The extent of COVID-19’s health and economic costs in Canada and across the world is high and continues to grow. Public health measures such as social distancing, while effective, disrupt economies, and might need to be maintained for a long time if COVID-19 keeps circulating. This makes the development and distribution of new medicinal products – such as vaccines, therapies or diagnostics – of paramount importance. But with uncertain financial returns and well-known investment risks, getting the world’s innovative powers behind medical innovations for the virus requires a creative, global solution.

Canada should help establish an international fund to reward the development of COVID-19 medical products, ensuring the rapid, equitable and efficient production of new innovations to all countries.

How vaccine and drug R&D works

The cost to develop a new medical product is subject to enormous uncertainty. With both vaccines and drugs, however, salaries of pharmacologists, scientists, clinical trials and equipment plus overhead costs are all part of the R&D process. Most innovations that drug companies test fail and there are costs associated with those failures.

Medical research is chiefly funded by governments and by investors, but using two different approaches.

Governments generally use a push approach, paying for many research projects in universities and medical innovation agencies that advance basic and applied science. The financial assistance to the basic research and development costs pushes researchers to do more, because they otherwise would not qualify for the generous research grants.

Investors, meanwhile, fund small and large companies in the search for innovative products, from which they may profit. The opportunity for profit pulls investment into new drugs and vaccines, and is enabled by patents – a period of temporary exclusivity over the use of an invention that allows the patentee to charge high prices and earn profits as a reward for developing a useful innovation. If the opportunity to earn profits is diminished, the willingness to invest will also fall.

The pandemic has led to a substantial public push to support investment in COVID-related biomedical research: this ranges from the World Health Organization’s “solidarity” trials of several promising potential therapies, to the vaccines work of the Coalition for Epidemic Preparedness Innovations, to publicly funded academic research on all aspects of the virus. This is good and we hope it will be fruitful. But emphasis on pulling new innovations to market is also critical.

Problems with the monopoly pricing model

The participation of for-profit biopharmaceutical companies in the global endeavour to resolve the pandemic is indispensable. They have unparalleled capability to advance new therapies and vaccines. These companies, however, are investing in a risky environment. They face scientific and technical risks, as with all biopharmaceutical projects. But they also now face the risks that the pandemic may end before their product makes it to market. They also face business risks from governments, including Canada’s, that have threatened to use compulsory licensing to strip them of patent rights if needed. None of this is encouraging to investors.

How do we get firms to invest, given the risk? And who will finance them?

One approach is to allow a successful innovator to charge monopoly prices, which would be deeply problematic in this situation.

Monopoly pricing always requires increasing the price to the point where some (or many) buyers – public or private health insurers – are unable or unwilling to pay the price. This would be morally disastrous. High prices also risk creating a pool of untreated, infectious populations that might sustain the virus, leading to future outbreaks or, even worse, to mutated forms of the virus that start a new pandemic. Further, high prices might be politically challenging, as fiscally strained governments are forced to divert scarce resources to a massively profitable monopoly.

If we are going to obtain the full engagement of industry in the fight against COVID-19, we need a better way to support the investment of capital required than the promise of a chance to hold the world ransom.

A proposal: an international COVID-19 Impact Fund

Canada should lead an international effort to create a global fund to reward medical products developed in the private sector that treat or prevent the virus. Pooling resources among developed countries will allow for a large fund that would reward novel effective diagnostics, treatments and vaccines for COVID-19.

The fund could distribute rewards for new medicinal products according to their contribution to resolving health and economic harms caused by COVID-19. For example, a novel diagnostic test that could identify immunity, and allow people to return to work, could accelerate economic recovery. A treatment that could reduce death and time in hospital for people with serious illness would be of immense value. And a vaccine, of course, would have tremendous preventative value.

In exchange for access to this large, multi-billion-dollar international impact fund for COVID solutions, innovators would agree to price their approved medical products – vaccine, drug or otherwise – at the manufacturing cost to every purchaser in the world. The allocation of the fund would be delegated to an international commission, whose job would be to determine and show the health and economic benefits of different products in an open, transparent manner. The most effective medical products would receive the most money from the fund.

The Government of Canada could make an initial contribution to the fund of, say, $3 billion and encourage other countries to follow suit. The pandemic, according to most estimates, is cutting GDP by at least 25 percent, which translates into economic losses of $1.6 billion per day in Canada. Scaled up to include other OECD countries, on a GDP-weighted basis, such a fund would be in the order of $150 billion, enough to motivate an enormous investment in COVID-related medical innovations. Such a fund would mitigate some of the current risks facing innovators in COVID-related technologies, and that would allow them to attract investment to accelerate development. Such a fund would pay off even if it gets us back to normal just two days earlier than otherwise.

The governance of the fund could include clauses that allow for fair, equitable and speedy access to new innovations for all participant countries, making this a major multilateral effort. One of the additional benefits would be to ensure that poorer countries also get rapid, effective access to these innovations as well. We must push beyond domestic patent and pricing regimes and move toward a more equitable and effective model of pricing and distribution of medical products.

Forward-looking policy-makers must acknowledge that there is a strong likelihood that even with wider testing, a rising incidence of COVID-19 cases could recommence once social distancing measures are relaxed. Countries that have effectively reduced the local caseload must also confront the potential re-introduction of the virus from foreign sources. A sizeable COVID-19 impact fund is needed to spur the full engagement of industry in the development and distribution of new products to solve the COVID crisis.

Now is a unique time to create an international regime that strongly encourages innovation and multilateral solutions. Our interconnected world depends on us getting this right. Canada could play a leading role in spearheading a global effort to find rapid and enduring solutions to the COVID pandemic.

This article is part of the The Coronavirus Pandemic: Canada’s Response special feature.

Photo: Shutterstock, by TrifonenkoIvan. 

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Aidan Hollis is professor of economics at the University of Calgary and president of Incentives for Global Health, which is focused on advancing the Health Impact Fund proposal.
Colin Busby
Colin Busby est directeur des politiques et du dĂ©veloppement Ă  l'Institut sur la retraite et l'Ă©pargne de HEC MontrĂ©al. Il Ă©tait prĂ©cĂ©demment directeur de recherche Ă  l’IRPP. Il a aussi Ă©tĂ© directeur associĂ© de la recherche Ă  l’Institut C. D. Howe et travaillĂ© Ă  Industrie Canada et Ă  l’Organisation des Nations unies pour le dĂ©veloppement industriel. SpĂ©cialisĂ© en politiques budgĂ©taires et sociales, ses recherches portent plus gĂ©nĂ©ralement sur les questions Ă©conomiques. Twitter @cbusby_eco

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