Actively Speaking Podcast
Steve Bleiberg, portfolio manager and thought leader at Epoch Investment Partners, Inc. (TD Epoch) takes on current topics and issues facing today's investor.
Actively Speaking Podcast
The Economics of Vaccines
From Big Pharma development to the boots on the ground efforts to eradicate polio, Epoch Research Analyst Jérôme Van Der Ghinst returns to Actively Speaking to provide insight into the economics behind vaccines. (October 23, 2020)
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Hello,
Speaker 2:And welcome to Actively Speaking. I'm your host, Steve Weiberg. Join us each episode as we discuss current issues concerning capital markets and portfolio management from the perspective of an active manager.
Speaker 1:Well, welcome back everybody to another episode of Actively Speaking Today. I'm, uh, joined by returning guests, Jerome Vander, who was here a number of months ago to talk about autonomous cars, but today we're gonna talk about a very different subject. We're gonna talk about vaccines. So, uh, welcome Jerome.
Speaker 3:Thanks very much, Steve. Very happy to be back.
Speaker 1:So, vaccines are obviously a topical subject right now because of Covid, the, the ongoing search for a Covid vaccine. And we are gonna talk about that a little later in the podcast. But, uh, we thought this would actually be a good opportunity to talk more broadly about vaccines and, and the business and the economic of vaccines. They kind of suffer from a stereotype of being a bad business, uh, one that is characterized by, you know, high capital intensity, a lot of investment required to come up with a vaccine, and then it's margin business. Uh, you're dealing mostly with government buyers, and so that, that is the stereotype of the vaccine business. But Jerome is going to challenge that and, and make a case for why vaccines are actually a good business for drug companies. But I thought it would be good to start with maybe a review of a quickly Yeah. Of certain the history of, of vaccines. We, we take them for granted. You know, people living today, I, I mean, I'm, you know, 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, I think today everybody really does take vaccines for granted, you know, to the, to the extent that we actually, you know, have people who, who challenge them, and they sort of don't realize what life was like without them. So, Jerome, can you, can you fill us in a bit on how we got to where we are today? When, when did vaccines first really, you know, come along? And, uh, like how many lives do we think have been saved over the centuries by vaccines?
Speaker 3:So, yes, thanks, Steve. Vaccines have been around for a very, very long time. Inoculation against Smallpox was practiced more than 2000 years ago in, uh, 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, uh, cowpox, uh, pu chills 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, uh, around a hundred thousand 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, as a source of national pride and prestige, but quickly be became essential to public health. Uh, if we moved to the 19 hundreds, there were two human viruses against smallpox and rabies, and three bacterial vaccines against typhoid, chole 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 the, after the success of the Smallpox program, uh, which resulted in the di disease being eradicated by 1979, a disease, by the way, that it killed an estimated 300 million people in the 20th century, that the Wolf Health Organization, uh, launched the, uh, E P I, which is the expanded program on immunization. And the initial goals of the E P I 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, and other, uh, vaccines that are continually being added to the E P I program in many countries. And then in 1999, we saw the Global Alliance for Vaccines and Immunization Gavi, which created to extend the reach of the E P I and to help some of the poorest countries introduce new and underused life-saving vaccines into their national programs. And today, uh, to bring it back to today, to do a very quick, uh, you know, 2000 plus year history, the World Health Organization reports that we have about, uh, 25, that vaccines are currently available for 25 preventable infections. In terms of your question about lives saved, I mean, it's tens of millions, you know, hundreds of millions potentially. And the, the World Health Organization estimates that immunization currently prevents two to 3 million deaths every, every year.
Speaker 1:That's very impressive. So, so where do we stand in terms of, are there, uh, other vaccines in development right now? Are there other, you mentioned the 25, you know, sort of vaccines that are out there for major diseases. Are there still some big diseases that, you know, scientists feel can be vaccinated against that they're working on?
Speaker 3: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 death, 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. So just on what we have alone, we have, you know, more room to go, certainly improving the vaccination programs, but in terms of comparable diseases, there's, uh, numerous, uh, vaccine opportunities that still exist. We have much yet to conquer. While significant work has been done over many years, uh, we've seen vaccines for malaria, tuberculosis, and h I v just remain elusive. Uh, we haven't been able to find vaccines for them, and these remain very, very serious public health challenges. There are also several new vaccine indications that provide opportunities, I won't go into them in much detail, but we've, they're important in, in rsv, C O P D, dengue, C M v, strep B, those are areas that are being, are being looked at, and clearly there's 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, you know, have the potential to open up a, a new, new range, uh, or a range of new target pathogens, I should say.
