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What Does Pharma’s Quest For A COVID-19 Vaccine Mean For Its Credit Quality And ESG Profile?

The COVID-19 pandemic has placed much of the hope of returning back to normal on the pharmaceutical industry to develop effective treatments and vaccines. In S&P Global Ratings' opinion, innovation is the key to sustaining a successful pharmaceutical company. Several pharmaceutical companies have rapidly responded and are using cutting-edge technology to develop vaccines or effective treatments and are testing new drugs at an unprecedented speed. We have already seen vaccines being tested in humans less than six months after the worldwide spread of the COVID-19 virus.

ESG (environmental, social, and governance) factors are considerations in our analysis, including a company's pricing decisions and reputation with stakeholders such as legislators, patients, doctors, payors, and employees, which we categorize as social factors.  The effort to develop a vaccine gives pharmaceutical companies an opportunity to improve the image of the industry that is increasingly being criticized in the U.S. for aggressive pricing tactics. We believe that the reputation of the industry and a supportive regulatory environment is likely to hinge on not only the development of effective and safe treatments, but also on their pricing and accessibility.

S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The consensus among health experts is that the pandemic may now be at, or near, its peak in some regions but will remain a threat until a vaccine or effective treatment is widely available, which may not occur until the second half of 2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

The Vaccine "Race" May Have Multiple Winners

Although frequently portrayed as a race, pharmaceutical manufacturers' rush to develop a COVID-19 vaccine may ultimately produce more than one winner. Operation Warp Speed, a White House initiative, aims to fast-track the development and production of a vaccine in the U.S. through funding and access to government-secured manufacturing capacity and supplies. The finalists for Operation Warp Speed are purported to include AstraZeneca PLC, Johnson & Johnson, Merck & Co. Inc., Moderna Inc., Novavax Inc., Pfizer Inc., and Vaxart Inc., and all have a shot of emerging with vaccines on the market. Outside of these finalists, several strong contenders could ultimately prevail, including Sanofi and GlaxoSmithKline PLC, makers of 13 of the top 20 revenue-generating vaccines in 2019, as well as upstarts with little or no track record, including Germany-based (and now partially German state-owned) CureVac AG, and Inovio Pharmaceuticals Inc. Still, Chinese producers, led by CanSino Biologics Inc. and SinovacBiotech Ltd., may ultimately be first to develop and mass-produce a successful vaccine.

Table 1

Summary Of Vaccine Candidates
Company Vaccine type Current status Government partnerships
AstraZeneca PLC*/University of Oxford Non-replicating viral vector Entering Phase III About $80 million U.K.; up to $1.2 billion U.S. BARDA; up to $383 million CEPI; up to $367 million Gavi.
CanSino Biologics Non-replicating viral vector Entering Phase III Fast-tracked in China; collaborating with People’s Liberation Army.
CureVac mRNA Phase I German government 23% equity stake.
Inovio DNA Phase I $17 million CEPI; $71 million U.S. DoD to bolster Cellectra 3PSP device.

Johnson & Johnson*

Non-replicating viral vector Phase I to begin in July Over $450 million pledged from U.S.

Merck & Co. Inc.*

Replicating viral vector Entering Phase I in July (Themis) Phase 1 late 2020 (IAVI) $38 million from U.S. BARDA (to Merck for IAVI); $4.9 million CEPI (to Themis).
Moderna* mRNA Phase III to begin in July Up to $483 million U.S. BARDA; undisclosed CEPI.
Novavax* Protein-based Phase I/II Up to $60 million U.S. DoD; $1.6 billion from U.S. Operation Warp Speed; $384 million CEPI.

Pfizer Inc.*/BioNTech

mRNA Phase I/II No external funding.

GlaxoSmithKline PLC/Sanofi

Protein-based Phase I/II September 2020 $30 million U.S. BARDA.
Sinovac Whole-virus vaccine Phase II complete Fast-tracked in China.
Vaxart* Non-replicating viral vector Phase I trials to begin as early as summer 2020
*Operation Warp Speed finalist. Sources: S&P Global Ratings and company data.

