Vaccine As a Subscription Service

Photo by CDC on Unsplash

“Bad business models make bad technology.” — Moxie Marlinspike, Creator of Signal.

TL;DR: New mRNA technology is a biotechnological leap in progress but our ability to scale (Uber for vaccines) and mandate (Regulatory or media capture) mRNA medicines opens the world up to self-inflicted medical crises. We can limit the risks of a “biological Chernobyl” by being thoughtful about the business models used to develop and deploy mRNA medicines.

Incentives Drive People and Companies

Human behavior is generally irrational and often unpredictable, except for one thing.

People do what they are incentivized to do.

Of course, incentives can be mixed, conflicting, perverse, transparent, opaque or irrational. As a rule, however, if you can map incentives in any human system, you can predict outcomes and decent judgement about what or who to trust.

Essentially, you can categorize individual incentives along Maslow’s Hierarchy of Needs. Cold people will move toward warmth. Lonely people towards love. Shamed people toward redemption.

Individual incentives are complicated.

Corporate incentives are simpler.

Corporations do what makes the most profit (or increases stock value) and keeps the executives out of jail and away from the risk of personal ruin.

When incentive structures are well designed, we have efficient, self-regulated markets that provide consumers with the goods they want at a reasonable price.

When incentives are bad, you get a moral hazard.

Moral hazards are bad because they cause society to divert resources into things which are bad for society.

The most common moral hazard is when a corporation is shielded from risk of loss or ruin. Take, for example, the housing bubble that led to the Great Recession.

Subscription Models Drive Markets

Now, let’s talk about subscription-based revenue models (a.k.a. recurring revenue models) and why investors love them.

1. Subscriptions are predictable. Subscribers produce reliable revenue flows that are easier to maintain and grow than one-off product sales which require winning the same customers again after every sale. Predictability means less risk, which is good for investors.
2. Subscriptions are scalable. Subscription business models allow companies to understand exactly their customer acquisition cost. As a result, companies know they can spend X dollars and get Y new customers.
3. Subscriptions are direct-to-consumer. Subscription services own the customer data and know exactly who their customers are. Not having to go through a retailer means no middle-man is taking a cut of the revenues.

How powerful is the subscription model? Consider that 14 of the Fortune 500’s most profitable companies use subscription models of some kind.

Berkshire Hathaway? Owns several insurance companies.

Apple? Apple Music, Apple TV and Apple One.

JP Morgan Chase? Mortgages are a subscription you can’t cancel.

Verizon? Mobile service is a subscription too.

As a company in the modern economy, the most valuable strategy you can devise is to scale out a subscription service. There is probably no better case study of this phenomena than Disney.

Rewind to February of 2020…Disney released Disney+ the prior quarter and announces stunning subscriber numbers. Shortly after, the pandemic forces Disney to shut down it’s parks and attractions.

It probably does not need explaining, but Disney’s parks are the centerpiece of it’s intellectual property engine. Pre-COVID, the parks and attractions accounted for 40% of the company’s revenues with another 25% coming from ESPN. The pandemic shut down the parks and cancelled live sporting events on ESPN, but a funny thing happened to Disney on the way down the drain…

Subscriptions.

Disney’s share price dropped from $139 on February 21st to $86 on March 20th but recovered to $181 (a record high) by New Years Eve of last year. All of this with parks revenue dropping by almost $10 billion (down nearly 40%) from the year prior.

Investors so highly valued the future potential subscriber earnings of Disney+ that the company actually became more valuable with its iconic parks flywheel crippled and revenues down double digits.

Notably, some analysts believe that Disney will turn some of its attractions into experiences only available to Disney+ subscribers at a as-of-yet-unannounced higher tier.

Even the parks are going to be a subscription service in the future.

So far, we’ve established two facts.

1. Incentives matter and corporations are incentivized to make profits.
2. Subscription models are the market’s preferred way of making profits.

Now, let’s get back to vaccines (and consider the argument that makes my analysis controversial).

American pharmaceutical companies can use the pandemic to make vaccines into a subscription service and that poses a substantial risk to our health and liberty.

The Vaccine Business

Until the last decade, vaccines weren’t a sexy, controversial or very profitable business line. Vaccine makers sold bulk orders in developed countries that were the staple immunizations for anyone going to public school.

This Atlantic article from 2015 gives a good summary of the situation for vaccine makers prior to the release of “blockbuster” vaccines for HPV and Hepatitis B. These vaccines added new vigor to the market as they weren’t just for children. Additionally, demand in developing countries for vaccines increased, growing the total market for shots like the MMR vaccine.

Legacy vaccine slates are a proto-subscription of sorts in that almost everyone born in the United States gets them as a rite of passage. Those vaccines however, are a one and done aside from the occasional booster or flu shot.

Not the best way to get into the subscription business.

At this point, the thoughtful reader may argue that prescription medications are a true subscription model business. When a person gets a prescription for A,dderall or Viagra they usually take the drug for years on end and refills can even be done via the mail.

