In July, with the H5N1 virus (aka bird flu) threatening to jump to humans, the U.S. Department of Health and Human Services awarded Moderna $176 million to develop an mRNA-based pandemic influenza vaccine.

While we applaud the action, we feel it is uncomfortably similar to hiring an architect to design a storm shelter even as the sky darkens and wind ruffles the roof shingles. We must prepare now for the viral storms we know are coming over the next five, 10, 20 years.

In particular, the world needs oral antiviral therapeutics for treating acute disease before vaccines are available. Vaccines can’t be made until a novel virus’s genetic code is sequenced. But antiviral pills could be available when an outbreak occurs and could be the difference between life and death for the more than one billion people who are unable or unwilling to use vaccines. Note, too, their additional benefits: therapeutics, of course, are designed to reduce mortality and morbidity during viral outbreaks, but they also serve to ease hospital overcrowding and, when deployed effectively, slow viral spread.

Contrary to conventional wisdom, building an antiviral pipeline isn’t a daunting scientific challenge. Researchers have the know-how to discover and develop broad-spectrum antivirals that target both existing viruses, like dengue and zika, and potentially catastrophic novel viruses that have not yet emerged and for which humans lack immunity.

The real challenge is financial: without a clear and present viral threat, there is currently little incentive to invest in R&D. Once a viral outbreak occurs, demand is likely to soar, but by then it’s too late. After the virus SARS-CoV-2 (which caused the disease Covid-19) emerged in 2020, a handful of companies (fueled by taxpayer dollars) developed both therapeutics and vaccines that generated more than $200 billion in revenues. Yet Covid-19 still caused seven million deaths and trillions in economic losses. If the therapeutics had been developed in advance and stockpiled, they would have saved a large number of lives – and generated even more massive profits for the pharmas.

Futures Market to the Rescue?

We propose a novel futures market designed to bridge the time gulf between pandemic neglect and panic, between no market and clamoring market demand. By more evenly spreading risks and potential returns, this market would incentivize investment in antiviral drug development even when there is no imminent viral threat – which is precisely the kind of sustained, long-term funding needed to arm humanity against future outbreaks. We believe this market approach could enable the deployment of approximately $2 billion into early-stage R&D focused on developing broad-spectrum antiviral drugs. But we’re getting ahead of ourselves.

This proposed futures market in antivirals would facilitate trades in financial instruments derived from the bundling of antiviral therapies currently in development. The fundamental instrument would be an options contract written on the underlying value of the antiviral assets. Assets include “small
molecule” compounds (as opposed to larger molecule compounds that are generally more fragile and more difficult to synthesize) at the sequential stages in the drug development pipeline: Lead, Pre-clinical Candidate, Clinical Phase 1 Candidate, Phase 2 Candidate, Phase 3 Candidate and New Drug Application.

Investors trade on the value of drugs in development all the time – for instance, when a biotechnology company with an oncology therapeutic goes public based on promising early research findings. As the therapeutic succeeds in progressing along the development pipeline reaching pre-clinical and clinical milestones, company stock shares increase in value, providing a means to generate much-needed capital for the ferociously expensive R&D needed to bring the drug to market.

But since virologists are uncertain about which virus will cause the next pandemic, few if any individual companies are going public on the promise of antiviral drugs to protect against the unknown enemy. Investing piecemeal in antiviral R&D is simply too risky.

Virologists, however, do know with a high degree of certainty that the next catastrophic viral outbreak will emerge from one of eight known viral families. Importantly, our futures market concept aggregates pipeline compounds that target all eight virus families of pandemic concern, encompassing as much of the potential market as possible.

Think of this bundling of different assets from multiple innovators as a kind of “index fund” that diversifies investments across different threats. This spreads the risk for investors in futures contracts, offering potential returns when rare events like outbreaks or pandemics occur.

In the grid on page 46, the rows represent the virus families with pandemic potential, and the columns represent subclasses of antiviral assets. The market will fluctuate as viral threats rise and fall and as assets move closer to the new drug application stage. Market participants could bundle their investments to reflect their return requirements, risk tolerance and time horizon.

Contracts would be “in the money” if any of the compounds covering the likely virus families suddenly becomes valuable. This lowers the risk relative to investment in any single compound by diversifying the portfolio of compounds.

How Antiviral Drug Options Contracts Would Work

Generally speaking, options contracts grant holders the right (but not the obligation) to buy or sell something at a predetermined price up to a specified date. Options holders can choose to exercise their contract rights or to sell the contracts to others. In this case, options contracts do not involve shares in a company – say, the right to buy 100 shares of Nvidia at $150 until December 15 – but rather the value of a bundle of small-molecule antiviral drugs in development.

The exact rights created by the contract could vary based on the particulars of the given market. They might include giving the contract holder:

• The right to purchase manufacturing rights in a geographic area at a price set in the contract.

