By Dominique Jacquet

A study just published by the International Journal of Infectious Diseases reports that more than 30 molecules were tested out of approximately 120 candidate molecules for the treatment of COVID-19.

Some were disappointing candidates, others are being used successfully in the treatment of other viral diseases. What they all have in common is that they predate the development of COVID-19.

Mobilizing finance to talk about treating a pandemic may seem trivial, but you will find that the conclusions I draw from this analysis are not!

The pharmaceutical groups that invested in the development of these molecules did not take into account the emergence of a virus that did not (yet) exist. They have invested funds in order to respond to an expressed need, in this case the development of an effective treatment for an identified pathology. But, in doing so, they have built up intangible capital, a technical capacity, possibly protected by a patent, potentially enabling them to meet a need that is difficult to predict.

This investment is of a completely different nature from the traditional acquisition of a machine that makes it possible to manufacture a product that meets a need and is amortized through its use. The “material” investment is subject to a financial evaluation based on a proven principle: it must yield more than it costs (the NPV must be positive for the financiers!) … However, this evaluation process neglects (very often…) the potential subsequent mobilization of the human and technological capital created by the project beyond its own execution.

This capital is called an option, and it is indeed the exercise of these options that the drugs being tested at the moment constitute.

Mathematical modelling confirms what intuition suggests: these options are all the more valuable as they are relevant in a world of probably increasing uncertainty. On the other hand, a poorly adapted use of mathematical tools (see our July 2019 vidcast on the concept of a real option applied to an R&D project at Gilead) is no more useful than a short-term discounting of cash flows.

It is therefore necessary to go beyond simply taking into account identified benefits in the allocation of resources, especially in intangible investments (technology, skills, etc.) that cash flows find so difficult to grasp.

More strategy and economy are needed in financial valuation processes.