Pharmaceutical Giants Ignore Warnings: Will 16 Million Deaths and £13 Trillion Losses Repeat?

The COVID-19 outbreak has highlighted the importance of vaccines. The pandemic has killed 16 million people, adding a harrowing statistic to the global death toll. Currently, concerns around the Mpox virus have renewed public panic about a new outbreak. This reflects the need for big pharma to invest resources in vaccine stocks to prepare for future large-scale viral threats. However, they have not yet done so and it remains unclear whether they will take action.

The World Health Organization says the world should prepare for a virus that could be 20 times more deadly than COVID-19. Scientists have dubbed the hypothetical virus Disease X and predict that the next outbreak could come from an unknown pathogen rather than a known virus like flu. This prediction is all the more worrying in view of the increasing frequency of epidemics.

According to the US National Library of Medicine, five of the last 12 pandemics occurred in the 20th century and the other two occurred in the 21st century. Increased levels of travel and urbanization are thought to be contributing to more frequent outbreaks of the pandemic. Given the ubiquity of travel, scientists estimate that a deadly pathogen could spread across the globe in a matter of hours.

This growing risk poses a major threat to the world economy. The International Monetary Fund estimates that the global cost of the last pandemic was close to $13 trillion, reducing global GDP by 3 percent in 2020 alone. Health systems around the world are still struggling to cope with record waiting times to provide essential medical care. With the threat of another serious health emergency looming, Big Pharma would be wise to invest in vaccines to deal with such an emergency.

Pharmaceutical company leaders do not need to be well-meaning to recognize that this is a smart business decision. If a company can successfully develop a vaccine against a deadly virus, it will reap huge financial benefits. Thanks to the success of its COVID-19 mRNA vaccine, Pfizer's market value has increased by 80% to $337 billion between 2019 and 2022. Its operating profit more than doubled to $40 billion over the same period. Meanwhile, shares of Moderna (MRNA.O), which uses the same technology, have risen 11-fold, growing from an operating loss of more than $500 million to a profit of nearly $9.5 billion by 2022.

Still, drug makers are not entirely immune to the threat of future pandemics. Pfizer and AstraZeneca are using the money to build up their expertise in oncology rather than mass-produce vaccines. The $257 billion pharmaceutical giant has also launched a COVID-19 vaccine during the pandemic. Pfizer bought Seagen late last year for $43 billion, aiming to double its cancer drug pipeline. It has not made similar investments in the fight against future COVID-19. Meanwhile, Astrazeneca, which bought Alexion for $39 billion at the height of the epidemic in 2021 to build its rare disease portfolio, could see huge success if it makes a breakthrough in diseases that affect a small number of people. Because of limited investment, Astrazeneca's vaccines and immunotherapy businesses accounted for a negligible percentage of sales last year.

At first glance, the silence seems puzzling. In an interview with Reuters Breakingviews, one investor noted that investors value the vaccines business at a 50 percent premium over other pharmaceutical units. Historically, this has meant GlaxoSmithKline's (GSK) new vaccine-related business would be valued at about 15 times expected EBITDA, while its remaining pharmaceuticals division would be valued at only about 9.5 times expected EBITDA. Similarly, investors value Sanofi at 10.5 times, while its vaccines business (nearly €7.5bn in sales, or about 17 per cent of the group's total sales) is valued at 14 times EBITDA.

However, this premium is not as helpful to the global response to the pandemic as it might seem. Shareholders are more likely to invest in vaccines where demand is stable, such as flu shots. Diseases that are less frequent but have a higher impact - those that could trigger a pandemic - are unlikely to receive high market attention.

Mpox is a telling example. Shares in Denmark's $3.1 billion Bavarian Nordic are up more than 50 percent since the start of the year, compared with a 15 percent rise in the S&P pharmaceutical sector index (.SPXSPH). Until now, investors had little faith in the company's ability to effectively treat a deadly disease. Last year, the Copenhagen-based company was trading at just two times earnings. Now it trades at more than four times earnings.