per cent growth in the US this year, as a result of President Joe Biden’s fiscal stimulus, would normally have Asian exporters licking their lips.

Line chart of GDP rebased (2019 = 100) showing Asian economies were less affected by the early stages of the pandemic

The outlook, however, is more subdued than record US growth would usually imply: Americans already bought plenty of goods during the pandemic, while higher US interest rates would mean tighter financial conditions in Asia.

“Adding stimulus at this stage, from the goods perspective, is a real test of whether wants are insatiable,” said Freya Beamish, chief Asia economist at Pantheon Macroeconomics. As the economy opens up, US consumers will probably pay for the services they were denied during lockdown — such as meals out and haircuts — rather than replacing their television again.

There will still be some spillover from the US stimulus, said Beamish, noting that service providers needed equipment, too. “We suspect that people will find new goods to buy and that Asia will benefit from that.” But she added: “We suspect that China will benefit proportionately less from the services recovery than from the manufacturing recovery.”

Whether the extra US demand for goods turns out to be large or small, it is clearly positive. By contrast, higher US interest rates and a stronger dollar would threaten many emerging Asian economies with a repeat of the 2013 “taper tantrum”.

Increased financial integration and foreign currency borrowing mean that the pain of rising US interest rates is quickly felt on the other side of the Pacific.

“A stronger dollar is no longer an unalloyed blessing for Asia,” said Frederic Neumann, co-head of Asia economics at HSBC in Hong Kong. “It helps exports but tightens financial conditions.”

However, inflation is subdued across most of emerging Asia, and the ADB said the risk of a US-induced shock to financial conditions “remains manageable at present”. It said economies such as Sri Lanka and Laos would be vulnerable if such a shock occurred.

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Some Asian economies are well-placed for the next few years, especially Taiwan and South Korea, which are exposed to the semiconductor cycle. “Judging from semiconductor shortages, it doesn’t look like the electronics cycle will break down in the next two or three quarters. That tides them over this rough patch,” said Neumann.

But other Asian economies will find themselves in the less familiar position of relying on domestic demand to grow. One of the biggest question marks is China itself, where first quarter numbers suggest the economy has lost a little momentum.

“Chinese domestic demand still has a way to go,” said Cochrane. “Our forecast right now is for 8 per cent growth in China in 2021, but it depends a lot on policymakers and how quickly they pull back on stimulus and introduce frictions in areas like construction.”



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Analysis

Has Venezuela’s economy bottomed out?

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After one of the biggest economic meltdowns in Latin American history, there are signs that Venezuela may finally be turning a corner.

According to some economists, the socialist government’s decisions to loosen currency controls, relax import restrictions and encourage informal dollarisation have breathed a modicum of life into an economy that has shrunk by about 75 per cent since 2013.

The change of government in the White House has also raised hopes that a solution might be found to the country’s long-running political stalemate, which might lead to an easing of US sanctions and in turn fuel a further rebound.

Credit Suisse recently predicted the Venezuelan economy would expand by 4 per cent this year, which would be its first year of growth since 2013. The bank acknowledged this was in part due to the resumption of economic activity after last year’s hit from the coronavirus pandemic, but this was “not the whole story”.

“The revival in domestic demand, which we have long been noting, is becoming more apparent in the data,” Alberto Rojas, the bank’s chief economist for Venezuela, wrote in a note to clients.

“The easing of controls and widespread use of foreign currencies in everyday transactions has rekindled economic activity — even if just slightly.”

Rojas forecasts further growth of 3 per cent in 2022. “In our view, the growth this year is not just a dead cat bounce,” he wrote.

In Caracas, people were sceptical that this amounted to any sort of meaningful recovery. According to the IMF, per capita gross domestic product in Venezuela has dropped a staggering 87 per cent over the past decade, from $12,200 a year in 2011 to $1,540 now. For the first time, the average Venezuelan is poorer than the average Haitian.

“When you’ve fallen so low, eventually you’re bound to see some sort of correction,” said Adán Celis, president of Venezuela’s manufacturers’ association Conindustria. “The government has introduced some anarchic measures of economic flexibility and that’s provided us with a little bit of oxygen but the structural problems remain.”

But a handful of other banks and consultancies also expect output to increase. Two Venezuelan consultancies, AGPV and Dinámica Venezuela, predict growth this year of 1.9 per cent and 2.3 per cent respectively.

UK-based Oxford Economics forecasts growth of 0.2 per cent this year followed by a jump of 13.1 per cent next year, although it stresses this recovery needs to be seen in context.

