Did MBAs Engage in Covid-19 Pandemic Profiteering?
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In 2020, as the Covid‑19 pandemic took hold, what allowed some pharmaceutical executives to earn millions while it claimed over 1.2 million U.S. lives and over 7 million worldwide?
Executives at companies racing to develop SARS‑CoV‑2 treatments and vaccines found a way to cash in big during the crisis. Many hold MBAs from top schools like Harvard, Wharton, or Chicago Booth. They often profited before their products reached the market, if they ever did.
This piece looks at executives who seemed to focus more on boosting stock prices for quick sales than on delivering vaccines. Their goal appeared to be windfall profits from stock sales, even if no approved vaccine came.
Back in 2020, no safe and effective coronavirus vaccine had ever reached the market despite past tries. The coronavirus family covers common colds, MERS‑CoV (Middle East Respiratory Syndrome), and SARS‑CoV (2003 outbreak).
Since then, vaccines like Pfizer‑BioNTech (95 percent efficacy) and Moderna got full FDA approval and generated billions; Pfizer made billions from its vaccine in 2021 alone. But early insiders still sold shares at peak prices during the 2020 hype. A Covid vaccine marked medicine’s first success against a coronavirus, but the rush raised questions about executive pay and timing.
What Does It Take to Profit from a Global Crisis?
What’s generally required for executives and other insiders to reap windfall profits from Covid-19 drug development? As we’ll see, based on this NBC News report, this New York Times investigation, and some other sources like LinkedIn, one can identify these requirements:
- A business school degree, preferably an MBA from a top business school like the Harvard Business School, the Wharton School, or the University of Chicago’s Booth School of Business. Several of the figures profiting from selling stock in Covid drug developers hold degrees like those.
- Leadership of a corporate effort towards developing a SARS-CoV-2 vaccine, either by steering a going concern in that direction, or by leading a small startup that can quickly pivot and embrace that mission.
- Well-placed insider connections within the investment and pharmaceutical industries, as well as the government.
- Associations with government programs like “Operation Warp Speed.” That’s the flagship federal initiative that bankrolls efforts to swiftly develop drugs to treat the Covid-19 illness.
- A willingness to withstand allegations of ethical improprieties in executive and insider stock compensation plans’ timing and structure, along with the scrutiny those charges may bring from stakeholders, the stock market, and regulators like the Securities and Exchange Commission. Because companies report news that can inflate stock prices, the timing of stock sales is particularly relevant if the sales closely follow such press releases.
Curiously enough, reaping windfall profits for Covid-19 drugs through the stock market during the pandemic emergency did not require proving conclusive results—like an early vaccine candidate’s efficacy and safety in human subjects—to the market or to regulators.
Consequences of Stock Transaction Timing
Stock sales by executives are usually legal, even when timed near big company news. But experts in corporate rules and everyday investors say these moves can cause real problems.
Key Problems
The first consequence is that timed transactions can create the perception of insider trading. This involves the appearance that executives and other insiders might be taking profits based on inside information not available to the rest of the stock market.
And at a time when a desperate populace is looking toward firms like these to cure the illness, the second consequence is that timed transactions may undermine confidence in drug developers, as well as in the pharmaceutical industry in general.
Ben Wakana, the executive director of the nonprofit interest group Patients for Affordable Drugs, told the New York Times:
It is inappropriate for drug company executives to cash in on a crisis. Every day, Americans wake up and make sacrifices during this pandemic. Drug companies see this as a payday.
Even years later, similar worries linger. Studies show insiders sold heavily early in Covid based on private info, raising ongoing calls for stricter sale rules to rebuild faith in markets.
Covid-19 Profiteering Examples
An analysis compiled for the Times by the data provider Equilar disclosed at least 11 companies where executives have harvested profits in the range of seven- to eight-figures connected with their work on Covid-19 therapeutics and vaccines, overall accounting for an aggregate value over $1 billion. But nowhere was this profit-taking more audacious and swift than at a small Northern California firm.
Vaxart
Vaxart, a South San Francisco firm with about 15 employees, had never brought a vaccine to market before 2020, and was mostly unheard of before February 2020. But only months earlier, it had issued a few million dollars worth of stock options to executives, board members, and other company insiders that would soon be worth some money—a lot of money.
To understand the story behind Vaxart’s stock, it helps to know a little about hedge funds. As the video accompanying this Investopedia article explains, a hedge fund is an aggressive, risk-seeking investment fund that typically uses sophisticated trading, portfolio building, and risk management techniques to magnify returns.
Under favorable conditions, these techniques can dramatically boost returns. But in unfavorable circumstances, they can magnify losses as well. Because of this extreme risk profile, financial regulators only permit investments in funds like these by those who are financially sophisticated, like wealthy individuals and institutional investors.
This was the sort of fund that had obtained most of Vaxart’s stock. Specifically, in 2019, a New York hedge fund known as Armistice Capital had acquired almost 66 percent of Vaxart’s shares. Those shares sold for only about 35 cents each in early January 2020, and the fund purchased warrants at merely 30 cents per share to buy 21 million more shares as well.
Late in January, Vaxart started work on an oral recombinant SARS-CoV-2 vaccine. During only the following 12 weeks, the company released encouraging preliminary data for that vaccine, then announced a manufacturing partnership for it. By the end of April, the shares had already climbed by an order of magnitude to $3.66 per share.
