TheChek News Flow

When people in the biopharmaceutical world speak of the valley of death, they’re not talking about a geographic hot spot where a lethal disease has infected a large number of people. Rather, the valley of death is where scientists in a research program have spent the last of their grant money, or a young biotech company has burned through its preliminary financing, and, though a program may still be promising, potential funders decide that they don’t want to risk the costs of taking it to the next level, and it dies. Currently, the valley of death, and similar financial constraints, are hampering vaccine development, which health officials are counting on to release us from the scourge of covid-19 and, perhaps even more important, from future pandemics that the novel coronavirus portends.

Judging from the Times’s “Coronavirus Vaccine Tracker,” a lack of research funds wouldn’t seem to be a serious problem. More than a hundred and sixty-five vaccines are in development around the world. Seven, including three in China, are in advanced human trials. The two most talked-about in this country—Moderna’s, in Cambridge, Massachusetts, and AstraZeneca’s, at Oxford University—rely on new technologies, based on genetic engineering, being deployed with seemingly unprecedented speed. Similar programs run by Pfizer, Johnson & Johnson, and Novavax claim to be not far behind. All speak of a vaccine by 2021. The U.S. government is paying up to ten billion dollars in subsidies to five of these programs, for trials and manufacturing, under a plan called Operation Warp Speed. Three weeks ago, Pfizer was awarded a contract worth nearly two billion dollars, to pay for a hundred million doses, and to support the company’s scaling up to produce six hundred million. On Tuesday, it was announced that Moderna would supply a hundred million doses for a billion and a half dollars.

This would all suggest that governments and Big Pharma are doing all that can be done. And that may well have been the case if the vaccines currently under development were in response to a virus so novel that no one could have anticipated it; or if nothing like it will ever occur again, so that emergency funding on this scale will never be called for again, either. But neither is true. We have known about other fatal coronaviruses, such as sars and mers, for years—and we have also known that they would not be the last that we encountered. Moreover, vaccines are developed in distinct research platforms: some work with genes, others with proteins, or parts of the virus itself. Each requires particular methods of development and manufacturing, and those methods, not to mention the extensive testing regimes that are required—in this country, by the Food and Drug Administration—all make the typical financial pitfalls of drug research worse in the case of vaccines.

For a start, costs are higher. You aim to vaccinate millions of people who are still healthy, and whose responses to an inoculation may vary greatly by age, gender, body type, and other factors. You don’t want to harm anyone unnecessarily, so advanced trials may involve tens of thousands of people. Then there’s the issue of demand. A drug that could successfully treat a chronic disease such as cancer would be in demand around the world every day. Right now, so would a covid-19 vaccine, but that’s not typical of vaccine markets; indeed, vaccine producers will likely face radically shrinking markets as soon as their products become widely available. Other vaccines, for diseases such as malaria, which target poor countries, are often purchased by philanthropic organizations for distribution, and do not promise satisfactory returns.

sars and mers both subsided before vaccines for them could attract investment. But, had investments been made, Ray Jordan, Moderna’s chief corporate-affairs officer, told me, by now we might have at least learned what levels of antibodies were sufficient to provide immunity against other coronaviruses. He added that this knowledge might have expedited advanced human trials for covid-19, and, just as crucially, that we might now have had “a vaccine-manufacturing system and supply-chain up and running.”

Little wonder that, prior to covid-19, only four of the Big Pharma firms—most prominently, perhaps, Britain’s GlaxoSmithKline—considered the market for vaccines attractive enough to commit to developing them in their own labs. Pfizer’s covid-19 vaccine, for instance, is being developed by BioNTech, a twelve-year-old German biotech firm with which it entered into an agreement in August, 2018, to do research on cancer and infectious diseases, where the former promised a more profitable return. As things stand, even at the current accelerated pace, it will take a year, at least, from the time the coronavirus genome was sequenced, in January, for a covid-19 vaccine to reach the first of us. And who knows what new mutations or viruses may present themselves as we wait?

