It is becoming quite clear that absent an accessible and widely distributed vaccine, there will be no complete economic recovery. What originally was thought to be a 15 week problem has quickly evolved into something that looks more like a 15-month challenge. The premature reopening of the U.S. economy has resulted in an intensification of the pandemic, which is now causing growth in the economy to slow. The spread of the disease has resulted in a rollback of normal social and economic activity that poses significant risk to already subdued utilization of the full capacity to produce around the economy. Thus, any discussion of a full reopening and recovery of the domestic economy must be discussed within the context of a viable timetable that includes a vaccine.
No vaccine, no recovery
The rebound in financial markets began in late March and was followed by an end to the economic free fall in April. Since then, investors have been pricing in hopes of a vaccine in 2020, which we see as a premature expectation for a near-term solution to the overwhelming challenges associated with the pandemic. In short, a market recovery initiated by robust policy response has been sustained by overzealous expectations for a vaccine to end the spread of a pandemic that has killed more than 600,000 people globally, including 140,000 in the United States.
According to the World Health Organization, there are 23 COVID-19 vaccines in human trials, and many more in development globally. Over the past several days, encouraging announcements include a report in the British medical journal The Lancet that the University of Oxford and AstraZeneca Plc have seen promising results in phase II trials of their recombinant adenovirus vaccine, known as AZD1222. The Oxford-Astra vaccine has been shown to stimulate both arms of the immune system, the neutralizing antibodies, as well as the T-cells that directly target the virus, according to Adrian Hill, head of Oxford’s Jenner Institute. Last week in the United States, Moderna Inc. announced initial results of its mRNA-1237 vaccine, targeted to protect against COVID-19. The results show that neutralizing antibodies were induced, which would attack the “spike” protein the coronavirus uses to enter human cells. And in Abu Dhabi, China-based Sinopharm Group has started the world’s first phase III clinical trials involving a vaccine based upon an inactivated form of the actual SARS-CoV-2 virus.
Recognition of reality
- The failure rate of novel drugs under standard conditions approaches 90%
- The historical time frame for development of a novel drug is about a decade
- Due to the potential for global distribution of a vaccine, safety and efficacy must be sufficiently vetted
- Effective phase III clinical trials of a vaccine rely on sufficient numbers of at-risk subjects (typically thousands), which could be difficult to conduct given variations in affected populations and the ebb and flow of infection waves.
While this is all positive news, views on a realistic timeframe for a vaccine vary widely. Seventy-three percent of healthcare industry leaders polled in a Lazard survey believe a vaccine will not be widely available until the second half of 2021. This stands in stark contrast to comments from Goldman Sachs analysts who suggest investors have not fully appreciated the chances of a vaccine being approved in 2020, as reported by Bloomberg on Friday.
This divergence of opinions is playing out in the real economy as equity valuations continue to rise, even while the United States sees record numbers of COVID-19 cases, deaths and the reinstatement of lockdowns that had been prematurely eased just weeks ago. North Carolina, Louisiana and Kentucky reported record case counts on Sunday.
To be clear, the resurgence of the virus is not a second wave. The increase in testing indicates this is simply a continuation of the initial spread that shuttered the economy in March. As a result, over the last four months approximately 51 million Americans have filed for first-time unemployment claims, as trillions of dollars of fiscal aid and liquidity commitments have been put forward by the Federal Reserve to stabilize the economy, and Congress is debating additional aid as several deadlines are approaching.
The unfortunate reality is that COVID-19 has been so devastating to the real economy, our society, and the national psyche, that we as a collective group have yet to consider a reality that may not include a near-term vaccine and the substantial challenges associated with an impaired economy.
The science hasn’t gotten any easier
Scientists and researchers around the globe have been moving at an unprecedented pace toward a vaccine, looking to cut years off a development timeline that often takes the better part of a decade.
According to Joseph A. DiMasi, director of economic analysis at Tufts Center for the Study of Drug Development, only an estimated 12% of new drugs entering clinical development are approved for marketing. The limited number of novel drugs that make it to phase III clinical trials face a 54% failure rate, with 57% of those resulting from a lack of efficacy, according to a 2016 study published in the Journal of the American Medical Association.
