Issue 19

No Herd Immunity, No Problem

The supply of COVID-19 vaccines from Pfizer Inc., Moderna Inc., and Johnson & Johnson is expected to be more than sufficient to cover all 330 million Americans (including children) by the end of July. Now the focus shifts from production and logistics to promoting vaccinations to the hesitant. Daily vaccinations in the U.S. declined from their peak of over 4.3 million on April 1 to a seven-day average of below 900,000 on June 3 (chart 1). Current vaccination trends indicate the U.S. is unlikely to achieve the targeted 70% vaccination rate for herd immunity by late summer. Multiple media outlets doubt the country will reach President Joe Biden's goal of 70% of adults receiving one shot by July 4, despite 65% of those 18 and older already having done so, given that vaccines are now readily available.

We believe that economic reopening at this point has largely decoupled from vaccination efforts because those most concerned with COVID-19 have been vaccinated and those unvaccinated are largely less concerned about the virus. We no longer believe recovery of the U.S. economy hinges on achieving herd immunity.

While another spike in cases is possible (chart 2), particularly from the Delta variant, we do not view that as a significant risk to economic recovery. Assuming vaccines remain highly effective at reducing severe illness and death from new variants, we expect availability--and a corresponding change in sentiment toward vaccines--will significantly reduce the severity and duration of potential spikes.

Chart 1

With the U.S. Centers for Disease Control and Prevention no longer recommending masks for children outdoors, we expect the upcoming school year to spark a surge in vaccination among children. This is on the condition of regulatory approvals for the vaccination of children younger than 12. While some private schools and colleges have announced vaccine mandates, we believe it is unlikely public schools will widely adopt such measures, since changes to vaccine requirements require legislature approval in most states. We expect that by the fall--but not before September--vaccines will be available for all school-age children (5-12). By the start of 2022, vaccines may be available for children 6 months and older.

In a slightly older demographic, hundreds of colleges and universities across 35 states and the District of Columbia have mandated vaccines for in-person learning in the fall. Many others will add the requirement once a vaccine receives full U.S. Food and Drug Administration approval, expected by the end of the year. These schools are still a significant minority, however.

The significance of children being eligible for vaccines is profound on the economy and returning to work. Parents, teachers, and administrators reluctant to attend school in person can return with the peace of mind from being vaccinated. We expect this could contribute to a substantial return to the labor force, which may ease some challenges in the economy including wage pressures and labor shortages. But note that increased labor force participation may drag on the unemployment rate.

Chart 2

That said, restrictions are easing and activities constrained because of the pandemic are resuming, supporting a strong economic recovery. Additionally, vaccine approvals for children seem only a few months away, providing hope for the largest involuntarily unvaccinated group of the population. Therefore, we don't view herd immunity as a necessary condition for full economic recovery. This is a credit-positive broadly across the health care sector. We expect specialty pharmaceutical companies will benefit from new patient referrals. We expect medical services to benefit from normalizing patient volumes and pent-up demand from elective procedures. This in turn should contribute to a resumption of domestic medical device purchasing. We also believe the industry is positioned to benefit from additional labor supply--or at least be insulated somewhat from labor pressures--as nurses and caregivers who left during the pandemic may return to work.

Most Restrictions Are Likely Lifting Permanently

At all levels of the economy, we expect restrictions--both public and private--will continue to ease and much harder to reimplement. In March and April 2020, concerns about capacity within hospital systems and attempting to protect the most vulnerable segments of society from the virus were primary drivers of shutdowns and travel restrictions. With daily infections, hospitalizations, and deaths all lower than in the last 12 months (charts 3 and 4) and the summer heat helping to slow the virus' spread, it is reasonable to expect reopening will proceed uninterrupted into the fall. Even with vaccination rates seemingly stalled, most at risk to the virus are those who have elected not to be vaccinated. Although many immunocompromised individuals may be unable to receive a vaccine or solicit a sufficient immune response from vaccines, this subset of the population appears too small to continue affecting public policy. Other than this high-risk group, the virus will disproportionately affect the unvaccinated. (Not all unvaccinated groups are of equal risk. Children and young adults, for example, generally face limited risks.)

Chart 3

Chart 4

Many states, particularly those in the South, have vaccination rates well below the national average. This is cause for concern about a potential community or regional resurgence of the virus, particularly resulting from a mutated strand. These are mitigated by the availability of COVID-19 tests, vaccines, and the ability to isolate incidents. While the summer heat will abate and new variants will continue to spread, particularly as global travel normalizes, the risk to reversing reopening trends seems low. Vaccinated individuals would be less likely to be seriously ill, which will ensure hospital systems have capacity. We assume that even if a vaccine booster is needed, adoption rates will be similar and supply will continue to exceed demand. We also expect these vaccines and/or boosters will protect against new variants.

Although we expect mask mandates and testing to continue or reintroduced in some settings, including schools, hospitals, and the transportation industry, we see little risk that government mandates will be more severe.

Natural Immunity Provides Some Help

While about 70% of the country may be vaccinated, it is important to note that rate has always been toward the low range of estimates for herd immunity. Tim Spector of Kings College London says over 95% of the population needs antibodies against the super-transmissible Delta variant. Partial vaccination and natural immunity provide some measure of immunity that meaningfully contributes to herd immunity. In fact, Canada's public health response hinges largely--albeit temporarily--on the effectiveness of a single shot.

With over 10% of the population having tested positive for COVID-19 and estimates that well over 20% has contracted it, a larger percentage has some level of immunity. The limits of natural immunity, however, are highlighted by the devastation in India. Despite positivity rates well above 50% in Mumbai's slums in summer 2020, new variants have led to infection and death rates that greatly exceed 2020 peaks. Immunity induced from vaccines has been touted as more durable and resistant to multiple strains, according to Dr. Ashish Jha, dean of the Brown University School of Public Health. Still, at both the individual and community levels, there are some benefits to herd immunity from individuals who have contracted the virus.

Outlook

Given the clear trends in terms of vaccinations, infections, hospitalizations, and deaths, as well as the uniform directional movements toward reopening the economy, we no longer believe the U.S. economic recovery depends on achieving herd immunity to COVID-19. Instead, we believe current vaccine supplies in combination with additional approvals for children, easing of restrictions, and natural immunity will allow full economic recovery in the fall, barring significant evolution of vaccine-resistant strands.

Related Research

• The Health Care Credit Beat: COVID-19 Vaccine--Patent Waivers, Falling U.S. Shot Rates, And Thoughts On Potential Pharma Ratings Upside, May 26, 2021
• EU's Vaccine Supply Boost Will Aid The Race Against COVID Mutations, April 28, 2021
• The Health Care Credit Beat: U.S. Herd Immunity By Midyear Is Possible With Additional Vaccine Approvals, Feb. 11, 2021
• EU Could Meet 70% Vaccination Target By Late July If Production Steps Up, Feb. 11, 2021
• COVID-19 May Accelerate Disruption In The Global Vaccine Market, Aug. 3, 2020
• What Does Pharma’s Quest For A COVID-19 Vaccine Mean For Its Credit Quality And ESG Profile?, July 8, 2020