Multi-Agency Funding for COVID-19 Vaccine Development

By Jacob S. Sherkow, Lisa Larrimore Ouellette, Nicholson Price, and Rachel Sachs

Moderna, Inc., a Cambridge, MA-based biotech company, is a leading contender in the race to develop a SARS-CoV-2 vaccine. Moderna’s vaccine, however, works using a completely novel mechanism, unlike any other vaccine currently approved anywhere in the world. Despite this, the U.S. government—and two agencies in particular, the NIH and Biomedical Advanced Research and Development Authority (BARDA)—has invested, heavily, in the vaccine’s development. This week, we explore how these investments interact through different forms of research partnerships, and what this says about IP, novel technologies, and innovation policy.

What is Moderna’s vaccine and how is the government funding it?

Moderna’s vaccine candidate, mRNA-1273, is a so-called “mRNA” vaccine, which works through a novel mechanism that is not used in any existing vaccine. Traditional vaccines involve injecting an inactivated virus or fragments of a virus; the immune system learns to attack the foreign material and “remembers” that target if the patient is later exposed to the virus. mRNA vaccines take a different approach. The vaccine is a small piece of mRNA—an intermediate between DNA and protein to be made by a cell—coding for the “spike protein” of SARS-CoV-2, which targets the surface of human cells. In theory—but not yet conclusively demonstrated—once the mRNA is injected into a patient’s arm, it will travel inside cells, which will then produce the spike protein. The immune system, recognizing a foreign protein, should attack the spike protein—and learn to attack and destroy the virus just as if the patient were actually infected. 

This approach is new and exciting. mRNA vaccines have the potential to be cheap, easy, stable to manufacture, and easy to scale up to very large quantities. And an mRNA vaccine could be changed to target a different virus (or different variant of the same virus) more easily than a traditional vaccine. 

But the newness of mRNA vaccines is also potentially problematic. mRNA vaccines have never been used or made at scale, and one researcher has described Moderna’s vaccine as having the “most unknown unknowns.” Nonetheless, mRNA-1273 was ready for testing on February 7—weeks before the first reported COVID-19 death in the United States. The firm began Phase III trials on July 27, which it expects to complete by the end of this year after early promising results. 

At the same time, Moderna’s vaccine has not come out of nowhere. Moderna had been working on mRNA vaccines for years under a longstanding CRADA (p. 19) with the National Institute of Allergy and Infectious Diseases (NIAID), a part of the NIH. The agreement consisted of some level of funding from Moderna to the NIH, along with a roadmap for NIAID and Moderna investigators to collaborate on basic research into mRNA vaccines and eventually development of such a vaccine. Such agreements are not unusual for government agencies in general or the NIH in particular. Often, the industry partner may engage in more basic research than it otherwise would, and the NIH takes a greater interest in the later development than it normally might—and often partial ownership of the final product (as it claims for Moderna’s vaccine).

Even with the NIH as a partner, successfully taking a therapeutic product across the finish line—let alone an untested, novel vaccine to be produced at immense scale to combat a globe-spanning pandemic—needs additional support. Enter BARDA. BARDA, which may be less familiar to innovation policy scholars than NIH, is an arm of the Department of Health and Human Services formed in 2006 in response to—wait for it—SARS-CoV-1 (and other health threats). BARDA focuses on countermeasures for biomedical and public health emergencies, which can range from a bioterror attack to public health crises like antibiotic resistance. It provides direct investment in technologies to firms, but also engages in public-private partnerships (PPPs) and coordinates between agencies. A specific part of BARDA’s mission is taking technologies through the “valley of death” between creation and commercialization.

Taken together, Moderna’s vaccine (if successful) will be a product of CRADAs with NIH and a PPP with BARDA—as well as an advance purchase agreement for 100 million doses for milestone payments up to $1.5 billion. Amid the substantial government funding Moderna has received, it has also taken on substantial debt; according to its SEC filing, it had accumulated $1.5 billion in debt by December 31, 2019.

When should policymakers consider supplementing market rewards for innovation with direct public funding?

In general, innovators developing new healthcare technologies (including vaccines) can expect to reap a certain level of market-based rewards, particularly for products serving previously unmet medical needs. But in many cases, market-based rewards may fail to substantially encourage the development of important new technologies; there is additional value in mixing market-set rewards with government-set rewards. The social value of a particular intervention may outweigh the amount an innovator firm is likely to earn in the market because the intervention creates positive externalities, or because the value for some patients is greater than their ability to pay, or because certain aspects of the intervention cannot be patented or otherwise protected by traditional forms of intellectual property. All of these are likely to be true for a pandemic like COVID-19.

Governmental rewards in situations like these may take a variety of forms, several of which we have previously considered in this blog series. Particularly common may be grants, but prizes and advance purchase commitments have also been used to speed the development against healthcare technologies related to COVID-19. But CRADAs, which have the purpose of “mak[ing] Government facilities, intellectual property, and expertise available for collaborative interactions to further the development of scientific and technological knowledge into useful, marketable products” may also be part of the government’s portfolio of innovation policy tools.

