- We believe the market for a COVID-19 vaccine will involve multiple players, rather than a winner-takes-all scenario, given the high level of pent-up demand and differing profiles across potential vaccine offerings and patient groups.
- The pharmaceutical companies we rate that are seeking to commercialize a vaccine will likely set reasonable pricing on a vaccine and therefore, the associated profits will be limited.
- We believe the reputational benefits to the industry will result in a more balanced debate about U.S. drug price reform, reducing the risk that legislative changes will severely curtail industry profitability.
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.
|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.|
|mRNA||Phase I/II||No external funding.|
|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).
|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.
Some Logistical Challenges In Breaking New Ground
Outside of developing and testing coronavirus vaccines, pharmaceutical companies will face significant challenges producing and distributing vaccines at an unprecedented scale.
Pharma companies need to deal with the following issues:
- Vials. Anticipating a shortage of glass vials, companies are planning to increase the number of doses per vial, which could increase the likelihood for spoilage and waste. Alternatives, including pre-filled plastic syringes and glass-lined plastic vials, are being explored.
- Personnel. Personnel limitations may hinder the ability of companies to scale up its production facilities. Additionally, travel restrictions including quarantines have complicated the ability of pharmaceutical manufacturers to operate their global operations and supply chains.
- Storage. Most vaccine candidates will require refrigeration, while some will require ultra-cold storage. This can make some vaccine candidates difficult to distribute to areas with underdeveloped infrastructure.
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 $10 or €10 per dose. We have not included material EBITDA from the development of a vaccine in our base case for any of the companies we rate that are involved in developing a vaccine.
|Rated Pharmaceutical Companies Working On A Vaccine|
|Company||Vaccine type||Status||Rating||2019 Revenue ($ mil.)||2019 adj. EBITDA margin (%)||2019 Debt/EBITDA (x)||
|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.
|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.|
|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|
|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.|
- Pharma Industry Only Moderately Affected While Helping Mitigate COVID-19 Pandemic Impact, March 16, 2020
- ESG Industry Report Card: Health Care, Feb. 11, 2020
This report does not constitute a rating action.
|Primary Credit Analysts:||Tulip Lim, New York (1) 212-438-4061;|
|Marketa Horkova, London (44) 20-7176-3743;|
|Patrick Bell, New York + 212-438-2082;|
|Arthur C Wong, Toronto (1) 416-507-2561;|
|David A Kaplan, CFA, New York (1) 212-438-5649;|
|Nicolas Baudouin, Paris (33) 1-4420-6672;|
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: email@example.com.