Value resulting from the development of the COVID-19 vaccine: Who benefits?

United States-based drug company Pfizer made the startling announcement on Nov. 9, that its COVID-19 vaccine, codeveloped with German biotechnology company BioNTech, is over 90-percent effective in preventing the illness. The announcement was made in the midst of a relentless upsurge in coronavirus cases in the United States, in many parts of Europe, and elsewhere on the globe.

This announcement was followed in the following week by an equally surprising disclosure from biotechnology firm Moderna that its vaccine is nearly 95-percent effective in overcoming the deadly virus, and 100 percent for preventing severe cases.

The reaction of stock markets was immediate and overwhelming.

The value of the blue-chips FTSE 100 companies went up by 6,186 points, or by 4.7 percent, to £70 billion, or approximately $93 billion.

On Wall Street, the benchmark S&P 500 index rose to a record high of 3,645.99 points; and the DOW index ended the day up 2.95 percent.

Shares of Pfizer jumped by almost 15 percent on the day the announcement was made, increasing its market capitalization to $214.67 billion as of Nov. 16, and BioNTech market cap jumped nearly 20 percent, from $92 a share to $112.76 .

The increase in the market value of Pfizer’s and BioNTech’s shares of stock resulting from the COVID-19 vaccine signifies a substantial increase in shareholder wealth (aka producer surplus). However, it grossly understates the increase in total economic value resulting from the development of the vaccine because it does not reflect the corresponding increase in consumer value, which could be enormous considering the drug’s potential for preventing the deadly disease and saving lives. Clearly, the development of the vaccine has been a source of considerable newfound wealth for both Pfizer and BioNTech shareholders.

Does this select group of investors have exclusive claim to this newly created economic value?

Following a long-standing tradition in business finance, which regards profits as the economic reward for the entrepreneurial risks assumed by owners of businesses, the windfall profits realized by Pfizer and BioNTech for developing COVID-19 vaccine rightfully belongs to their shareholders for having invested money in the companies.
We note, in particular, Pfizer’s strategic move in investing heavily in its effort to develop a coronavirus vaccine despite the slim odds of successfully coming up with one, and in deciding to scale up production and distribution facilities well in advance of its availability for distribution.

The increase in shareholder wealth accruing to the owners of corporate stocks is a residual that remains after all contractual obligations with the other stakeholders have been met. These include the agreed share of profits between Pfizer and BioNTech resulting from their joint endeavor, pay-for-performance commitments with corporate executives and managers, bonuses for company employees, and so on.

We take special notice of the role played by the two scientists who are credited for having been largely responsible for the development of the vaccine: Ugur Sahin and Ozlem Tureci, the husband and wife team that cofounded BioNTech in 2008. Countless other scientists in both companies, corporate managers, suppliers and distributors, all the way down to the lowliest lab technicians, form part of a huge value network that created the vaccine, touted by Pfizer CEO Albert Bourla as “the greatest medical advance in the last 100 years.”

Sharing value ‍ with all stakeholders

From a long-run strategic perspective, both companies and all others that are actively engaged in developing COVID-19 vaccines should appropriate part of the value arising from their inventions to all of those who collaborated in the development of the vaccine, not as a voluntary gesture of benevolence or gratitude, but as part of a strategy of providing incentives to spur further value creation in the future.

These incentives take the form of expenditures on human capital to enhance productivity, largely in terms of new knowledge and current information, and as part of their remuneration systems that reward their scientists, managers and workers to encourage superior performance. These expenditures are investments to enhance value in the future, and not short-run costs to be minimized.

Not to be forgotten are the tens of millions of potential users of the vaccines across the entire face of the COVID-ravage world, a good number of whom are too impoverished to afford the life-saving drug. Long-established pricing strategies require pricing new products at the highest feasible prices in order to recoup huge initial investment and to insure shareholders of a high return on their investment. These rapacious pricing strategies leave unserved or underserved countless of potential consumers and result in huge economic value foregone (referred to as “deadweight loss” in economics textbooks). Currently emerging progressive strategies call for more consumer-focused approaches to pricing and product development. While such strategies may entail short-run declines in net revenues, they help expand markets and ensure sustained revenue streams over the long haul. INQ