• Claims on a share of the revenue generated when the drug is acquired by governments or pharmaceutical companies.

• The option to purchase a stake in a biopharmaceutical company, the entity managing the portfolio of underlying assets.

However, direct ownership of the drug
itself is unlikely to be desirable for the investor in the contract; this would remain in the hands of governments or pharmaceutical firms.

The price an investor is willing to pay for the contract (i.e., the contract’s value) is thus tied to the combined potential of these small-molecule drugs to combat emerging viral threats effectively. A bundle might contain 20 assets, for example, with its trade price reflecting the market’s view of the likelihood of those assets proving valuable.

For example, an investor such as a hedge fund might purchase an options contract that gives it the right to collect one percent of the revenue generated when any drug in the bundle is acquired by a government or pharmaceutical company during the next 15 years. The price of the contract would be in part determined by market participants’ estimates of the likelihood of that happening for any of the bundled drugs.

Two years later some of the compounds in the portfolio may have moved to a later phase of development, or the risk of a viral outbreak may have increased, both of which would increase the likelihood of the drug being acquired. This would increase the market value of the contract, meaning that the investor could sell it for a profit immediately or hold it with the goal of either selling it later or exercising it to collect the money directly.

Trading Examples

The following hypothetical options trade involves a sovereign wealth fund (SWF), a biopharmaceutical company (biopharma), a nonbiopharmaceutical company with vested interests and an impact investor:

Market Participants

• Biopharma. A company with a unit that specializes in drug development, particularly for pandemic-related therapeutics.

• Nonbiopharmaceutical company. A large multinational corporation operating in a region at substantial risk from an emerging infectious disease – for instance, a rare-earth mining syndicate or oil exploration company such as BP or ExxonMobil.

• Sovereign wealth fund (SWF). A sovereign wealth fund representing a nation that is especially concerned about pandemic preparedness because of prior experience, possibly Saudi Arabia or the United Arab Emirates.

• Impact investor. An individual or institutional investor with a focus on both financial returns and positive social impact – think ESG funds.

Trade Description

Biopharma’s drug development option. The biopharmaceutical company offers to sell one set of drug development options within a portfolio designed to address potential respiratory infections, including influenza, avian flu, MERS and SARS-Covid. These options represent the right to develop and produce specific drugs within a defined timeframe, typically five to 10 years.

Oil exploration company hedging risk. The company has operations throughout the Middle East, with significant numbers of personnel in Saudi Arabia, Kuwait and UAE. A viral epidemic, say one like MERS, which has killed thousands in the Middle East since 2012, would affect many company workers and dramatically reduce oil output over the course of the epidemic. The company seeks a hedge to ensure its workers have early access to medicines in the event of an outbreak. The company would buy a five-year option on a bundle of late-stage MERS antiviral drugs to mitigate risks to its workers (and its business).

Sovereign wealth fund’s investment. The sovereign wealth fund recognizes the importance of pandemic preparedness for its nation’s health security. It decides to invest in a select subset of drug development options within the portfolio offered by the biopharma. The SWF carefully evaluates the likelihood of each pandemic scenario, the associated costs, and the potential benefits to its population. For example, the SWF might invest a significant amount in options related to MERS treatment, considering the regional risks and historical outbreaks. It also invests in options targeting avian influenza and SARS-CoV, albeit to a lesser extent, as these scenarios have lower estimated probabilities.

Impact investor’s role. The impact investor shares the SWF’s vision for combining financial returns with humanitarian impact. It decides to participate by providing liquidity for these options. The impact investor purchases options that align with their health care goals and financial strategies. For example, the impact investor might buy options related to pandemic scenarios with the goal of providing affordable access to the drugs in low-
income countries when needed. This aligns with its objective of improving health care
access in underserved regions.

Who Trades What

The sovereign wealth fund and the impact investor purchase the selected options, which like other sorts of futures contracts are traded in the global derivatives market. Meanwhile, the oil exploration company, partnered with the SWF, buys a contract on MERS drug options so Saudi Arabia has rights to manufacture the drug in-country and treat company workers in the event of an outbreak. The company agrees to buy a certain amount of each drug at a fixed future price.

As the holder of the intellectual property and initial seller of any given contract, the
biopharmaceutical company receives capital from both the sovereign wealth fund and the impact investor, providing funds to support both R&D and the stockpiling of potential pandemic drugs.

As options mature, their market value will fluctuate based on factors such as changing pandemic risk assessments, advancements in drug development and regulatory approvals. In the event of a MERS outbreak, if the drugs within the options are developed and deployed the SWF and the oil company benefit by having access to critical therapeutics while the impact investor makes money even as it improves global health equity. A rider to a contract could be included that allows the SWF to be granted limited intellectual property rights to manufacture that drug within a defined region. Each participant’s actions and objectives contribute to the liquidity of the market, enhancing pandemic preparedness.