This is true. Prescription medications are a good business even with the long development timelines and eventual loss of patents as drugs become generic.

If you recall, however, one of the key aspects of the subscription model Wall Street adores is that they require no middle man. Prescription drugs are subject to a prescription by a middle man who happens to be your doctor.

For a direct-to-consumer business, doctors are a tough friction point. Before prescribing, your doctor must know about the drug, be willing to prescribe the drug and then keep renewing the prescription.

Imagine if you had to visit a psychiatrist and get a referral to be able to purchase Disney+ and then every three months you had to go back for another visit to review if the Disney+ subscription was working. There would be a lot fewer Disney+ subscriptions sold to date.

Sales Pipelines Gone Wild

Drug makers know that motivations of medications and vaccines are different. People purchase medications when they feel pain or discomfort. For medications, the ailment is the trigger for consumer behavior.

The motivations for vaccines (like all prophylactics) are fear and regulatory requirements. For vaccines, anxiety is the trigger for consumer behavior.

Vaccines and medications are each prone to their own kinds of moral hazards.

Let’s look at two prior examples.

Pharmaceutical companies know doctors are a barrier, and that’s why they have sales teams, advertisements, and consultants working to get those scripts written.

In some cases, these marketing efforts can get out of hand…like creating a mass opioid epidemic which ruins millions of lives.

The consulting firm, McKinsey, recently settled a case for almost $600 million over it’s role in helping Purdue Pharma sell OxyContin. Among other activities, McKinsey staffers would shadow Purdue sales reps at doctor’s visits and then coach the salesperson on how to better sell the drug.

In effect, McKinsey did what would be normal in any other industry but, given the nature of drugs and the complex system of the human body, has horrific consequences in pharmaceuticals.

Again, for almost 30 years, the incentives at play were simply to sell more drugs with no risk exposure.

The same sales incentive present in pills can also be present in vaccines.

A decade ago, there was a scandal in Europe over consultants paid by the pharmaceutical industry who advised European countries and the WHO to stockpile drugs and untested vaccines.

Later the investigation found the companies were also prodding the British media to intensify coverage of the Swine Flu in order to create panic.

Again, in any other industry this would be a world-class public relations and lobbying effort. In the health industry, you can destroy lives and public confidence.

The COVID-19 Vaccine Marketplace

Now, here we are in 2021, midway through a massive global vaccine rollout. We know four things about our current marketplace for COVID vaccines.

The development costs of the COVID-19 vaccines have all been taxpayer funded.

While the mRNA vaccine technology has been around for a decade, relatively few dollars were invested in bringing the technology to market. Taxpayer funding allowed the new vaccines to reach the market quickly while allowing the pharmaceutical companies to retain the potential profits. (Note: Some vaccine makers forwent federal funding for portions of vaccine development).

With marginal development costs funded by company revenues, profits on the vaccines should be healthy.

Governments have pre-ordered billions of doses of the vaccines.

Governments are the primary buyer of the vaccines and have committed to large orders. As a result, the marketing expenses for the vaccine are marginal for the industry. Removing marketing costs from the equation should also help keep margins healthy.

Vaccine liability is waived for vaccination related damages.

As with most vaccines, the manufacturer bears no liability for vaccine related damages. People harmed by vaccines take their claims to the National Vaccine Injury Compensation Program while people harmed by COVID vaccines can take claims to the Countermeasures Injury Compensation Program.

Removing the legal costs of a new product also bolsters margins.

COVID vaccination and boosters are likely to be de facto compulsory for most Americans.

While unlikely the US will make the vaccine compulsory for all citizens, it’s likely that proof of vaccination will be required by many private entities even with legislation protecting businesses from COVID liability.

The politics of vaccination are intense and most large businesses will simply opt to make it mandatory for employees, visitors, customers or vendors who use in-person facilities. Specifically, air travel is likely to be the key driver of ongoing vaccination and boosters by requiring passengers to show proof of vaccination.

Again, the demand outlook for the vaccine is strong, independent of sales efforts and that also helps margins for vaccine-makers.

I’m not critical of the pharmaceutical companies for having their costs covered and keeping the profits. Without a robust pharmaceutical industry, we would never have been able to develop vaccines within the year.

I also have no reason to suspect that vaccine-makers aren’t acting out of patriotic duty and humanitarian interest (aside from demanding sovereign assets as collateral from South American countries to cover potential legal costs) in helping the world through a crisis.

Notably, Pfizer and Moderna both showed sluggish financial results last quarter.

The Pfizer summary in Yahoo even noting, “It looks like the market is not ready to buy into the vaccine story despite the continued problems on the coronavirus front and the potential for recurring revenue in case of annual vaccinations.”

The industry may just be happy with the eventual profits from the COVID vaccine and simply use those profits to invest in the further development of amazing mRNA vaccine technology for other ailments.

And yet, I do see the potential for extreme moral hazard.

The current vaccine setup in the United States effectively socializes 100% of the costs of vaccine development, distribution and sales, while privatizing 100% of the profits to a handful of companies.

This poses two questions.

