Issue 18

The COVID-19 vaccine remains in the spotlight, as the U.S. and the world continues to grapple with the COVID-19 pandemic. While there has been significant improvement in supplies and availability of the vaccine, many parts of the world experiencing outbreaks in infections are still struggling to secure enough vaccine. This has led to over 100 countries backing a WHO proposal to temporarily waive patent protection on the COVID-19 vaccines and enable more manufacturers to produce the badly-needed vaccines. In contrast, in the U.S., where we believe there is enough supply to theoretically achieve herd immunity, vaccination rates have slowed, making herd immunity, if we assume current vaccine rates do not decline further, potentially achievable in the mid to late third quarter. Still, the successful development and deployment of the COVID-19 vaccine has been largely a win for the pharmaceutical industry, from a reputational halo and financial perspective. We have been increasingly receiving the question as to why there has not been any positive ratings actions for the pharmaceutical industry yet. However, we believe positive actions at this point would be premature, given the uncertainty as to the sustainability of the momentum and which companies would be the major winners over the longer term, along with ongoing questions around companies' commitments to use vaccine profits to permanently reduce leverage.

COVID-19 Vaccine Patent Waiver Could Be A Troubling Precedent

The Biden Administration surprisingly expressed support for the temporary easing of patent protection on COVID-19 vaccines, which would allow other manufacturers to produce the vaccine to increase supply and ease access issues for poorer countries. While the U.S. is nearing a 40% vaccination rate, many other countries have not been able to gain significant vaccine supplies to make much headway.

From a ratings perspective, we do not think the temporary waiving of COVID-19 vaccine patents would hurt the pharma industry. For instance, Pfizer Inc.'s projected $26 billion in COVID-19 vaccine sales represent already contracted sales and the earnings from lower income countries would not have accounted for a significant portion of overall earnings. We also project a sharp decline in COVID-19 vaccine sales in succeeding years.

However, the temporary waiver would set an uneasy precedent, raising the possibility that future products could experience a similar suspension, which could reduce overall profitability and potentially have a chilling effect on R&D spending. We also believe that there is the risk that opening manufacturing too widely could compromise product quality and increase the risk of a counterfeit subpar product. A further issue is that the pharmaceutical industry is already criticized for not devoting enough R&D dollars toward treatments for diseases that are more prevalent in the developing world, given the limited profitability of the market. The potential threat of having their patents waived on treatments needed by lower-income countries would disincentivize R&D on those diseases even further.

Prognosis:  The pharmaceutical industry donates and provides at steep discounts significant amounts of drugs to the uninsured and lower-income countries. However, the industry will be under increasing pressure to do more, especially in an age where social responsibility and sustainability become bigger and bigger themes. Otherwise, similar proposals will become more frequent and would be a long-term credit negative for the industry.

Vaccination Willingness, Not Supplies, Stands In The Way of U.S. Herd Immunity

Given the significant improvements in COVID-19 vaccine supply and the resumption of the administration of the single-dose Johnson & Johnson version of the vaccine, the U.S. vaccine supply is no longer a barrier to the country achieving herd immunity (loosely defined as 70% of population over 16).

U.S. vaccine supply availability supports theoretical midyear herd immunity.  With the approval and launch of the single-dose Johnson & Johnson COVID-19 vaccine and the increases in capacity by Pfizer and Moderna for their respective vaccines, the vaccine supply is no longer a limiting factor for the U.S. to theoretically achieve herd immunity near the midyear timeframe. The U.S. is on track to have sufficient vaccine supplies to vaccinate its entire eligible population by the end of May—even without the 300 million AstraZeneca doses or 100 million of the Novavax vaccines already ordered.