We note that several different technologies are behind the vaccines being developed, and these technologies have varying track records of success. The technologies currently in development are messenger RNA (mRNA), DNA, protein-based, replicating viral vectors, non-replicating viral vectors, and whole-virus vaccines (see table 2).

Table 2

Summary Of Vaccine Type Advantages And Disadvantages
Type of vaccine Mechanism of action Advantages Disadvantages Company
Whole-virus vaccines Use an inactivated version of the novel coronavirus to generate an immune response More robust immune response, potential for single dose Could pose risks to immunocompromised individuals Sinovac
Viral vectors vaccines Use weakened versions of other viruses to generate immune responses More robust immune response, potential for single dose Could pose risks to immunocompromised individuals & may be ineffective for those immune to the viral vector; will likely require multiple doses as all currently disclosed clinical trial plans are for multiple doses CanSino Biologics, Johnson & Johnson, University of Oxford, AstraZeneca, Merck, Vaxart
Messenger RNA vaccines Encode genetic instructions in mRNA to produce specific coronavirus spike proteins, and deliver these instructions through a lipid nanoparticle Safer as not produced from weakened versions of a virus Questions about how long would immunity last; multiple dosage BioNTech, Pfizer, CureVac, Moderna
DNA vaccines Use electroporation to open pores in cells, allowing DNA molecules to program cells to produce coronavirus proteins. Safer as not produced from weakend versions of a virus Questions about how long would immunity last; multiple dosage Inovio
Protein-based vaccines Deliver an extracted coronavirus-derived protein (produced in insect cell lines) alongside an adjuvant to help boost the immune response Safer as not produced from weakened versions of a virus; potential for single dose Questions about how long would immunity last; will likely require multiples doses Novavax, Sanofi, GSK
Sources: S&P Global Ratings and company data.

The efficacy of the vaccines on the market may matter tremendously in terms of the health of both people and the economy. Given the combination of the overwhelming need for a vaccine and the accelerated clinical trial timeline, a lower bar for efficacy may be adopted to allow vaccines to be approved early, potentially with a bar as low as providing 50% protection over at least six months. While that level of immunity would likely ease the strain on health care workers, a higher bar of 70% efficacy with duration of at least a year would be more likely to produce herd immunity and allow economic activity to resume at a more normalized level. This is before any consideration of likely vaccination rates, which may fall below optimal levels because some individuals fail to vaccinate.

A vaccine may take longer than expected to produce and distribute

Vaccine-makers have faced many hurdles over the years. Vaccines can regularly take over 10 years to develop. While vaccines that enter human trials have a likelihood of approval of around 16%--much higher than those of other drug candidates--roughly five out of six fail. Some data suggests vaccine success rates have been even lower in recent years. However, historically, by Phase III, three out of four vaccine candidates are likely to be approved. We believe the accelerated Phase I and II trials, and the experimental nature of some of the technologies may result in lower rate of success for the COVID-19 vaccines.

Once a COVID-19 vaccine is approved, its distribution will begin almost immediately. Several manufacturers have expanded their manufacturing capacity and have plans to begin producing coronavirus vaccines before they are even approved. For example, the Serum Institute of India plans to produce at least 4 to 5 million doses per month of the AstraZeneca/Oxford vaccine while it is still in clinical trials. While the pharmaceutical giants will likely have an advantage in producing at a large scale, U.S. government assistance through Operation Warp Speed can help smaller biotech companies achieve scale if they are first to market. The majority of leading vaccine candidates will require more than one dose, with approximately four weeks between doses, meaning that the number of people vaccinated will likely be around half of the number of doses administered.

Notwithstanding these arrangements, executives from Merck & Co. and Moderna point out that sourcing raw materials and assembling skilled labor forces to produce vaccines at necessary volumes may prove exceedingly difficult. For example, a vaccine manufacturer would also have to coordinate with other health care manufacturers (for example, Becton Dickinson for syringes) and distributors to get a vaccine out.

