India Can Lead the World
T K Arun
Failure to invest in increasing vaccine production capacity has resulted in a desperate shortage of vaccines. If a third wave of the pandemic is to be averted, some 900 million people must be vaccinated twice over before winter sets in. That would call for 9 million doses a day, whereas we have 2.3 million dose availability at present.
So, a third wave is likely, unless, for some quirk of nature, the pandemic abates on its own, as the original SARS had. All viruses mutate, some more than Decades of struggle to develop an HIV vaccine has not succeeded because of the shape-shifting tendency of that virus. The coronavirus behind Covid is not that changeable but still has produced several variants — the British, the Brazilian, and the South African ones — that the WHO has described as being of concern. Now, the Indian variant, too, has been labeled as a variant of concern.
So far, only one Indian variant of concern has been identified. As the number of those infected rises, the possibility of new mutations in new hosts also rises. It is more likely than unlikely that some variant would emerge that pretty much escapes a present lot of vaccines.
New Mutant aGlobal Threat
The result would be for the pandemic to return to the rich world that now heaves a sigh of relief after a successful vaccine rollout. The challenge, therefore, is to produce not just more vaccines, but also new kinds of vaccines, and new kinds of testing kits that both detect the virus accurately and do it fast.
How do we go about scaling up vaccine and test kit production, and innovating new vaccines? Lifting the patent on new-generation vaccines that ask the human body to produce both the target pathogen protein and the immune reaction to that protein would not, by itself, help replicate those vaccines. If the companies that have developed these vaccines do not transfer technology, and they are unlikely to, the vaccines must be reverse-engineered. So must their ingredients.
This is a challenge that only a handful of developing countries can meet. India certainly can. Indian bio-technologists slog away in labs around the world, some of them at the cutting edge of research. India must call upon those among such nerds who have an entrepreneurial itch to come back to India and set up startups that the government would fund, giving the nerds liberal quantities of sweat equity.
Vaccine production is a risky business. You spend a lot of money developing and testing a new vaccine for a new bug that promises to throw an epidemic, only to find that the epidemic does not materialize. This has happened with the original SARS, with the Ebola virus. The rationale for granting vaccine innovators a chance to build hefty intellectual property margins into their vaccine prices is this risk. If they lose money on developing vaccines that either do not work or, even if they do work, do not have a market, they must recoup that investment and make returns from the vaccine for which there is demand.
It is possible to take the risk out of the vaccine companies and spread it out across society. One way is for the government to fund the entire vaccine production process directly. This is what the US government did, under Operation Warp Speed, which gave billions of dollars to several vaccine makers to fund research and make pre-purchase commitments. Another is to use market methods of risk transfer.
The Indian government did neither when it mattered. Adar Poonawala put up $150 million of his own money and the Gates Foundation gave him a like amount to increase Serum Institute’s capacity to produce Astra Zeneca’s vaccine, long before the vaccine got regulatory approval.
That risk-taking ability deserves to be commended. Instead, the government beat Serum’s price down to Rs 150 per dose for its procurement.
Then, to let Serum realize a better average price, it allowed the company to sell to the states and to private hospitals at higher prices. Still, it did not fund any expansion of capacity.
Revamp Vaccine Policy
Now, for the new vaccine types and to scale up vaccine and vaccine-ingredient output, the government must be liberal with startup funding and prepurchase commitments. And it can issue risk-transfer bonds, similar to catastrophe bonds, to take out the risk of the demand for vaccines drying up.
These bonds, of three- to five-year tenor, could offer higher than normal yield. The proceeds would go to a collateral fund, and be invested in risk-free instruments to generate predictable returns. In case the demand for the vaccines is below some benchmarks, the bonds would offer lower coupon, and have their principal written off in part or even in full.
It is to compensate for this risk that the bonds offer higher than normal returns. The bonds issued to form additional tier-1 loss-absorbing capital of banks are precisely such instruments. Hedge funds, pension funds and large pools of capital would allocate a sliver to such bonds, in pursuit of their higher returns. This way, the risk is transferred to society at large, instead of being concentrated with the vaccine makers. Once risk is dispersed, the vaccine makers’ claim too high royalties to compensate for their risk capital and effort also dissipates.
First Published in The Economic Times View: How India can increase output of Covid vaccines on May 11, 2021.
Read another piece on COVID Vaccine by T K Arun titled Increasing Vaccine Production: India an Answer to Global Woes in IMPRI Insights
Read another piece on COVID Vaccine by T K Arun titled Bold Vaccination Policy Needed in IMPRI Insights.
About the Author
T K Arun, Consulting Editor, The Economic Times, New Delhi.