We should note here that while this trade is similar to other hedging strategies, such as those used in “long tail,” low-probability strategies to take account of “black swan” events, these pandemic-asset and options trades need not mean that the options investor absorbs losses over long periods before realizing massive gains. Since the market is liquid, trades can result in small gains followed by medium-to-large gains as the market perceives both the efficacy of the drugs in question and the rising likelihood of an epidemic.

Governments may commit to purchasing these compounds once they are fully developed and approved for use in managing outbreaks, which would shape the evolving price of a given contract. Pre-commitments to purchase drugs in the event of an outbreak would make this question easier to answer, decreasing investment risk.

A market in futures contracts would offer an opportunity for organizations like the World Health Organization or the public-private vaccine alliance Gavi to both incentivize drug research and share in the rewards. By investing in these contracts, organizations could both fund drug development and reap returns in a pandemic event, unlocking funds just when they’re needed for relief efforts.
Alternatively, returns could be used to reinvest and continue to stay ahead of future pandemics. This is not unlike “venture philanthropy” where charities invest in drugs treating their focal illness and then put the returns on those investments into new R&D.

Investors often seek to hedge by taking positions that do well in opposite situations, betting on multiple outcomes to avoid being wiped out by an undesirable event. These contracts create a hedging opportunity for pandemics. If a fund is, for example, invested in supply-chain-dependent sectors that are susceptible to pandemic-related disruption, then these contracts would offer a counterbalanc-ing investment to mitigate portfolio risk.

Consider, too, that as therapeutic assets mature and become financially robust, parts of a contract’s value are returned to the assets’ owners, benefiting drug development companies. The approach thus supports sustainable funding mechanisms for ongoing R&D in antiviral therapies.

Letting Markets Do What Markets Do

With money to be made, future demand for classes of antiviral therapies would be estimated through a combination of the sort of analysis familiar to stock market investors plus pandemic risk forecasting. Pricing strategies that balance assurance of equitable access with profitability would be developed, ensuring sustainable revenue streams in diverse health care landscapes.

A key challenge for this market-based approach is the initial pricing of the financial assets linked to the supply and demand for therapeutics. Currently, there are few sources of primary research on the future value of antivirals for a probabilistic pandemic event. Valuing a basket of drugs for a viral outbreak that may or may not occur with a severity unknown in advance would be difficult, to say the least.

Multiple factors, as outlined above, affect an asset’s perceived worth. We believe markets would quickly set their own valuation and pricing for tradable instruments, while ongoing access to more precise information would enable arbitrage opportunities across markets. However, we will need to continue to identify primary research and work with outside experts to determine the initial listing price for many of these contracts.

Market participants would, of course,
employ their own sophisticated financial modeling techniques to project returns based on revenue forecasts and discount rates along the drug development life cycle. Investors could and would manage risk using time-honored techniques, diversifying portfolios of drug candidates and geographic markets, enhancing resilience against market volatility.

An antivirals capital market should be able to establish revenue streams beyond initial product sales, including licensing agreements and royalties from manufacturing partnerships. This initiative would not only support biopharmaceutical firms and incentivize investors, but also enable sovereign authorities to participate in drug development and manufacturing rights.

* * *

The overriding goal here is to efficiently channel capital into drug research aligned with public health priorities and regulatory standards. As a bonus, the market would encourage the development of a robust legal and regulatory framework that fosters collaboration among organizations with stakes in containing pandemics, streamlining processes and accelerating drug development timelines.

Who might participate in this market? Most notably, large institutional investors,

with collective assets in the range of $120 trillion, could move the needle. Their capital already fuels much of the world’s economic activity, making them vulnerable to the sort of economic shock caused by a catastrophic viral outbreak. It’s not difficult to imagine that enlightened institutions would invest a tiny fraction of that $120 trillion to mitigate the downside for their bottom line – and possibly make a pile of money – while also helping humanity prepare for the killer viral storms we know are coming. 

Beyond Pandemic Preparedness

Pandemic antivirals are only a start. Futures markets might also reduce the sort of market failure that dogs other global public health challenges such as antimicrobial (i.e., antibiotic) resistance, rare and neglected diseases, cancer and even certain aspects of the climate crisis.

For antimicrobial resistance, similar options contracts could be structured around portfolios of novel treatments. These contracts would diversify risk across classes of antibiotics and treatment modalities, incentivizing research into urgently needed solutions against resistant pathogens.

In the realm of cancer research, options contracts could focus on portfolios of promising oncology drugs or therapeutic approaches. These contracts could cover a range of cancer types and treatment strategies, spreading risk for investors while providing advance funding for innovative oncological therapies.