Alternative methods of production and distribution are being explored. New vial technologies and cold storage capabilities are likely to increase to meet vaccine demand. The Vaxart oral tablet is likely to be the only vaccine candidate that can be stored at room temperature, which could greatly ease the logistical challenges of providing the vaccine to areas with underdeveloped infrastructure. Altogether, according to Reuters, producing enough vaccine to end the pandemic will be the biggest medical manufacturing feat in history.

The ESG Benefits To Pharma From Ending The Pandemic

Social factors are prevalent in our credit analysis on health care companies because most health care companies are either providing a service to the community or a product to treat a human ailment. While many of these treatments, products, and drugs greatly benefit society, they can also be costly to stakeholders such as the government or taxpayers, commercial payors, and consumers. The public debate focuses on the accessibility and affordability of medicines and these issues have constrained the pharmaceutical industry's social license to operate, including increasing calls for drug price reform in the U.S. (which is the most profitable global market).

A successful vaccine could burnish the pharma industry's reputation

Notwithstanding certain risks, the economic and societal benefit of a COVID-19 vaccine would be enormous. This could improve the industry's reputation and beyond the direct benefit of saving people's lives, include some indirect benefits. Communities could go back to normal, economies could recover more quickly, and jobs would be created.

It is estimated that it costs about $2 billion to bring a vaccine to market. GlaxoSmithKline said it had spent a similar amount to develop the avian H5N1 flu vaccine, which, incidentally, it was able to make available in a little over 12 months. Building up sufficient manufacturing and distribution infrastructure form a substantial part of the cost estimate.

The pharmaceutical manufacturers involved in a COVID-19 vaccine have not disclosed how much they are spending on the effort. Many companies are receiving government contributions. One exception is Pfizer, which is not getting any external funding. Although it is unclear how much they are spending on their own, it is likely many are self-funding a portion of the cost. Also, there is not much direct profit motive for these companies, so being part of the vaccine effort would rather strengthen a company's position in vaccine development, and enhance both the reputation of the company and the industry.

In our opinion, the race for a vaccine has already improved the biopharma industry's reputation and many companies are committed to making a vaccine affordable, but they need to proceed with caution. Even if a vaccine is affordable, treatments for COVID-19 may carry a level of profit that seem high to the public. When Gilead Science Inc. announced its price for remdesivir in developed countries, this drew some criticism to the company and the industry.

As with any medicine, vaccines have safety risks like unexpected immune side effects. The known side effects of existing vaccines for other ailments are probably worth the risk for most populations, except possibly children, given the alternative of a COVID-19 infection. However, some of the technologies that are being used to develop a COVID-19 vaccine have not been approved for use before, clinical trials are being accelerated, and efficacy could be relatively low, at first.

Access will also be an issue in the early stages. Questions have arisen over who and which country or countries will get access to the first batches. Many governments—including the U.S., the U.K., the EU, and China--are investing in vaccine development. The Coalition for Epidemic Preparedness Innovations (CEPI), a foundation supported by several countries as well as other donors and whose mission is to enable equitable access of vaccines in developing countries, has provided funding to several programs. These national government investment programs raises the issue of "vaccine nationalism" and could pose an ethical challenge for the biopharmaceutical companies in the form of prioritizing supply. In Europe, the French president has questioned Sanofi's vaccine supply priority after its CEO commented on the U.S. government investment into Sanofi's vaccine program. Presumably the country or countries where the manufacturer is based or which provided funding would have some priority, but a country hoarding a vaccine for its own population could exacerbate geopolitical tensions and potentially change the way people regard the industry.

Does A Vaccine Swing The Pendulum On Drug Price Reform?

Despite the potential positives from a reputational standpoint, we are skeptical that the pharmaceutical industry's race and collaboration with governments to manufacture a vaccine will slow the pace of drug reform efforts materially. As tabulated in a recent Gallup poll, the majority of Americans say they are "very concerned" with rising drug prices, a key issue affecting the industry's social license to operate.

