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It seems like many governments are in the Covid vaccine purchase business. Hardly a week goes by without purchase announcements ranging from 100M+ to several billion $.

UK 60M doses

US $1.5B

Canada millions of doses

Taking for example, Japan-to-pool-20bn-with-Europe-Canada-for-vaccine-buying-fund, this is what they state:

The purchasing program would negotiate with vaccine developers to secure supplies with upfront payments. Proponents of the proposal said it would support vaccine development by giving drugmakers assurance of demand for their product.

Assurance of demand??? With covid?

At this time no one has a proven Covid vaccine, so how are these deals structured?

Are they options to buy? Firm commitments? Contingent on success? Obviously, whoever first makes a fully functional vaccine will have a huge customer base, so the usual seller-side incentive of scoring a lead customer does not apply overmuch.

I can see many reasons to buy ahead of time, but not all of them obviously require these vast sums of money to be given to a corporate entity in advance. I assume only some of those sums are getting disbursed right away, but it seems like only the overall total agreement envelope makes the headlines.

  • support R&D. Are the funds required for R&D that high?

  • support testing. That's probably a better one, I could see large scale testing taking lots of resources.

  • prep the manufacturing pipeline. Another good one, since the vaccine numbers required are going to be so high. You want to be able to ramp that up, without needing the cash flow from selling the product. Or risking bankruptcy from a failed candidate. But would it not be better to structure that as funding a joint pooled manufacturing capability, at least by broad families of vaccine technology and then slotting in whatever vaccine works and is compatible?

  • secure priority treatment in advance. When company X has a working vaccine, everyone is going to want it right away. But what happens if you secure rights to a dud (90% of vaccine candidates fail)?

Not to mention that there have been concerns for a while that, if and when a vaccine shows up, rich nations will get first grab at it, leaving poorer nations behind.

DW has a round up article. Now, this actually touches a bit on what I am asking about, but doesn't really go into specifics.

"If we don't undertake 'at risk manufacturing,' then when the vaccine is successful in clinical trials, there will be a long delay (estimated to be almost a year) from the time of that clinical success to the scaling-up of production," a Gavi spokesperson told DW.

Now, I don't know how much Gavi is spending on that but sums like $1B on manufacturing seem high for pharmaceuticals. If this was semiconductor manufacturing, then yes, their fabs can cost that much.

How do taxpayers know that their money is being used in the most efficient fashion, rather than as either corporate welfare or as political gestures to show that "the government is doing something".

Note: I am NOT claiming this is corporate welfare, or that the funding is unjustified. At the level of economic pain, let alone deaths, that Covid is causing, multiple billions can be worthwhile spending.

But I am rather curious about what safeguards are being put in place when large $$$ contracts are being signed for unproven products.

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  • 1
    When you secure the rights to a "dud," you have wasted money. Fire engines are a waste of money while they park at the station, too, but when they go out you are glad you have spent the money.
    – o.m.
    Aug 23 '20 at 5:32
  • Odd choice of metaphor. Fire engines will work, but you may not get a fire. We have the virus, but the vaccine may not work. Aug 23 '20 at 14:01
  • Either way, it is spending money now in the hope/expectation that it will work, and save lots of grief later on.
    – o.m.
    Aug 23 '20 at 14:31
  • Why is it a "concern" that rich nations will get the vaccine first? Isn't that the point of being rich? And if the rich pay, and pay well, for early access, doesn't that fund further production?
    – jamesqf
    Aug 24 '20 at 3:45
  • You're quote says "upfront payments" and "assurance of demand". Options don't assure the full strike price will be paid so they are not assuring. Payment contingent upon success is not as assuring as upfront payment. If the intention is to create assurance then options and contingency do not help achieve the intention.
    – H2ONaCl
    Aug 24 '20 at 4:34
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Assurance of demand??? With covid?

What you're talking about is assurance that people will want a vaccine for COVID, which is indeed quite obvious.

But the article you quoted isn't talking about that. It's talking about assurances towards the drug manufacturer that people will buy the vaccines from them.
As a consumer, you don't quite care which manufacturer you buy the vaccine from, but the manufacturer definitely cares that you get it from them instead of their competitor.

No drug manufacturer is going to happily invest massive funds into something when there is significant risk of being overtaken or undercut by a competitor and effectively losing all of their investment without making anything back (or with huge losses).

That logic applies to every company involved in R&D, not just pharma. This is exactly why patents exist - to prevent being undercut by competitors, and therefore allowing your company to ensure that they can market the products they have invested in.