“This follows two years in a row [2019 and 2020] when GDP fell by a third or more,” said Marcos Casarin, OE’s chief Latin American economist. “Given the magnitude of the collapse seen since 2014, Venezuela could grow at double-digit rates for several years in a row and still not recover its pre-crisis GDP level.”

Column chart of GDP change (%) showing Venezuela's economy has been shrinking for years

For every economist predicting growth, there are plenty who say Venezuela will suffer more pain before things finally improve.

FocusEconomics, a provider of economic consensus forecasts, recently polled 21 banks and consultancies for their views on Venezuela. The consensus was for a fall in GDP of 3.1 per cent this year followed by a rebound of 2.7 per cent next year. The IMF predicts a contraction of 10 per cent this year and 5 per cent next.

The huge differences between forecasts reflect uncertainty over the consequences of the pandemic, the impact and timing of the rollout of Covid-19 vaccines and the future of the sanctions regime.

“The evolution of US sanctions under the Biden administration remains the key determinant of the outlook,” wrote Stephen Vogado, economist at FocusEconomics.

The sanctions prohibit Venezuela from selling oil to the US and make it difficult for it to export elsewhere, although the government has found ways to get round the measures. Venezuela’s oil exports have risen slightly in each of the past five months, hitting a 10-month high in March — although they are still feeble compared with historical highs.

While oil has been the mainstay of the Venezuelan economy for the past century, the country also used to produce cacao, coffee and rice in significant quantities. It boasted a textile industry and produced chemicals, cement, steel and aluminium. Most of those industries have been decimated in the past two decades of revolutionary socialist rule.

At an outlet selling car accessories in a petrol station in the Las Mercedes neighbourhood of Caracas, store manager Alfredo Barrera said informal dollarisation had brought some degree of price stability after years of hyperinflation.

“The economy has adapted to the country’s problems,” he said. “Right now, it’s fair to talk about relative stability in terms of the currency but we’re a long way from seeing real improvement.”

At La Alicantina, a bakery that has been in business for more than 30 years, manager Douglas Palencia said sales had been hit hard by the pandemic. The shop’s windows, usually full of cakes and pastries, were empty. “I don’t have great expectations for this year,” he said.



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Analysis

Sturgeon taps Scottish resentment over Johnson and Brexit

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Kenny Paton, the postman in Dumbarton, has been criss-crossing the west coast town near Glasgow, delivering flyers for all the parties contesting Scotland’s parliamentary elections this Thursday. But he is only listening to one.

For all the shortcomings of the Scottish National party’s 14 years in power, the recent turmoil surrounding its handling of sexual harassment claims against former leader Alex Salmond and the destructive nature of its cherished goal of breaking the 314 year union, the party is on course for victory once again.

That is in large part because the SNP, with first minister Nicola Sturgeon at its helm, has been speaking to the heart, tapping into the deep resentment many Scottish people feel at being ruled from Westminster by Conservatives whose leader Boris Johnson and policies, notably Brexit, they did not vote for.

Dumbarton, Scotland map

For some Scots, the economic arguments against independence — and these have only grown with the sharp deterioration in Scotland’s fiscal position since Brexit and the onset of the coronavirus pandemic — are no longer cutting through. 

“You can get into all the intricacies about the border and the currency but at the end of the day who do you want to run the country Boris Johnson or Nicola Sturgeon?” said Paton, who once supported Labour, but is now rooting for the SNP.

Nicola Sturgeon campaigns in Dumbarton © Jeff J Mitchell/AFP/Getty Images

If opinion polls in the run-up to Thursday’s vote are correct, the party is sure to remain the largest in the devolved Holyrood parliament and will possibly gain the slender majority it wants to continue pressing Westminster, for its second chance in seven years of winning independence in a referendum.

There is also the probability that with the Scottish Green party, and Salmond’s newly launched Alba party, the SNP will form part of a bigger block in favour of Scotland going its own way.

Chart tracking voting intention polls for the constituency vote in the Scottish Parliament election

But to get across the line to an SNP majority, Sturgeon may need to win marginals such as Dumbarton, where Jackie Baillie, the deputy leader of Scottish Labour and a popular constituency MSP is defending a majority of just 109, the most vulnerable in Scotland.

As well as her appeal to Scottish identity, Sturgeon has a number of other things in her favour. One is Labour’s weakness, and the perception that it could be long before the party Scotland once voted for en masse returns to power.

