We’re in the midst of not one pandemic, but two, as Nobel Laureate Robert Shiller warned: COVID-19 and the ensuing contagion of financial anxiety, which amplifies volatility in capital markets and policy spheres alike.
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The VIX index of stock volatility has surged, fueled in part by political volatility, despite bipartisan congressional efforts and heroic work on the frontlines of medical care, treatment, and research. Unhinged fear – escalated by a relentless echo chamber of bad news and conspiracy theories – drives the same herd instincts that once led to witch trials and bank runs, and is creating a negative bubble for asset prices.
Global anxiety has frozen the capital and labor markets, paralyzed the economy, and impinged on individual physical and mental well-being. Yet important as it is, the exclusive focus on disaster relief is delaying critical financing for innovative biomedical technologies that can solve both the public health and financial crises.
Funding and investment are scarce right now, even though we have the scientific and engineering expertise to detect and treat COVID-19, and to produce vaccines for it and other viral and bacterial diseases. Yet the world has plenty of capital available – $100 trillion in fixed-income markets and $75 trillion in equity markets, much of it now parked at negative or low single-digit interest rates. Think of the capacity unleashed if this money were to target investment in new technologies for medical infrastructure, new vaccines and new solutions to future global health threats to the economy.
Unfortunately, all medical solutions take time – up to 7.5 years for drug development through U.S. Food and Drug Administration approval, plus another 3.5 to 4.5 years to ramp up manufacturing and supply chains. In a crisis like COVID-19, lost time means lost thousands of more lives. Perhaps a new pandemic vaccine paradigm to develop could work, but it will come with elevated financial risk that we can certainly afford under the circumstances.
The good news is that innovative finance offers a proven toolkit to fund detection, discovery, treatment and prevention. We already know how to accelerate breakthroughs in under-financed medical and biotech research and development because we’ve identified the funding bottlenecks along the discovery, development, testing and production value chain. We know how to dilute risk by pooling medical, science and technological projects, especially long-shot endeavors, into diversified, well-financed portfolios.
What we must do now is apply this knowledge to arrest contagion and create end-to-end biomedical diagnostic, treatment and vaccine development, large-scale manufacturing and deployment – not just to target COVID-19, but for pandemic threats lying ahead.
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This we also know: The only fast way to bring medical solutions to scale is to blend private and public investment into long-term health bonds. It will take research-backed obligation bonds, medical equipment financing and big data predictive analytics enhanced by government-backed loss guarantees, leveraged with philanthropic grants, to reduce risk and incentivize large-scale venture philanthropy and private investment. There is no other way.
Since 2006, the International Finance Facility for Immunization has raised $6.5 billion in Vaccine Bonds, backed with government guarantees, to successfully immunize over 760 million children and avert 13 million deaths. Since the last finance crisis, central banks have grown more comfortable making large-scale asset purchases to stimulate recovery. Countries like Austria, Israel and Belgium, universities like Ohio State and Oxford, and corporations like Disney and Siemens, have all issued long-term bonds of up to 100 years. In recent weeks, Pfizer, the IFC, Nordic Investment Bank, the African Development Bank and 25 Chinese companies have issued COVID-related bonds.
Tracking COVID-19 requires us to know how the virus spreads, who it targets, and their risk profiles. Scientific and technological advances through genomic sequencing and high-throughput antigen screening, nanotechnology, sample processing, assay performance, and detection have led to lab-on-a-chip and card solutions for fast, accurate point-of-care tests.
It will likely take massive investments of $100 billion a month to ramp up testing to enable healthy workers to return to their jobs and pinpoint where quarantining is needed. Expensive as that is, it is a huge savings relative to estimates of monthly $300 billion to $500 billion economic losses without sufficient testing. The cost avoidance of future economic disruption will quickly become self-financing if the government invests in tracing, increased point-of-care diagnostics, and telemedicine.
There are 260 tests for COVID-19 in the innovative diagnostic pipeline, but expensive equipment and training, and the lack of personal protective equipment may constrain rapid response. New technologies that decentralize diagnostics and treatment can lower the costs of disease management. South Korea, Taiwan, Germany, Norway and Israel all practice swift testing and tracing.
At UC Berkeley, engineering teams at the Blum Center for Developing Economies, Fletcher Lab, and at UC San Francisco hospitals are also moving forward with point-of-care diagnostics that could be deployed by healthcare workers or for in-home use. These will be particularly beneficial for developing countries with fewer resources. In Israel, Start-Up Nation Central has identified 200 companies addressing the pandemic via the CoronaTech Hub, covering protection and prevention, home-care remote monitoring, diagnostics, decision support, and social and mental health dimensions.
Linking such innovation centers globally will launch multiple waves of innovative technology that need financial tools to deploy.
We’ve learned from our Financial Innovation Labs at the Milken Innovation Center in Jerusalem and at similar Milken Institute Labs in Singapore, China, London and New York how to accelerate biomedical solutions to the market. We’ve helped design successful novel capital structures, backed by government guarantees and leveraged also with philanthropic grants, to accelerate medical solutions.
The guarantees are needed to overcome two areas of financial risk. One is the gap, often called the valley of death, when early funding is needed to keep R&D processes going, even though results are far off on the horizon. The other is the gap between application for FDA approval and the production roll-out. No manufacturer will proceed with production of therapeutics or vaccines prior to FDA approval. The financial risk is too high, considering the long-term capital investments for manufacturing plants, supply chain development, etc. – all told, $500 million per vaccine, according to a 2017 study reported in Vaccine.
We’ve also learned that the most successful portfolios include investments in projects that may seem to have low success probability, long gestation periods, large up-front costs, but very large payoffs relative to initial investments. Blended projects have proved effective in ongoing efforts against HIV/AIDS, malaria, and TB by the Global Alliance for Vaccine Initiative through advanced market commitments and research evaluations by the MIT Lab for Financial Engineering.
Most important, we know that it is possible to accelerate treatments and cures without compromising the critically important FDA process – if the manufacturer can work on concurrent activities in the development process before FDA approval. This requires shifting the risk to the government through loss guarantees, for example a hedging tool in which the buyer pays a monthly premium to the seller in exchange for insurance against a therapy’s non-approval. Existing manufacturers would participate in a tender process to meet global demand; supplies would be stockpiled globally, ready for delivery upon approval. In exchange for its guarantee, the government would take warrants in successful companies.
With an expected 85 percent failure rate of new vaccines in the pipeline, the guarantee pool, capitalized with long-term bonds, would need to cover about $2 billion to $3 billion in losses in four to six projects ready to go right now. We have 78 vaccines in the COVID-19 vaccine pipeline. That seems burdensome, but in terms of today’s economic recovery costs, it is a drop in the bucket.
Glenn Yago teaches at the Hebrew University of Jerusalem School of Business. He and Steve Zecher are research directors at the Milken Innovation Center-Jerusalem Institute and Blum Lab for Developing Economies.