Lambert here: Too bad that’s not what Bill Gates wanted. Oh well, nevertheless…
By Michael Stolpe, Senior Economist at the Kiel Institute for the World Economy. Originally published at VoxEU.
To win the critical race between vaccines and mutations, the worldwide Covid-19 vaccination campaign must mobilise economies of scale. The most effective way to do so, this column argues, is to convert the existing Covid-19 Vaccines Global Access initiative into a more generously endowed global fund. Instead of merely obtaining the surplus vaccines of rich countries, and relying on unpredictable donations, the initiative should acquire the most promising vaccine patents and offer free production licenses to every qualified vaccine and generic drug manufacturer in the global South.
In the absence of public policy interventions, demand is constrained by the deadweight loss from the monopolistic pricing power that patents create where perfect price discrimination is unavailable, and by the divergence between susceptibles’ private willingness-to-pay and the social value of vaccinations.
The static deadweight loss leaves unprotected those susceptibles whose willingness-to-pay, while exceeding marginal costs, falls short of the vaccine’s monopoly price, which is set to equate marginal revenue to marginal costs. The combination of deadweight loss and large consumer surplus for many inframarginal vaccine buyers implies that even strictly enforced patents may not enable the developers of vaccines to appropriate more than 5% of their total value to society – and most likely far less – with inequality posing a major obstacle to appropriability (Stolpe 2021a). Continuing viral spread can cause further dynamic welfare losses, especially when vaccine-resistant mutations emerge.
Private and social valuations also diverge as inoculations reduce the probability of virus transmissions, severe illness, and hospitalisations; release healthcare resources for non-Covid patients; and help end the need for lockdowns. Taking these external benefits into account, a benevolent government derives its willingness-to-pay from the value of statistical lives that a population-wide vaccination campaign would save; for an alternative and potentially more comprehensive asset-pricing approach, see Acharya et al. (2021). The government would then seek to negotiate volume rebates from vaccine makers and offer vaccinations for free.
Many countries in the global South, however, have difficulties implementing population-wide free vaccinations. What then happens – in the absence of equal access – is explained by economic models of epidemiology (Geoffard and Philipson 1996): the rich have private incentives to protect themselves and often neglect the poor.
This is the core of a global problem: equal access exists neither within nor across countries. International price differentiation can facilitate more equal access, and the WTO agreement on Trade-related Intellectual Property Rights (TRIPS) outlaws parallel trade – i.e. the reimporting of patented goods – thus enabling vaccine makers to supply poor countries at lower prices without undermining their price-setting power and profits in rich countries. For example, the BioNTech/Pfizer vaccine has reportedly been sold at €19.50 per jab to the EU (Kollewe 2021) and at ca. €6 to African countries (Oxfam 2021), approximately six times the estimated €1 marginal production costs according to Kis and Rizvi (2021). This form of third-degree price discrimination, reflecting countries’ different average incomes, is in principle compatible with global profit maximisation, but is far from sufficient to address the large inequalities that exist within many poor countries (Stolpe 2021a).
In its laudable drive for equal access, the Covid-19 Vaccines Global Access initiative (COVAX) has been hampered from the start by the existence of rich countries’ advance purchase commitments: intended to incentivise speedy vaccine development and preparation of mass production in 2020, they effectively created a queue. COVAX was pushed to the end of that queue when rich countries pre-ordered volumes of vaccines that vastly exceeded their own needs. Moreover, contracting on deliveries instead of production capacities allowed vaccine makers to underinvest in capacity and de facto incentivised them to delay deliveries (as predicted in Castillo at al. 2020), thus exacerbating international rivalries in procurement, driving up prices, and giving the virus more time to spread.
To make vaccination a worldwide success, COVAX must be redesigned: instead of acquiring vaccines, COVAX must buy out the patents for the most promising vaccines. Geoffard (2020) called on the EU to go alone, but COVAX is the more appropriate institution for global patent buyouts. COVAX can then make production licenses freely available to all technically qualified vaccine and generic drug producers in the countries of the global South. This will intensify competition in the production of each vaccine and help create truly global supply chains with trade in specialised inputs, thereby accelerating the expansion of vaccine supply. To improve incentives even further, COVAX could offer countries financial rewards for successful vaccination campaigns, conditional on surpassing predetermined population-immunity targets by some set date.