Vaccination rates, while significantly improved, is the limiting factor.  Vaccination rates rapidly and significantly improved in the past two months, hitting a single-day peak of 4.63 million doses administered on April 10. But with roughly 49% of the total U.S population having received at least one dose (164 million Americans having received one dose, 288 million total doses administered), an estimated 39.5% having been fully immunized (received both doses), about 15% of the population under age 12 (and thus not yet eligible for the vaccination), and a roughly 30% vaccine hesitancy rate, vaccine supply is now beginning to exceed demand in some areas. The vaccination rate has steadily declined to the roughly 2 million per day. Assuming the current roughly 2 million doses per day holds, we estimate the U.S. will not achieve herd immunity until possibly late August or early September.

COVID-19 infection, hospitalization, and death rates will carry larger weight going forward.  While the focus will remain on vaccination rates, we believe the overall recovery of the U.S. economy will increasingly depend on the trend of infections, hospitalizations, and death rates due to COVID-19, as well as government policy responses. Even if vaccination rates accelerate and the total number of people vaccinated approaches herd immunity, a new wave of infections could undermine consumer sentiment and government policies on re-opening.

Children Are Our Future

While only the Pfizer/BioNTech vaccine has currently been authorized for those under 16 (for children 12 to 15 years old), all of the leading manufacturers are conducting trials for adolescents aged 12 and up. Moderna is reported to be receiving approval soon for ages 12 and up--if all goes well before the start of the 2021 school year. Moderna and Pfizer are also testing vaccines on children as young as 6 months. Together, these vaccines allow an additional 20% of the U.S. population and 17% of the Canadian population to contribute to herd immunity efforts.

Prognosis:  At the current rate, and assuming the vaccines will soon be approved for children, herd immunity in the U.S. should be achieved by late in the third quarter. We believe there will be a re-acceleration of vaccination rates now that Pfizer, and potentially soon Moderna and others, are approved for children over 12, and likely another surge as we get closer to the beginning of the next school year. However, the sustainability of the vaccination rate will determine when, or if, we achieve herd immunity in the U.S. In terms of impact on economic activity, we have already seen the increased vaccination rate in the U.S. result in a continued return of patient volumes and procedures, as well as moderating expectations of the COVID-19 tailwinds in the diagnostic and life science industries for the second half of 2021. However, we are watching for the further emergence of new COVID-19 strains and their impact on infection rates.

COVID-19 Vaccine Success Favorable For The Industry But Ratings Upside Is Premature

The COVID-19 vaccines have been an unqualified success story for the pharmaceutical industry. While there have been challenges in the rollout and supply and questions on the long-term efficacy of the vaccines, from a technological achievement, speed of development, industry and regulatory cooperation and manufacturing capacity ramp up standpoints, it has largely been a success. And there may be more to come. The rapid development and approval of the COVID-19 vaccines have led to hope of an accelerated time frame for future development of drugs and the breakthrough approvals of Pfizer's and Moderna's mRNA vaccines have led speculation of future mRNA-based vaccines for various diseases. Sales of COVID-19 vaccines have also been significant, with Pfizer recently giving guidance of $26 billion in sales from its mRNA-based vaccine.

Given this success, we have often been asked when there would be positive ratings actions as a result. We have not taken any in the pharmaceutical industry for the COVID-19 vaccine tailwind yet, due to questions around:

• The longer-term durability of COVID-19 vaccine sales, as well as the long-term market share of each of the players.
• The low likelihood that the COVID-19 vaccine process will provide a roadmap to speed up future drug development timelines.
• Limited visibility on new mRNA-based vaccines in the pipeline.
• Manufacturers' willingness to maintain permanently lower leverage metrics, even after vaccine sales subside.

Sales Are Sustainable, But At What Level And For Whom?

The sustainability of vaccine sales remains to be seen. Though there is speculation that booster shots or re-vaccination will be needed, given questions of how long the vaccine's protective effect is, the potential need to constantly "re-program" the vaccines for newer strains, and how significant an issue will the COVID-19 virus be in the future, we are doubtful that the vaccine opportunity will be as large as it has this past year. The U.S. health care system, already under the strain of rising costs (projected to grow 5%-6% annually before the pandemic), will be pressured to absorb such high additional COVID-19-related costs annually over the long term, especially not a $26 billion-a-year drug from a single company, without a major overhaul of the system.