“I have been an advocate for Scottish independence since the Conservatives won a majority in Westminster. They do not reflect our views — Scotland is a progressive place,” said Ross Crawford, a 28-year-old IT consultant. “It will be a while before Labour can collect themselves — that’s what makes it so discouraging. It means yet more Conservative rule,” he said.

Labour’s Jackie Baillie in Dumbarton © Jeremy Sutton-Hibbert/FT

Most of all Sturgeon has Brexit and the indifference shown by first Theresa May, the former prime minister, and then Johnson to the majority in Scotland who voted to remain in the EU and who wanted to retain close relations.

“In 2019, the polls began consistently showing higher levels of support for the SNP. The rise occurs entirely among Remain voters,” said John Curtice, professor of politics at the University of Strathclyde. “Whatever the preferences of Boris Johnson, and Michael Gove [Cabinet Office minister], the brutal reality is that their pursuit of Brexit has undermined support for the union,” he said. 

Julie Reece: ‘We felt safe with her [Nicola Sturgeon] during Covid’ © Jeremy Sutton-Hibbert/FT

For most of last year backing for independence in Scotland polled at 50 per cent or higher when undecided voters are excluded. But while it has slipped back since then, support for Sturgeon in Dumbarton remains high. This has much to do with her more assured performance during the pandemic, which has helped the SNP avoid an awkward reckoning for its less than stellar longer term record in areas such as education and health. 

“We felt safe with her during Covid,” said Julie Reece, a bus company manager and former Labour supporter now backing the SNP.

Like many people strawpolled in the constituency, Reece was unfazed by Sturgeon’s alleged mishandling of sexual harassment claims against her former ally. “They have tried to make her a scapegoat for Alex Salmond’s affairs,” she said, adding, with a nod to how the first minister has brought women like her behind the SNP cause: “She has engaged women better — it switches you on that bit more,” she said.

But the stakes are high and the tightness of the contest is also galvanising Scots who support the union and are passionately against the rupture it would cause. This has led to unlikely alliances in Dumbarton, with some staunch supporters of the Conservative party even promising to vote tactically for Labour — a rare occurrence in UK politics.

Chart tracking voting intention polls for the regional vote in the Scottish Parliament election

“Anything that keeps the SNP out,” said Carl Vickers, who works at the Faslane naval base further up the Clyde estuary, where thousands of jobs could be lost if Scotland breaks away. The SNP opposes the use of Faslane to store the UK’s nuclear deterrent.

Vickers described himself as a Conservative by nature but said he would be voting for Baillie on the day.

“It’s all about stopping them [the SNP] getting another referendum,” said Trish Collins, a headhunter and Tory who was also planning to vote for the Labour candidate in the constituency vote, which the Conservatives have little chance of winning.

In Scotland, members of the parliament in Edinburgh are elected using a hybrid voting system: constituency representatives elected using the first past the post voting system while additional representatives are elected according to the proportion of votes a party secures in a region comprising several constituencies.

On the banks of the river Leven, Baillie herself remained defiant. “My seat on paper should go to the SNP but I am a seasoned campaigner so I am not stopping until polls are closed,” she said.

A pro-Scottish independence rally in Glasgow last Saturday © Jeremy Sutton-Hibbert/FT

“Our number one priority should be recovery and then we can argue about the constitution,” she added, warning that when Westminster pulls the plug on the job protection scheme, there could be a surge in unemployment.

“Brexit has been a mess,” said Baillie. “Leaving the UK could be 10 times worse.” 

That need to focus on recovering from the pandemic — the core of Labour’s campaign — does appear to have resonance, even among some SNP supporters. But for those already convinced about the risks involved in breaking up the UK union, the feelings were even more emphatic.

“We’d just got over one independence vote then Brexit was thrown at us. Now the SNP have got a good chance of coming out with a majority — the whole of Scottish politics is a joke,” said Bryan Burn, a wholesaler for fishing tackle.

He was speaking an hour south by car from Dumbarton in the relatively prosperous town of Ayr, where Conservative MSP and former farmer John Scott is defending another slender majority. A life-long Labour supporter, Burn was visibly distressed at the way things are headed. “If I were younger I would be looking to move elsewhere,” he said.

But Sturgeon is picking up votes in Ayr too.

“I like what she stands for. She’s great at what she does,” said Chris Hughes, a self-employed software engineer, who hoped an independent Scotland could rejoin Europe, and who along with his wife was voting SNP.

Scott, the Conservative incumbent who is defending a majority of just 700 votes, acknowledged that the odds were even. “It will be very, very close,” he said. “The independence issue has become an issue of the heart. Many people don’t take into account the grim realities it might hold for Scotland.”



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