Pricing Vaccine Patent Buyouts
To be sustainable, patent buyouts must offer a price that induces patent holders to sell voluntarily, but not so high a price that COVAX stakeholders could perceive it as wasteful. To reward and incentivise the right kind of innovation, the price should be linked to the social value of vaccinations. One way would be for COVAX to buy patents in exchange for regular payments that are linked to average consumer surplus multiplied by the number of vaccine doses administered worldwide after the buyout. As an added benefit, this would create incentives for know-how transfers from vaccine developers to makers anywhere, so long as such transfers help vaccinations succeed.
However, such a payment scheme would not necessarily help ex ante to identify and select the most promising types of vaccines in terms of scalability in manufacturing, ease of distribution in resource-poor settings, and duration of induced immunity. Vaccines launched at various points in time and those still under development may be difficult to compare, inter alia because clinical studies based on randomised controlled trials would have been conducted in different populations and at different stages of a pandemic in which the relative prevalence of mutations has varied greatly.
For efficient use of decentralised information in identifying the most promising vaccines, COVAX should host auctions for a range of vaccines preselected to meet certain obvious quality standards, such as minimum effectiveness in preventing hospitalisations and death, and maximum risk of adverse side-effects. A sealed-bid second-price auction, described in Kremer (1998) and Stolpe (2003), could then be used to elicit private bids for vaccine patents, say from competing pharmaceutical companies, on which COVAX would offer to pay a mark-up just high enough to ensure patent holders sell voluntarily.
The auction scheme should be adapted to deal with substitute patents, such as product patents for alternative vaccine technologies, and complementary patents for production processes that need to be bought out jointly with the product patent (as explained in Kremer 1998). In addition to combining product and process patents, the auction should also be designed to include contracts for the transfer of the technical and managerial know-how required to quickly set up vaccine production at an efficient scale.
A further issue to address is that of patent holders’ potentially high opportunity costs of selling patents for processes that may be needed not only to make vaccines, but also for other – perhaps even more profitable – products, such as the expected breakthrough cancer treatments for which mRNA technologies were first developed. Many industry experts hope mRNA technologies will become a new kind of general-purpose technology for the pharmaceutical industry, with beneficial applications across a wide range of diseases.
The owners of these process patents might be reluctant to sell them at prices COVAX derives solely from the valuation of vaccines against Covid-19 when much larger profits loom elsewhere. These opportunity costs might drive up the prices COVAX would have to pay in patent buyouts. To limit them, the packages to be auctioned should not include the process patents as a whole, but only licenses that limit permissible use to vaccine production. This would leave untouched the developers’ patented rights to other applications of their technology, such as cancer treatments. These rights might subsequently be included in separate buyout schemes not financed by COVAX.
Finally, to incentivise further vaccine innovations that may be required against escape mutations, COVAX should commit itself to maintaining target levels of vaccine effectiveness over time, and to hosting auctions for any new vaccines that offer the required effectiveness against mutations should they push the effectiveness of existing vaccines below a preannounced threshold. In addition, COVAX should promise to use future auctions for any new vaccines that demonstrate substantial predefined improvements in other relevant criteria, such as the duration of vaccine-induced immunity.
At this critical time in the pandemic, patent buyouts offer the best opportunity to bring the most effective vaccines to all countries, achieve high and sustainable levels of population immunity, and win the race against SARS-CoV-2 mutations. Unlike patent waivers, buyouts need not impair private incentives for further innovation, but might even improve them – including incentives for vaccine upgrades that counter escape mutations. Unlike waivers or other forms of compulsory licensing, buyouts can be designed to incentivise voluntary transfers of relevant tacit knowledge, such as technical and managerial know-how. The valuation of patents in buyout auctions will increase when contracts for such transfers are included.
Unlike decentralised bilateral licensing, patent buyouts hosted by COVAX will break the price setting power of private vaccine monopolies worldwide, boost global competition in the production of each vaccine, and bring down prices to the often lower marginal manufacturing costs in poorer countries. Finally, patent buyouts will improve private incentives for developing vaccines that are optimised for or easily adaptable to the conditions in resource-poor countries. In this vein, they will also improve incentives for clinical trials performed in poor countries and designed to study a vaccine’s robustness against mutations.
According to the IMF (as cited in Stolpe 2021 b), 40% of the boost to global economic growth from successful worldwide inoculation, estimated at $9 trillion, will flow to rich countries (see also Çakmaklı et al. 2021). Much greater financial support for COVAX and political support for vaccine patent buyouts would therefore be in rich countries’ best interest.