In theory, CRADAs should be particularly useful where this type of non-financial support from the government, such as the transfer of tacit knowledge or the pooling of information resources that are typically otherwise artificially divided between different actors, would be beneficial. Given that vaccine development and manufacturing and know-how are highly specialized fields of expertise, CRADAs may be advantageous in the context of vaccines against COVID-19. In addition, non-CRADA PPPs, involving formal agreements between both governmental and private-sector actors to share resources or information, may also be beneficial, and many of the advance purchase commitments for vaccines seem to fall into this category. These arrangements enable the government to share in the financial costs and risks of developing the product in question, while also obtaining a benefit in terms of ownership of the end product. PPPs, like CRADAS, can also serve to pool expertise and transfer information between parties. 

Despite these advantages, many CRADAs and PPPs still fail to produce marketed products. This is not unexpected, given both the large risks and challenges of developing new technologies in the healthcare space and the likelihood that both CRADAs and PPPs will arise in particularly complex technological areas (such as Alzheimer’s). The failure rate might simply be higher than normal. This complexity also makes it challenging to evaluate the best uses of each system. For instance, a CRADA between the Army and Sanofi regarding the development of a Zika vaccine has yet to result in an approved product, due to ongoing development roadblocks. Pooling and information-sharing between the public and private sectors is no guarantee of success.

How should public funding for biomedical research affect pricing?

Given the massive public funding involved in developing COVID-19 vaccines, politicians and patient advocates have criticized vaccine manufacturers like Moderna who won't commit to selling their vaccines for no profit, arguing that for-profit pricing makes U.S. taxpayers “pay twice” for a vaccine. As we’ve explained before, these discussions often conflate the separate issues of affordability for patients and incentives for developers. The real concern is not about access—the federal government is committing to making COVID-19 vaccines available to all Americans for no out-of-pocket costs. Rather, the concern is that vaccine manufacturers will receive “too much” incentive—why should they be able to charge above-marginal-cost prices when taxpayers have already paid a substantial amount of vaccine development costs? A related argument centers on the communitarian commitment that companies who partner with the public sector should have to restrain profits.

As a legal matter, there are many tools the federal government could use to limit the ex post reward for a successful vaccine. Some commentators have suggested that the government allow other manufacturers to use Moderna’s technology, either due to joint government ownership of at least some relevant patents or by issuing what is effectively a compulsory license under 28 U.S.C. § 1498. Expanding generic manufacturing worked for driving down the price of easy-to-copy HIV/AIDS drugs, but is unlikely to be effective for more complex biologic medicines like vaccines, as woefully demonstrated in the context of other complex biologics. 

And yet even when just dealing with a single producer like Moderna, the federal government has options. Efforts to put “fair pricing” clauses in CRADAs in the early 90s were unsuccessful—drug companies refused to sign—but the federal government can negotiate prices in procurement agreements. Or it could turn to the many proposals that it has failed to implement to lower prescription drug prices more generally. State governments also have a number of potential tools for reducing drug prices.

As a policy matter, however, should the government exercise these options? It might sound intuitive that a firm that receives $X in public funding should have its profits reduced by $X (or should return $X to the government from those profits), but if public funding is directed toward innovation that the market undervalues—like vaccines, particularly in a pandemic when they have huge positive externalities and speed is of the essence—then reducing the market reward for these technologies may be counterproductive. This is why it doesn’t make sense as a general matter to ask firms that make use of public funding to provide the public with a “return on investment.” As noted above, although Moderna had substantial government funding, there were good reasons for the government not to pursue this project in-house. It is hard to imagine a public entity having a vaccine ready for testing by February 7, or moving into Phase III trials less than six months later.

Does this mean that the government should pay anything Moderna demands? Of course not. The “market” for drugs and vaccines is in many ways government-constructed, and policy changes like government healthcare coverage that affect the expected market size have demonstrable effects on pharmaceutical innovation; the U.S. healthcare system is not, classically, a “free market.” U.S. policymakers should consider following the lead of most other countries in adding some form of cost-effectiveness analysis (also known as health technology assessment) to healthcare reimbursement policy, which would limit reimbursement for drugs that provide little benefit over existing treatments. Changes in this direction by private pharmacy benefit managers had a measurable effect in pulling innovation toward more scientifically novel research; reform at the federal level would presumably be even more effective. In short, policymakers should make use of the large number of tools at their disposal to tailor developers’ rewards to the actual social value that their products provide. And for COVID-19 vaccines, that value is pretty darn high.

Disclosure: Rachel Sachs sits on the Midwest Comparative Effectiveness Public Advisory Council for the Institute for Clinical and Economic Review, a health technology assessment organization. She has had no involvement with ICER’s analysis and publications on COVID-19 treatments and vaccines.

This post is part of a series on COVID-19 innovation law and policy. Author order is rotated with each post.