Back in 2005, Anthony Fauci, who was already the director of the National Institute of Allergy and Infectious Diseases, presented the problem in a lecture to the Milbank Memorial Fund. “Infectious diseases accounted for about twenty-six per cent of the fifty-seven million deaths worldwide in 2002,” he said, deploring the persistence of HIV/aids, malaria, and tuberculosis. But, “faced with the choice of putting two hundred million dollars into a new area, will pharmaceutical companies make a product to combat an emerging microbe, for which there is an uncertain market, or will they develop a new Viagra or a better Lipitor?” No indictment was implied, at least not of individual companies, which have to answer to shareholders; the companies were behaving normally, which only makes the crisis more vexing. The challenge, Fauci suggested, calls for new approaches to producing vaccines not just for a moment of crisis but as part an ongoing, long-term process, and not just in the United States but internationally—in short, a radical breakthrough not only in biological science but also in financial engineering.

Andrew W. Lo and Roger M. Stein have been making the same argument for much of the past decade at the Massachusetts Institute of Technology’s Laboratory for Financial Engineering. Lo, the lab’s founding director, was born in Hong Kong in 1960, and was raised by his mother, in Queens. He did a Ph.D. in economics at Harvard, research in advanced financial models at Wharton, and, by 2010, he had become an innovator in managing large asset funds. He was one of the original quants, applying advanced mathematics to devise complex financial products. Then, Lo told me, “Over a four-year period, six people that were close to me all died of cancer, including my mother. I thought that, somehow, knowing me was carcinogenic.” He couldn’t reconcile himself to the slack pace of finding new drugs, and, he said, “The more I studied this, the more I realized that finance actually plays a huge role in drug development—in many cases, way too big a role.” It also became clear to him that it would be possible to secure better, more efficient financing “just by taking some of the tools that we use routinely in financial-portfolio management and applying it to drug-portfolio management.”

Drugs are a risky business and, for equity investors hoping to eventually share in the profits, each stage of development presents an escalated risk. Lo reasoned that substantially lowering the risks, even if it meant correspondingly lowering the rewards, could attract investment instead from ordinary bond markets—that is, from managers of pension funds, university endowments, and sovereign-wealth funds, who control a great deal of money and generally invest in low-risk, low-return assets. He took the idea to Stein, an expert in risk management and machine learning whom he knew from various professional encounters. Stein currently teaches at New York University’s Stern Department of Finance, but at the time he was the president of the research lab at Moody’s Corporation. As it happens, he had also been thinking about applying risk management to medical science, because his father, too, had cancer. “I thought at the time it was going to be a quick project, because the math didn’t sound complicated to me,” Stein said. “Had I understood how many different pieces have to come together for drugs to get developed—all the things I had to learn—I wouldn’t have thought it was going to be so quick.” (Their model was first published in 2012, in Nature Biotechnology, in a paper titled “Commercializing biomedical research through securitization techniques,” which they co-authored with José-María Fernández, who is now at Altamar Credit, in Spain. It was refined in a 2019 paper, “Funding Long Shots,” co-authored with the derivatives expert John Hull, of the University of Toronto, and published in The Journal of Investment Management.)

Stein told me that he and Lo agreed on two rules. “First, we didn’t care who got credit, and we were going to make all of our models available for free on the Web—the articles, spreadsheets, data, algorithms, everything,” he said. “Second, whatever we developed had to be able to stand on its own as a financial investment, though in partnership, at times, with governments and foundations. It had to promise continuing returns to investors, appropriate to the risks assumed.” That was the only way to make a model sustainable. “There are more people who want to do good and make a return,” he noted, “than there are people who want only to do good.”

In the earliest stages of drug research, it’s usually venture capitalists who keep programs viable. But a great deal more money has to be brought in to move a program through the three phased trials mandated by F.D.A.’s rigorous approval process. Bruce A. Chabner, a former director of the division of cancer treatment at the National Cancer Institute and now a professor of medicine at Harvard and Massachusetts General Hospital, told me that “the success rate for any new drug for cancer even entering clinical trials is probably less than one in five, which is still a marked improvement over my earlier time at N.C.I., when it was one in twenty. The valley of death is still responsible for maybe twenty-five per cent of the failures.” It costs tens of millions of dollars just to move from preclinical development (testing on animals) to Phase I trials, which primarily prove a compound’s safety in humans. Getting to Phase III—large-scale trials, usually involving around a thousand people—can cost hundreds of millions of dollars. (If a compound is approved, production and distribution costs can be equal to or higher than those in Phase III.) The chance of moving from Phase I to market varies, depending on the disease, but, on average, it’s just about eleven per cent.