1. Why would any company ever let this market condition pass?
2. What resources are needed to keep it going?

Here are my answers.

1. No, a company would never let a 100% profit margin pass it by, aside from a legal reason (and there are no legal barriers for this scenario).
2. The only resource you need is money in order to buy lobbying and public relations efforts.

Consider the following scenario:

As the majority of Americans get the vaccine and the country reopens, the sense of fear starts to ebb. A little debate exists about the need for boosters but, generally, life is returning to normal.

In order to keep the government covering the vaccine costs and making big orders, the fear level must be kept high. The industry’s PR consultants fund research on the importance of boosters and the emergence of new strains and feed the results to the media.

The traumatized public will do anything to avoid another pandemic and demands the government continue funding vaccine development and keep stockpiles on hand, just in case of a new outbreak. In the private sector, companies are pushed into proof of vaccination requirements for employees, travelers and anyone working with the public.

Eventually, the PR efforts and lobbying produce enough momentum for booster requirements. One shot every year at minimum and every six months to be safe.

The VaaS Model is Born

The growth of telemedicine and services like Uber has created a comfort for at-home services among Americans. A sharp young MBA at a vaccine maker proposes launching the world’s first Vaccine As a Service (VaaS)business model…i.e. the peace of mind that comes with routine vaccination without the friction and hassle of visiting your doctor office.

Using a branded “health passport” app on mobile devices, the consumer can schedule an at-home visit from a certified “vaccine tech” who administers the vaccine after a short consultation with a telemedicine doctor. The tech waits with the consumer for 15 minutes to monitor for any reactions and then certifies vaccination and leaves for the next customer.

The service can be paid upfront yearly for $200 or annualized each month for $20. At first, health insurances don’t cover the expense but employer Health Savings Accounts defray the cost for consumers who see the value. Eventually, the service hits critical mass and insurers are forced to start cutting deals with the VaaS companies.

Soon, new “services” are able to run on top of the “platform.” Blood tests are taken to create bespoke mRNA vaccines for a slew of illnesses.

When the subscription rates are flagging, the PR team churns up media coverage about some resurgent disease or the risk posed by the “under-vaccinated.” If costs are rising or supplies are lagging, the lobby team hits the street to shake out new government funding to offset operational costs or mandate a new vaccine as a matter of “public health.”

As the industry grows, it may be able to achieve enough regulatory capture to make vaccination compulsory for flying, public transit or events with large crowds.

A VaaS subscription becomes the cost of doing business in the civilized world.

All the middle-men (aka, your doctor) are cut out and there is a near frictionless flow of vaccine from the manufacturer to your arm. All the product development and liability costs are socialized through the government for a near frictionless flow of profit from your wallet to the manufacturer.

The last time we socialized the risk of a major industry, we got the 2008 financial crisis. By socializing the risk of the pharmaceutical industry, we are risking a biological crisis of science fiction proportions.

We must realize that mRNA vaccines are essentially a new technology and, like the internet or mobile phones, we can’t fully predict the consequences of its existence.

The new technology and distribution system, however, will be a real advantage in stopping future pandemics. We’ll be able to develop vaccines in a few months and distribute in a few weeks. This speed and scale poses existential threats.

New biotechnologies, public fear, socialized risk, privatized profit and aggressive business models are the recipe for a disaster we may never be able to unwind.

Inevitably, we’ll come to see mRNA vaccine tech as analogous to installing an app or upgrading your operating system. Using VaaS distribution systems, we’ll be able to scale out vaccines at lighting speed.

However, the consequences of bricking your phone pale in comparison to the consequences of crashing your body.

How To Prevent Biological Chernobyl?

So, how do we take advantage of new vaccine technologies, stop the pandemic (or future pandemics) and avoid a sci-fi biological risk?

We introduce risk aversion and create an incentive for considerate implementation.

Here are three ideas for managing our new vaccine technology.

• Any vaccine and related intellectual property developed using tax dollars should become public (generic) within three years after full FDA approval. As a result, no company has a long term interest in pressing the vaccine beyond what is medically necessary but may still take years of healthy profits.
• A company chooses to keep it’s intellectual property claims on a vaccine developed using tax dollars after 3 years but shares liability with the government for damages caused by the vaccine. As a result, no company has an interest in aggressively pushing a vaccine beyond what is proven safe.
• No vaccine can be distributed over a VaaS network unless it is fully approved by the Food and Drug Administration. Vaccines with emergency use authorizations can only be distributed through medical practices or government contracted facilities.

The reality is that in both scenarios, vaccine costs would rise in the United States to maximize short term profits or offset potential legal liabilities. But the higher costs are preferable to the risk of biological disaster if a vaccine technology “has a glitch.”

Our new ability to rapidly develop and deploy vaccines is a true technological marvel that would not be possible without a robust pharmaceutical industry. The processes we’ve laid out may prevent countless future pandemics from emerging in the future.

What we must ensure is that we balance the upsides of convenient vaccination with the risk posed to public health or individual liberty through overly aggressive vaccinate development and distribution.