Furthermore, lawmakers and election candidates in the U.S., an important market for many pharmaceutical companies in terms of profitability, are still using drug reform as a key platform. As recently as June, President Donald Trump in Tulsa, Okla., mentioned efforts to reduce drug prices. In our opinion, any material legislation on drug price reform is unlikely to be passed this year, but we note that election candidates will make campaign promises to take action on drug prices. Even though campaign pledges don't always translate to new legislation, we don't think public sentiment or lawmakers desire to do something about drug prices has materially abated.

Our base case remains that drug price reform will lead to moderate pressure (a few hundred basis points) on pharmaceutical company margins over coming years. This is unchanged by the search for an effective vaccine for COVID-19. However, the industry's involvement in vaccine development highlights the role it plays in public health and the need for an environment that supports investment in innovation. We believe this reduces the probability of more dramatic pricing reforms.

We view vaccine development as a modest credit positive for the industry

A vaccine could allow society and economies to return to normal and this should have a positive impact for many companies and sectors. However, even if a vaccine were successfully rolled out it is unlikely that it would be very profitable for the company that develops the drug. The public and governments would expect that a vaccine would be affordable. Governments are providing funding for the vaccine, and to reach herd immunity the majority of the population need to be vaccinated, or have already been infected.

Many pharmaceutical companies have also been clear that producing COVID-19 vaccines will not be wildly profitable. AstraZenca has publicly committed to providing the drug at cost. The CEO of Pfizer has stated that if it commercializes a vaccine, it will generate a profit, but also noted that the company will not "take advantage" of the situation, Sanofi's CEO committed to making a potential vaccine affordable, and Johnson & Johnson floated a possible price of $10 or €10 per dose. We have not included material EBITDA from the development of a vaccine in our base case for any of the companies we rate that are involved in developing a vaccine.

Table 3

Rated Pharmaceutical Companies Working On A Vaccine
Company Vaccine type Status Rating 2019 Revenue ($ mil.) 2019 adj. EBITDA margin (%) 2019 Debt/EBITDA (x)

Leverage expectations

Pfizer Inc.

mRNA Phase I/II AA-/Watch Neg/A-1+ 51,750 41.0 2.6

Leverage expected to improve in 2020, and generally remain below 2.5x going forward.

Johnson & Johnson

Non-replicating viral vector Phase I to begin in July AAA/Stable/A-1+ 82,059 32.6 1.1 Leverage to remain below 1x

Merck & Co. Inc.

Replicating viral vector Entering Phase I in July (Themis) Phase I late 2020 (IAVI) AA-/Watch Neg/A-1+ 46,840 38.3 1.3

Leverage is expected to be in the 1.5x-2x range if the spinoff is completed.

Sanofi

Protein-based Phase I/II September 2020 AA/Stable/A-1+ 37,631 25.5 2.2 Leverage expected comfortably below 2x by year-end 2020.

GlaxoSmithKline PLC

Protein-based Phase I/II September 2020 A/Stable/A-1 33,754 26.8 3.3 Leverage to remain in the 3.0x-3.5x range

AstraZeneca PLC

Non-replicating viral vector Entering Phase III BBB+/Stable/A-2 24,384 20.7 3.8 Leverage to decline and remain in the 3.0x-3.5x range
Source: S&P Global Ratings and company data.

Related Research

This report does not constitute a rating action.

Primary Credit Analysts:Tulip Lim, New York (1) 212-438-4061;
tulip.lim@spglobal.com
Marketa Horkova, London (44) 20-7176-3743;
marketa.horkova@spglobal.com
Patrick Bell, New York + 212-438-2082;
patrick.bell@spglobal.com
Arthur C Wong, Toronto (1) 416-507-2561;
arthur.wong@spglobal.com
David A Kaplan, CFA, New York (1) 212-438-5649;
david.a.kaplan@spglobal.com
Nicolas Baudouin, Paris (33) 1-4420-6672;
nicolas.baudouin@spglobal.com

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