Speaker 1:Thanks for that. Uh, quick, yeah, as you say, 2000 year history of, of how we got here. So here we are today, we look around, uh, what does the landscape look like? Who, uh, how, how many companies are involved in, in the vaccine world? Who, who are the big players?
Speaker 3:Right. So the vaccine market today is estimated to be, uh, over 30 billion. And it's growing in the high single digits. There's several vaccine suppliers globally. Many are actually smaller players, uh, that are based in developing countries, and they primarily supply these vaccines locally. These are generally known as developing country vaccine manufacturers, or d cvms, uh, for short. So these d cvms actually have the majority of today's global volume share with more than 65% in each region, excluding the, 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 or players, namely, uh, gsk, Sanofi, Merck, and Pfizer, that account for 85% of the global valued share. And the global pharma oligopoly has really been built through significant market consolidation over time, and that's largely driven by manufacturing and, and supply chain complexities. So you have this bifurcation between the developing countries and the developed countries, and a different significant bifurcation between volume and and value. I think it's also important while they represent a, a small part of the value share, but in the very important part of the volume share that the DC VMs have a major role to play in the vaccines market. For example, the Serum Institute of India S II 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, uh, to ensure the adequate supply of the Indian market, and it was making effectively copies of, of well-known vaccines at huge discounts to the multinational corporations. However, S II is now expanding into more profitable regions via m and a. And, you know, it's worthy, it's, it's, 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, uh, major global farmer players that I mentioned, the, the Glaxo, Sanofi, Merck and Pfizer will remain, but it'll be important to monitor the competitive threat in the long term from the dcns.
Speaker 1:So, uh, I'm, I'm kind of curious, where does the actual development of vaccines take place? Is it those big four drug companies you mentioned that, that do the actual development work, or does it take place like government research labs and then they just turn to those four big companies to manufacture the vaccines once they've been developed?
Speaker 3:That's a great question. Uh, Steve, it's, it, 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, uh, significant development programs underway, you know, from, from start to finish, from, from the research all the way to the development and the manufacturing. But there are also a lot of public efforts, uh, across the board and grants that are made available for public institutions to, uh, given importance to public health. There are a lot of public efforts and, and also development efforts as well as research efforts that go into vaccine production.
Speaker 1:Okay. Let's turn to the, the economics. And I mentioned upfront that there's a stereotype that vaccines are, do not have great economics attached them. And, and I know that you wanna challenge that. So tell us why vaccines are, are a more attractive business than people believe.
Speaker 3:Right there, 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, 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, you know, perhaps because the underlying economics of the vaccine business are a bit obfuscated by some of the limited disclosures we have today as well. So when you look at and try to figure out the financials of these business, it's not as easy because they, 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 spend more time and look more closely to appreciate, I think that the vaccines business, uh, can be more attractive, uh, or certainly more attractive than, than investors per perceive them to be, and in some instances, maybe even more attractive than the traditional pharma business. I think it's important to remember, uh, as I mentioned previously, that the vaccine industry operates under a stable oligopoly. It has a appealing economics in a very strategically important healthcare. And let's unpack that maybe a little bit. So the vaccine business enjoys high barrier st largely because, well, it's highly capital intensive, so a lot of players, you know, are not so interested in coming in and putting in that much money. The incumbents have put, you know, 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, you know, 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. So across the board, you have a lot of things that, you know, make this not easy to begin with. And if we take just vaccines, you know, at phase dial, you, you know, 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 and low income countries relative to traditional pharma businesses. So I think the, the, the usual criticism is that, you know, gross margins for vaccine businesses are much lower relative to traditional pharma. That's absolutely true. In some instances it can be half, uh, the gross margin of traditional pharma. That's as, 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. So 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 businesses operating margins can be in line or in some instances even higher than the traditional pharma business. What's also, I think nice is that the, 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 Epic, 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.
Speaker 1:You make a a very interesting case. I, I think, uh, there's another angle on this that I think we should talk about, which is the, in the sense of economics, like you talk about the return on investment, you know, of something like the vaccine and you just referred to the public health benefits. And clearly from a, from a public health perspective, there's a huge return on investment to, to vaccines because, you know, the reduced child mortality and just increased health of the population. All of these are, are good things for their own sake, but obviously they also feed through to, you know, a healthier population just means, you know, better productivity, better economic growth, which lifts everyone's standard on living, all that kind of good stuff. What I find interesting about it is normally when you talk about, you know, roi, return on investment of a, of a company's business, you don't worry about if, if there's an attractive ROI to be had, you don't generally worry that a company is not going to take advantage of it. You know, they, they have every incentive to do it. Do you think incentives are in place for when, when you've got governments making the, the, the spending decision on, on a vaccine program, for example? Clearly there is a high roi, but you know, the people in government who are spending the money, uh, they're not necessarily gonna benefit the way that a corporate management say will benefit when a company does really well. You know, and, and do you see a difference between how that decision making gets done in, in developing versus developed countries to to spend government money on vaccines?
