Worrying about Pandemics Is so 2020. Should It Be?

Amid all the concerns about inflation, interest rates and wars this year, at least investors haven’t needed to worry about pandemics. But maybe they should: The risks haven’t gone away.

Exhibit one: The President’s Emergency Plan for AIDS Relief, or PEPFAR, is on shaky ground. This U.S. initiative, created by George W. Bush in 2003, claims to have saved the lives of about 25 million people around the world. It had previously been renewed by Congress every five years with bipartisan support. This year, though, opposition led by Rep. Chris Smith—who claims PEPFAR has been hijacked to promote abortion—has foiled the effort.

This should worry markets. A recent analysis published on research portal KFF estimates that, without the initiative, growth in gross domestic product per capita in PEPFAR beneficiary countries between 2004 and 2018 would have been a massive 2.1 percentage points lower. Put another way, PEPFAR increased growth by almost a half.

Meanwhile, the International Monetary Fund believes that loss in economic output caused by Covid-19 will total $14 trillion through 2024. The downgrade in GDP forecasts relative to 2019 shows that poorer regions, including Latin America and sub-Saharan Africa, have been hit hardest.

Yet the Global Preparedness Monitoring Board—a joint World Health Organization and World Bank initiative—warned in October that the monitoring mechanisms that failed to warn about the impact of Covid-19 haven’t improved. This is on top of risks from tuberculosis, malaria, hepatitis and the rise of noncommunicable diseases.

The cornerstone of a fresh prevention strategy is supposed to be the new Pandemic Treaty proposed by WHO members. A draft agreement is due in May. However, widening differences on how to pay for research and medical technologies, including vaccines, medicines and diagnostics, could mean it amounts to little.

Last year, the World Bank approved a new Pandemic Fund, but so far it has raised less than $2 billion, when estimates of how much money is actually needed range from $10 billion to $130 billion. A 2021 McKinsey analysis argued that 65% of the spending needs to happen in middle and low-income countries.

Another barrier to better preparedness is that 47% of health spending in low and lower-middle income regions is done out of pocket—twice the global average, University of Washington researchers found. The poorest countries are also highly dependent on foreign aid to keep sickness at bay. This all increases their financial fragility.

The response to AIDS has shown the way forward. Because branded drugs are expensive, it is crucial to boost competition among generics manufacturers. Brazil and Thailand, for example, invested in local research and antiretroviral production in the late 1990s and early 2000s, stimulating demand for active ingredients—the main input in drug manufacturing—produced by Indian companies. The resulting economies of scale dramatically reduced the cost of so-called first-line generic HIV therapies—those treatments typically applied first. By contrast, the third-line generic therapies used when others fail remain expensive, because they are still sold in smaller and less-competitive markets.

Investors should reward developing nations’ attempts to replicate these successes, even as turmoil in bond markets has made the necessary investments harder to take on. Weaker nations such as Angola, Ecuador and Zambia look particularly vulnerable.

Of course, it helps emerging markets when pharmaceutical companies are less protective of their patents. The Medicines Patent Pool, a 2010 international initiative based on patent pooling and voluntary licensing, has also cut drug prices.

Similarly, since 2001 the World Trade Organization has occasionally waived intellectual-property agreements for health reasons. Developing nations have made ample use of this flexibility. Still, it took the WTO until June 2022 to extend it to Covid-19 vaccines, and it is still debating whether to cover medicines and diagnostics.

Eduard J. Beck, an epidemiologist at the London School of Hygiene and Tropical Medicine, points out another area that requires investment: data collection. “Many countries know their overall expenditure on health but have little granular information about what they are paying for medical technologies, and what the cost-benefits are,” he said.

Slow responses, underinvestment and scant information are red flags, and not just for health officials. Investors with assets in developing markets, or simply concerns about future pandemics, have their own monitoring to do.

Write to Jon Sindreu at jon.sindreu@wsj.com