11 JANUARY 2021 | OPINION
Is Europe paying too little for the vaccines?
Article first published on January 11th 2021 in De Standaard, “We betalen te weinig voor de coronavaccins”.
Managing Consultant, Price- and Promotion Strategy, Accuris UK
The European Union’s GDP declined in 2020 by 7.4% because of covid, which translates to a loss of 184 euro per citizen per month. This loss is devastating and incomparable to the purchase cost of the Pfizer-BioNTech vaccine, 15,50 euro. As it turns out that countries that paid a higher price are receiving larger quantities more speedily, it begs the question: is Europe paying too little for the vaccines?
There has been an incredible amount of human suffering and economic damage, unprecedented in most Europeans’ lifetimes. Yet, the number of infections is currently climbing past record levels in many countries. The exceptional effort of health care workers and the courage of the entire population to weather this crisis is absolutely commendable. We must do everything to stop this ordeal. Vaccination is our only resort. With military urgency we need to increase efforts to more rapidly vaccinate larger parts of the population. But then sufficient supply of vaccines is the first requirement.
The cost of corona
The EU economy lost almost a trillion euros in 2020 as a direct result of the crisis. For every additional month of covid-induced crisis, each EU citizen loses approximately 184 euro. On top of that comes the permanent loss of economic production factors - companies that go bankrupt and disappear forever. And of course, there is the intolerable human cost.
On Thursday December 17th 2020, Eva De Bleeker, Belgium’s state secretary for the budget, announced that Belgium is paying 12 euros for the Pfizer BioNTech vaccine. Other European sources are citing EUR 15.50 for the EU in general. Either number is significantly lower than what Israel, the UK and the USA have paid. Did we incentivise vaccine suppliers enough to prioritise deliveries to the EU?
Vaccinations by country
Source: UK: NHS, all other countries: Our World in Data
Some countries did start their vaccination campaigns days or weeks before the E.U. countries, but deliveries of doses to the EU during the first weeks of the campaign were limited. And once inoculation operations are fully deployed, Europe will be faced even more with shortages of weekly supplies.
One has to question whether Europe paid enough for the vaccines.
Consider the case of Belgium. It spends 279 million euro on vaccine purchases, according to widely published figures. But in 2020 alone the government provided income support for the self-employed, 4000 million euro, and for employees who were temporarily unemployed, 5000 million euro. These thousands of millions are recurring costs for the government, compared with less than 300 million to get rid of the covid crisis for good.
The right price
The market for covid-19 vaccines is not an ordinary market. There is currently a limited supply, and demand is many times higher. The number of approved providers in the EU is currently limited to just two (Pfizer / BioNTech and Moderna). Nevertheless, deliveries in recent weeks show that Pfizer and Moderna still have a margin for increased deliveries and production capacity in this first quarter of the year.
The right price for the vaccine is not necessarily the lowest price. In a "sellers' market" - a market where demand exceeds supply – the bidder of the lowest price puts themselves at the back of the queue for deliveries.
The graph below compares the budget for vaccines and the annual recovery of GDP for the European economy, in billion euro.
The most sensible price strategy economically for the pharmaceutical companies is “market skimming”: selling the first quota to the highest bidder, and slowly lowering the price until the entire production quantity has been sold. In practice it seems that countries such as Israel, the United Arab Emirates, Bahrain, the UK and the US have jumped the queue by offering higher prices. This leaves the European Union waiting for supplies for many more months, with continued massive economic and human costs. Despite the investments made by the EU and Germany in research and in the development of BioNTech's production capacity, other countries have bought their way to an increased supply of the vaccine. Only Astra Zeneca and Johnson & Johnson have officially declared that they will forgo profits from the vaccine during the pandemic. Pfizer and Moderna have not and therefore it is clear that they do want to make a profit. And there is actually nothing wrong with that, considering the fact that the economic value of general vaccination is many times higher than the cost of the vaccine.
Providers of an approved vaccine will choose to wait for all countries to bid, hoping to maximize their revenues. Assuming they are acting rationally, providers will choose to sell initial volumes at the highest prices, rather than large volumes at a fixed, pre-negotiated low price. What may work for any other drug will not work now. Upfront negotiations for large volumes at the lowest price may be the standard approach of EU negotiators, but it does not work in this highly exceptional case. Compared to other medicines, pharmaceutical companies now run a reverse economic risk. As long as there is a surplus of demand (i.e. a production shortage) they will optimize their profits prioritising smaller deals, and maximizing the price as production output follows. The agreement the EU signed with Pfizer last week for 300 million additional vaccines is an example. Only a quarter of these doses will be delivered in the second quarter. The majority will be shipped in Q3 and Q4, when there will be a surplus of vaccines from other providers such as Astra Zeneca, J&J, CureVac and Sanofi / GSK.
It is human to think in linear terms. Indeed, most daily changes are linear: the changing of the seasons, our children growing up, interest rates on bonds. Whenever a trend is exponential, we are surprised and revert to linear solutions. But what to do with infections that double every five days? How to free up hospital beds at a fast enough pace? The images of refrigerated trucks in front of hospitals in New York, London or Madrid are known too well.
It is remarkable, even baffling, that no greater urgency was given he last 9 months to setting ourselves up for success once a vaccine was approved. Picture this: within hours after approval, a button is pressed in Brussels to set in motion a fast, effective vaccination campaign, delivered with military-grade effectiveness, and made possible thanks to a continued weekly supply of scarce vaccines secured by EU negotiators thanks to a non-traditional process that gave the industry the right incentives to deliver – quite literally.
The most affected economic sectors in this crisis are travel agencies, aviation and the culture sector. People and companies have seen their incomes decimate overnight. Many policymakers and negotiators, however, did not feel the unprecedented urgency, nor did they feel it in their wallets.
It is not too late to increase orders and speed up deliveries. This can be done at European or country level - although the latter breaks European agreements - and if the right price is paid, it can put us at the front of the queue. The negotiation should focus on timing and quantities, not on price.
Moreover, production can be further expanded if current suppliers are incentivised to license production to additional subcontractors. CureVac, the other German vaccine provider, announced a partnership with Bayer last week to massively increase production capacity. The EU should secure orders for all of its citizens to be delivered before the end of April. It should place duplicate orders with all of the six providers it has been considering so far as well as with promising others such as Valneva and Novavax. In this scenario the EU economy will fully recover from Q2 onwards and we can support lower income countries by donating excess vaccines. Doing so the world will get rid of this horrible pandemic sooner and the human and economic damage will be less extensive than with current plans. Now let us wait for a government that recognizes the economic reality and gives the right incentives to the industry.
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