About six weeks later, in mid-June, Vaxart announced the selection of a new CEO, Andrei Floroiu. He had previously worked with Armistice’s founder, Steven Boyd, at the management consulting firm McKinsey & Company, as well as with the hedge fund.
Floroiu earned his MBA from the Wharton School of the University of Pennsylvania, and Boyd earned his undergraduate degree in economics and finance from Wharton as well. And along with Floroiu’s appointment, Vaxart announced three new board members, also brandishing strong business school credentials.
The new directors included Dr. Keith Maher, another Armistice executive who holds an MBA from Northwestern University’s Kellogg Graduate School of Management; Todd Davis, the founder of investment firm RoyaltyRx Capital who holds an MBA from the Harvard Business School; and Bob Yedid, a managing director at the investor and public relations firm LifeSci Advisors who has an MBA from the Graduate School of Business at Stanford University.
Vaxart then reported, on June 25, that it might mass-produce the vaccine with the help of another firm with whom Vaxart had signed a “letter of intent.” On that day, the stock price doubled.
The very next day, on June 26, the company issued a press release with the headline “Vaxart’s Covid-19 Vaccine Selected for the U.S. Government’s Operation Warp Speed.” The firm also quoted Floroiu as stating, “We are very pleased to be one of the few companies selected by Operation Warp Speed, and that ours is the only oral vaccine being evaluated.”
But the Times’ investigation disclosed both Vaxart’s press release headline and the quote to be misleading. That’s because the federal government didn’t actually negotiate with or select Vaxart to receive funding through Operation Warp Speed (unlike other firms like Novavax that had received many millions of dollars, as we’ll discuss below). Instead, the U.S. Department of Health and Human Services only selected Vaxart’s vaccine candidate to participate in a preliminary trial on primates organized in connection with Warp Speed.
Nevertheless, after news broke on the 26th based on the misleading press release, the stock had soared 3,600 percent over its baseline value in January. So on that day and the following Monday, the hedge fund exercised all its warrants and bought the 21 million Vaxart shares at 30 cents each.
Then, Armistice, almost immediately, flipped its inflated stock.
According to SEC reports, the fund sold its holdings at prices between $6.58 and $12.89 a share and reaped an instant windfall profit of more than $200 million. By the end of the trading day on Monday, the fund had dumped almost all the Vaxart stock it had ever owned.
The way the market had bid up the stock’s price had been tremendous for the board members as well. When the firm’s stock price skyrocketed, the insiders witnessed the value of their options climb more than six times over.
And after only a few days on the job, how did the new CEO do? The stock option signing bonus of about $4 million that Floroiu had received only days before was now worth $28 million. Usually, companies issue stock options to executives such that the options can’t be cashed in for many months or even years. But Floroiu’s unusual terms permit him to exercise his options as soon as he wants.
Incredibly, at an investor conference held online in July, he actually told participants, “It’s OK to make a profit from Covid vaccines, as long as you’re not profiteering.”
Novavax
Like Vaxart, this pharmaceutical firm based near Washington D.C., also gave insiders large stock option awards not long before the firm trumpeted news that pumped up the value of those options.
Novavax had been working on a vaccine against SARS-CoV-2. Then, in April, the firm issued stock awards to employees while shares traded at about $24. The firm allocated about $20 million worth of these options to four senior executives. That group included CEO Stanley Erck, who holds an MBA in economics and finance from the University of Chicago’s Booth School of Business.
The terms of the options permit the group to exercise them to buy shares of Novavax at a discount as early as 2021. More significantly, the terms also give the group the power to cash in those options irrespective of whether the firm develops a successful vaccine.
Not long after the stock awards, the firm reported favorable preliminary results along with a $1.6 billion grant from Operation Warp Speed. The stock exploded by 442 percent to about $130 per share. That would value the four executives’ stock options at more than $100 million.
Regeneron Pharmaceuticals
The shares in this Tarrytown, New York biotech firm have soared almost 80 percent since early February. Long before Operation Warp Speed, Regeneron announced a partnership with DHHS to develop therapeutics targeting Covid-19.
Company insiders have since sold almost $700 million worth of stock. On a single day, Leonard Schleifer, Regeneron’s CEO, sold $178 million worth of those shares.
Cashing in on a Crisis: Appropriate?
In a CNBC interview, SEC chair Jay Clayton talked a good game about urging companies developing drugs for Covid-19 to practice “good corporate hygiene” by avoiding even the appearance of insider trading. But what has the SEC actually done to investigate or curb pandemic profiteering?
The SEC did pursue some cases, like charging a Vaxart insider for $72K illegal gains on non-public OWS info, a Pfizer employee for $214K on Paxlovid results, and cousins for $1.5M on Kodak/Novavax deals. But no broad action against major exec sales like Regeneron’s $700M.
The agency sounds like it believes it’s OK to make a profit from Covid drugs, whether or not one might be profiteering. That’s great news for all the insiders at pharmaceutical companies exploiting their opportunities to cash in. Meanwhile, millions of Americans struggling every day during the pandemic likely saw any form of cashing in on the crisis as inappropriate.