That efficacy is inexorably tied to safety, and a trial must identify a dosage that balances the health benefits and risks to the patient. In the case of Moderna’s vaccine, initial phase I findings on a population of 45 healthy adults between 18 and 55 indicate that the vaccine did induce an antibody response. However, recipients of a larger dose (250-μg) did not develop a significantly better antibody response as compared to a smaller 100-μg dose, and the larger dose was associated with more negative side effects. While that may mean younger populations can receive a lower vaccine dosage with the same antiviral benefits, adults over 65 may need a higher dosage to garner necessary immunity, according to a 2014 study of dosage efficacy for the influenza vaccine. This presents a challenge, as seniors—who represent the majority of COVID-related deaths—are less resilient to negative side effects of these drugs. The phase III Moderna trial will involve a 100-μg dose, and will be the true test of efficacy.
Reading too much into phase II results is problematic as they are generally of a small sample size (less than 100 individuals), not placebo controlled and are focused on establishing proof of concept, initial safety and efficacy, while also identifying side effects. Phase III trials, which Oxford/AstraZeneca started in conjunction with phase II, and Moderna plans to start on July 27, consist of thousands of subjects across multiple locations; they are placebo controlled, and aim to confirm safety and efficacy, while monitoring adverse reactions from long-term use. According to reports from the vaccine developers, many are expected to announce phase III results and receive emergency use authorization (EUA) from the Food and Drug Administration later in 2020 or early 2021.
Although more than 160 vaccines are under development globally, this alone may not be enough for the markets to hedge against extremely high failure rates, and an aggressive time frame for approval. In addition, even if emergence use authorization is granted, will that be sufficient from a safety perspective to allow distribution on a widespread basis to healthy individuals?
Market recovery decouples from economic recovery
In our observation, much of the discussion dominating headlines is simply due to the rebound of markets from the overselling that took place in February and March that priced in two major factors: the worst possible outcome of the virus on the U.S. economy, while little was known, and the robust policy response from fiscal and monetary authorities to ensure adequate liquidity and access to capital for not only Wall Street but also Main Street.
Unfortunately, the recovery of the real economy has lagged the market recovery. It is becoming more apparent that the decoupling of the markets from from economic reality is now hinged on the hope for a vaccine that could allow children to safely return to school and bring consumers out of their homes and back into the economy. The market is now trading on headlines rather than economic and financial fundamentals; this, of course, is not sustainable and poses risks to the economy.
The disconnect was most vividly illustrated on July 14 when Moderna Inc. announced initial phase I results of its COVID vaccine. While an impressive milestone, the market reaction to this announcement completely overshadowed the other economic news, as the United States reached 3.7 million confirmed COVID cases, the Big Six U.S. banks announced a collective $35 billion in bad debt reserves, and general corporate earnings commentary indicated businesses and the economy have a long road ahead to reach recovery. “Right now we are seeing nothing that is consistent with an 11% unemployment rate”, said Bank of America CEO Brian Moynihan. This was a measurable market reaction to vaccine news that even with the best possible outcomes faces significant hurdles before any vaccine is deemed safe for administration to billions of healthy people.
In short, given the known challenges in developing a safe and effective vaccine, and based upon our review of industry specialists, our view is that markets assumption of a widely available vaccine in 2020 is highly presumptive.
Absolute economic recovery rests on the eradication of COVID-19.
In the absence of a vaccine, the only way to move toward economic recovery is by stemming the virus’s spread by continued social distancing, the use of personal protective equipment such as face masks, and increased testing. While we expect a vaccine to eventually come to market, the long road back for the economy requires individual discipline, and state and national policy predicated on science.
The unprecedented amount of capital and scientific effort being applied to the development of a vaccine is likely to produce at least one that will receive EUA, which allows the FDA to make unapproved drugs available during a health crisis. However, the question still stands as to how large and frequent a dose will need to be administered to support an immune response, how effective (what level of protection) will the immunity be, how long immunity last, and most importantly, how long will it take for a vaccine to be widely produced and distributed in sufficient numbers to effectively vaccinate a population. Several companies have already begun to ramp up manufacturing capabilities to produce millions of doses in anticipation of EUA later this year. We must keep in mind that any production will first be allocated to those at the highest risk—health care workers, first responders, the elderly—before being made available for broader distribution.
These challenges and questions are not intended to cause concern, only to raise awareness of what may lay ahead. Equity valuations and public statements by political actors all imply a vaccine will be made available in 2020 and allow the economy to quickly recover to pre-pandemic levels. The reality is that the timeline, efficacy, cost and distribution of a vaccine all introduce a significant number of factors that we do not believe are appropriately reflected in the markets and public sentiment. Our concern is that while the markets rise, Main Street continues to struggle; when a second wave or market correction comes, it will be the American household and the real economy that suffer.