However, since patents require strict definition of the product you wish to patent, this doesn't really work for pharma. The cost is in the R&D, and a patent cannot be obtained before R&D has found the product that needs to be patented. You cannot patent "a COVID19 vaccine" itself, you need to patent a particular recipe, which means you already need to know the formula of the vaccine.

These guaranteed sales act as insurance for any company looking to invest in COVID vaccine development. If they know that they will sell at least 20bn$ in product, then they can more reliably invest a few billion in trying to develop that product.

In short: it lowers the financial risk taken by companies investing in R&D, which in turn incentivizes companies to actually research it, instead of playing it safe and not bothering to take risks. While the latter can make financial sense to the company, it's detrimental on a global human scale as the pandemic rages on.

At this time no one has a proven Covid vaccine, so how are these deals structured?

This is no different from pre-ordering video games well ahead of their release date. If you ignore the additional sales tactics like pre-order-exclusive content etc, both parties can benefit from a pre-order:

  • The manufacturer guarantees some of their sales, which means they have more budget available and can also infer how well their product will sell post-release. If the pre-order demand is massive, they can prepare for massive sales figures and possibly increase their manufacturing budget.
  • The consumer can be sure to receive the product on the day of release (note: for video games, this part has been nullified by digital distribution, which is exactly why other incentives like pre-order-exclusive DLC has been added into the mix)

The same logic incentives apply to a potential COVID vaccine:

  • Instead of having to scale up production with the profits from the first few sales, manufacturers will be able to scale up production for the first round of sales themselves, massively increasing their revenue and profits.
  • Countries and the people they represent can be guaranteed to receive the vaccine on the day of release.
  • Everyone benefits from scaling up production sooner. Companies increase revenue, and less people will die from the raging pandemic.

Especially for a pandemic that is killing over a thousand people a day, it's easy to see why quickly scaling up production and guaranteed early access are desirable for all involved parties.

How do taxpayers know that their money is being used in the most efficient fashion, rather than as either corporate welfare or as political gestures to show that "the government is doing something".

There is no direct proof of that. There is an assumption of good intent, and the ability to legally prosecute violations of that intent. That is what we generally refer to as "corruption", I'll leave the legal distinctions to the lawyers.

But there is no way to pre-emptively guarantee that any action the government takes is in fact done in good conscience, regardless of whether we're talking about COVID vaccines or anything else.

Due to the moral implications of securing future available vaccines and therefore cutting out others; there hasn't been much detail revealed about the specific contracts drawn up between manufacturers and their consumers (mostly governments, possibly wealthy others). I cannot find any details on this, other than speculations by media outlets and experts based on what is usually agreed upon.

But what happens if you secure rights to a dud (90% of vaccine candidates fail)?

This is why you need to make sure of what you're agreeing to buy when it doesn't exist yet. This is no different from e.g. paying a contractor before they've built your house, or paying a software developer before they've developed your software.

We can only assume that due diligence has been applied and that the consumers have made sure to stipulate the minimum requirements for the eventual final product they will receive.

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  • +1 But all vaccines are not created equal. Promising to buy $2B of what turns out to be the 3rd best vaccine, with say more side effects or less efficiency than the first two is a dicey proposition. There is no sign, to me, that 2B$ would be the upfront gamble for early-stage R&D - those costs ought to be salaries & some tech, not adding up to $2B. Large part of pharma sunk costs are at the approval stage and covid ought to be different there. Promises to reimburse for early stage expenses that don't pan out seems liable to remove much of the risk but still leaves the door open for profit Aug 24 '20 at 17:17
  • @ItalianPhilosophers4Monica: Sure, but this refers back to the "you need to make sure of what you're agreeing to buy when it doesn't exist yet" point I made. If it's a vaccine, by the acceptance criteria that you agreed upon with the manufacturer at the point of signing the deal, then it's a vaccine regardless of whether another company came up with an even better one. I can't sue my contractor for not building me the best house in the street. If he built me what I asked him to build, then he fulfilled his contract.
    – Flater
    Aug 24 '20 at 23:15
  • @ItalianPhilosophers4Monica: I also think you're somewhat underestimating the total cost of R&D (resources, equipment, researcher wages, sheer time pressure and overtime for COVID) and how many trials are held, including the R&D and trials of all the failed attempts, and then still the production cost, distribution, certification, .... No one just makes the right vaccin the first time. Trial and error gets results, but costs effort, and therefore money. I'm not saying pharma isn't prone to overpricing their products, but it's not a cheap development process either.
    – Flater
    Aug 24 '20 at 23:18

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