Safe and efficacious vaccines are our best tools for defeating COVID-19. An unprecedented research and development effort has led to 12 vaccines with full or limited use emergency authorizations globally, but vaccinating everyone in the world as quickly as possible will require additional production capacity. Currently, there is not enough manufacturing capacity globally to accelerated immunization around the world in the next six months.
While there is widescale agreement on the urgent need to expand manufacturing capacity for COVID-19 vaccines, the best way to go about this remains the subject of debate. Some discussions focus on capacity expansion through the vaccine developers sharing intellectual property (IP) and manufacturing know-how, so that as many companies globally can manufacture COVID-19 vaccines. While public sharing of IP and manufacturing know-how remains an important area of debate, it is prudent to consider how the companies that have developed the vaccines can be incentivized to expand their manufacturing capacity—either by adding more in-house capacity, finding additional third-party contract manufacturing sites, or through voluntary licensing arrangements. In a new note, we try to identify the least-costly financial instrument to achieve this goal.
What’s holding back the expansion of manufacturing capacity?
Developing and constructing new manufacturing capacity for COVID-19 vaccines is both resource- and time-intensive. It can take up to 9 to12 months to build capacity and/or ramp up production capability and obtain regulatory validation, and the capital expenditures can run as high as $500 million to $1 billion. Moreover, the medium-term demand for a given COVID-19 vaccine is highly uncertain. The emergence of new variants, duration of protective immunity, results of studies in pediatric and other patient groups, potential success of competing vaccines, and uncertainty about future investments by country government to purchase significant quantities of COVID-19 vaccines—together they make it challenging for a vaccine developer to invest in large-scale capacity. If the demand doesn’t turn out as expected, such capacity may remain unused.
The benefits of vaccine manufacturing capacity expansion are much higher to society than to a vaccine developer. Underinvestment in manufacturing capacity which leads to slower pace of vaccination creates an average monthly GDP loss of $500 billion—a cost borne by all of society.
Instruments to expand manufacturing capacity
Country governments; global organizations such as the Coalition for Epidemic Preparedness Innovation; development finance institutions (DFIs) such as the US International Development Finance Corporation and the International Finance Corporation; and private philanthropies such as the Bill & Melinda Gates Foundation have all used (or explored the use of ) financial and contracting instruments which can help expand manufacturing capacity. The US government invested in manufacturing capacity expansion for vaccines and key input supplies through direct grants and purchase contracts awarded under Operation Warp Speed. The EU and many other countries made advance purchase contracts with several vaccine developers. Now with vaccines approved/authorized, it remains unclear what is the best financial instrument to encourage greater investment in manufacturing capacity.
We categorize the range of financial instruments into four main types:
Production subsidy. Production-linked tax credits or direct grants under which a firm that manufactures a COVID-19 vaccine gets a tax credit or payment for each unit of output.
Capacity subsidy. Grants to vaccine developers in an amount that is proportional to capacity.
Concessional loan. Low-interest loan for a portion or all of the capital investment.
Volume guarantee. The government agency or DFI guarantees a certain volume of the vaccine will be purchased over a set period of time (e.g., acts as a buyer of last resort). If market demand turns out to be lower than the guaranteed volume, then the guarantor purchases the difference from the manufacturer.
Building upon our earlier work, we try to identify the least costly instrument that incentivizes the COVID-19 vaccine developer to build sufficient capacity to meet global demand. With mRNA vaccines as an example, and using publicly reported data and reasonable assumptions, we assess the costs of these financial instruments using a mathematical modeling and optimization framework.
Which instruments work best and under what conditions?
Left to their own devices, COVID-19 vaccine developers may underinvest in building vaccine manufacturing facilities. The significant investments required to build manufacturing capacity combined with a high degree of uncertainty in medium-term demand leads to such behavior. National governments, DFIs, and global agencies can incentivize manufacturing capacity expansion using capacity subsidies, concessional loans, and volume guarantees. Our analysis reveals that concessional loans alone are never sufficient to increase the vaccine developer’s capacity to a level that society needs. The combination of a concessional loan coupled with capacity subsidy can achieve the desired level of capacity investment at the lowest costs for the implementing agency. When the government or philanthropic organization has a stronger outlook regarding medium-term demand but the vaccine developer has a more conservative view of future demand, volume guarantee is the only viable instrument to incentivize socially optimal manufacturing capacity.
These findings hold up under various scenarios of demand, price, capacity costs, and social values that we analyze. One important caveat: we consider scenarios in which a single government or DFI provides such instruments. When there are more than one and each implements different instruments, it leads to gaming behavior that can make some of these instruments infeasible or ineffective. Such dynamics are not captured in our analysis.
The use of such instruments should be evaluated not only for final steps of vaccine manufacturing capacity but for all critical inputs for manufacturing such as glass vials, lipids, and single-use bioreactors.
The success of specific instruments in spurring an expansion of manufacturing depends on policy cooperation across country governments, global agencies, private philanthropies, and DFIs, who are all working to figure out ways expand vaccine production. But if we can achieve policy cooperation and select the right instruments, we can expand production and speed up the pace of vaccination, globally.