The potential scenario is that the COVID-19 vaccines become akin to the annual flu shot, under which it would be only a moderate positive ratings driver. Using the flu vaccine market as an analog, the flu shot is largely a commoditized product, generating roughly $5 billion a year in sales. The market is also divided up between several different players--AstraZeneca, GlaxoSmithKline PLC, and Sanofi S.A. among them. While the mRNA vaccines from Pfizer and Moderna are currently leading in market share, mRNA vaccines have the disadvantages of being a two-dose regimen that needs to be deep frozen for transportation and storage and has relatively short shelf life. Newer, competing treatments could quickly divide the market. The Johnson & Johnson and AstraZeneca COVID-19 vaccines have been hampered by manufacturing capacity issues and concerns on safety, but once they are resolved, could cut into Pfizer's and Moderna's market shares.

Prognosis:  Should a COVID-19 vaccine become a similar annual vaccine as the flu vaccine (where annual vaccination rates in the U.S. are roughly in the mid-40% range), it will likely be a solid, though not game-changing, opportunity.

Speedier Development Times A Credit Positive, But Doubtful In Near Term

We think it is unlikely that the COVID-19 vaccine development, which from start to approval took only roughly a year, will lead to more rapid drug development times for other therapies in the future. Drug development, from discovery to approval, takes an average of 12 years, including roughly a one-year FDA review time. The FDA already has in place "fast-track" development programs that pharmaceutical companies can apply for if certain conditions are met, an accelerated review and approval time is applied. The COVID-19 vaccines were developed and approved quickly under the FDA's emergency use designation. Also, the FDA has a hard-won reputation as one of the most stringent drug approval agencies in the world, and accelerated approvals would require trade-offs in the depth of the clinical data. While there will be "lessons learned" from the COVID-19 vaccine development process, the FDA is likely reluctant to broaden too much the application of fast-track drug development pathways.

Prognosis:  Rather than resulting in a significant change in development and approval methods, the COVID-19 vaccines are more a reflection of the success of the current designed fast-track development programs already in place at the FDA.

Opening A New Category: mRNA Vaccines

As for the mRNA-based COVID-19 vaccines opening the door for other mRNA-based vaccines designed for other diseases, this is more of a high potential possibility, though it is speculative at this point. Vaccines based on mRNA technology have been under development for over a decade and there had been several challenges, such as the durability of mRNA-vaccines (which may be why booster shots may be needed). Still, with the Pfizer and Moderna vaccines being the first two approved vaccines, mRNA technology is receiving renewed interest from the pharmaceutical industry and it is being looked at for a variety of diseases, such as HIV and cancer. Pfizer is increasing its R&D spend to expand its mRNA vaccine program. While mRNA vaccines still have a number of drawbacks, such as the need to be stored and transported at very cold temperatures, further improvement and maturation of the technology could lead to a whole new generation of future blockbuster drugs.

Prognosis:  The most promising of the opportunities, but speculative at this point.

Related Research

• EU's Vaccine Supply Boost Will Aid The Race Against COVID Mutations, April 28, 2021
• The Health Care Credit Beat: U.S. Herd Immunity By Midyear Is Possible With Additional Vaccine Approvals, Feb. 11, 2021
• EU Could Meet 70% Vaccination Target By Late July If Production Steps Up, Feb. 11, 2021
• Pfizer Inc. Downgraded To 'A+' Following Divestiture Of Upjohn; Outlook Stable, Nov. 16, 2020
• COVID-19 May Accelerate Disruption In The Global Vaccine Market, Aug. 3, 2020
• What Does Pharma’s Quest For A COVID-19 Vaccine Mean For Its Credit Quality And ESG Profile? July 8, 2020