Speaker 3:Those are great questions. Uh, Steve, as, 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, a, a great Johns Hopkins, uh, 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 FU for immunization was 44 times the cost. Very difficult to challenge that. Um, even if you, you know, maybe quibble with some of the methodology and the numbers, it's a very high roi. But you're right, there's 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, a very strong push in, uh, developing countries. What's difficult is there's quite a bit of inertia in terms of vaccination and these, the ROI has been made evident. I think it'd be very hard for politicians to fight vaccination programs on, uh, a cost argument alone given the cost benefit analysis, which has, which has discussed, I really think it's 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, the very young, the elderly, you know, some, some of the individuals that, that, that may require it. But let's say for healthy individuals, uh, within certain, uh, age thresholds, you would not, I, I think that that could be something you could argue. I would say that, you know, the cost of a, a fairly old, uh, vaccine that you, you probably wouldn't save too much money, but you could make that argument. 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 benefits 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, you know, certain areas or maybe certain parts of the population that are more reluctant, but I do think that there's sufficient inertia and, and the cost benefit analysis is sufficiently clear that politicians don't need, you know, significant incentives, you know, beyond what exists today to make those decisions and have, you know, broad support for them and ensure that, you know, they<laugh> they stay in office, uh, maybe not long enough to see all the benefits, but that this is viewed as a, as an asset RA rather than a, a liability for their political, uh, aspirations.
Speaker 1:<laugh>. Let's hope So. Uh, okay, well, let's, let's turn now to covid, which is, you know, on everybody's mind these days for obviously, so we're recording this in in mid-October. We're, does the development process stand today as, as we're recording? Um, and two, two aspects of that in terms of, you know, how, how are we doing on developing a vaccine, but secondly, where do we stand in terms of the, do we have the supply chain in place once we find one that works? Uh, are we gonna have supply chain issues, uh, to, to get it manufactured in large enough amounts and distributed to where it needs to be quickly?
Speaker 3:Right? So this is obviously a very fluid situation and there's a, a very global dimension to all this. So 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, uh, development timelines, I mean usually, you know, vaccines take five to 10 years. Uh, we're, we're measuring the progress here in in months. I think we should still expect to see some of the front runners, which is Pfizer BioNTech, uh, 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. I think in terms of broader distribution of a Covid VI 19 vaccine that will occur in the first half of, of 2021, the supply chain is, is an area, you know, where a lot of people have initially, you know, were a little bit concerned, uh, rightly so, given the, 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 than 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, uh, I believe the supply chain is sufficient to cover those.
Speaker 1:So, so you mentioned the, you know, this compressed timeframe and, you know, it's understandable, people wanna rush this along and get something out there quickly, but there's real risks, there's downside risks to that, uh, aren't there? Well, let's talk about that.
Speaker 3:Right. So clearly the, uh, development and approval process has been compressed significantly. Uh, 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, uh, 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, uh, 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 that would be a material setback for public health on a global basis. I think that's the, that's the biggest potential downside. There could be clearly individual risks and issues occurring to patients that are being, uh, that are, have, have received the vaccine. But I think that the broader impact on vaccination program and a 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 safer efficacious, I think that would be a, a very big concern.
Speaker 1:Yes, yes, definitely fine balancing act there between, uh, speed and safety. One last question. So when, when we do get a vaccine, uh, it seems like demand is likely to far outstrips fly, uh, in the beginning. You know, so many people are gonna want it and we're not gonna have a, uh, it's not gonna be available immediately in massive quantities. So how do you see that playing out? Where do you think it's likely to, who's likely to end up getting it first?
Speaker 3:Right. So assuming we have, uh, limited doses available, usual protocols would be that those most at risk or in areas, uh, that are most at risk would receive the Covid 19 vaccine first. Uh, typically those, uh, most at risk are, you know, essential personnel that, you know, the, the doctors, first responders that are most likely to, to get exposed, uh, 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. So I would, 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.
Speaker 1:Hey, uh, I think we're wrapped up there. Uh, Jerome, thanks for joining me.
Speaker 3:Wonderful. It was a pleasure. Thanks very much, Steve.
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