The hit rate for vaccines is actually higher—about nineteen per cent—in part because immunology is a comparatively mature science, at least where diseases can be clearly traced to invasive pathogens. Again, however, vaccines ordinarily present higher costs and lower rewards than other pharmaceuticals; profit margins are slightly more than five per cent, compared with more than fourteen per cent. Before the coronavirus pandemic, the total global vaccine market was about forty billion dollars annually; a big number, but only about three-and-a-half per cent of the total pharmaceutical market.

Biotech companies trying to move beyond Phase I with vaccines, then, may confront not just a valley but a canyon. This is where private-equity firms ought to come in, and occasionally they do. But their focus is typically on restructuring existing businesses, not on placing hundred-million-dollar bets on scientific breakthroughs. That brings us back to Big Pharma, which does make such bets, generally by scooping up the most attractive smaller biotech firms in the most profitable markets. America’s top three Big Pharma corporations—Johnson & Johnson, Pfizer, and Merck—are, together, worth about three-quarters of a trillion dollars, and all three boast prestigious research specialties. So it may seem that the most important research is done at this level, and that the financial problems of thousands of scattered biotech companies are marginal to accelerating development. In fact, the scatter—a multitude of approaches, taking the greatest number of shots on goal—is crucial. According to a report from the IQVIA research group, emerging companies developed thirty-eight of the fifty-nine new therapies brought to market in 2018.

Stein presented the challenge succinctly in a 2014 ted talk. Imagine, he said, a hundred bottles of different compounds in various Phase I labs. They contain different compounds, six of which will save lives, and be worth billions of dollars—“sometimes, billions a year.” But for ten years, no one will know which six. Now imagine being asked to pick one of the hundred bottles and invest two hundred million dollars in it: if you fail to choose one of the winners, in ten years you’ll get nothing. Try raising an investment with that pitch.

The solution appeared obvious to Lo and Stein. (Nevertheless, no one seems to have connected the same dots in pharma.) They had studied Wall Street securitization methods—how investment banks bundle consumer debt (home mortgages, credit-card accounts) into a single bond, get it assessed by a rating agency, and market it to fund managers. They had also studied derivatives traders, who routinely profit from broad portfolios of high-risk, high-reward assets, basically on the assumption that, if just one of them hits, it will more than compensate for the losses on the rest.

Even before doing the math, they asked, as a thought experiment, what if the managers of a portfolio treated biotech firms purely as financial assets, eighty per cent of whose equity might be acquired at launch—a common split for venture capital. The portfolio would continue to invest in the companies as long as their research yielded positive results. Suppose that the portfolio acquired a hundred and fifty biotech firms in this way and, to pay for the equity, it raised a megafund of perhaps, twenty-five billion dollars, mainly through borrowing, using the companies’ scientific prospects as collateral. It could issue a bond—in the case of this portfolio, a ten-year, “zero-coupon” bond, the kind that pays no annual interest, but pays back a lump sum (capital plus compounded interest) at maturity. A number of companies, corresponding to the average success rate of compounds in Phase I reaching market, could be expected to provide enormous payoffs when a product is ready to be sold for manufacture, and the portfolio as a whole could be expected to earn a reasonable profit.

It’s simply a matter, Stein told me, of “scaling-up to smooth out risk.” In effect, he and Lo are proposing research-backed obligations (R.B.O.s); but these securities would avoid the moral hazards of, say, mortgage-backed securities, which helped to sink the markets in 2008, when mortgage brokers and investment bankers pocketed commissions irrespective of whether the bonds defaulted—which many did, in large part because of predatory subprime-lending practices, which roped in borrowers who could never have been expected to repay their loans.

With R.B.O.s, the science that serves as their collateral is subject to constant scrutiny. For portfolio managers, empirical results, not a lack of funds, or hype, would determine when to advance products and when to cut them off. Stein and Lo reckoned that the bond should gain a risk profile of among the safest assets that pension funds might acquire. But the concept is new, Stein added, “so having some kind of government guarantee, with little actual risk to the government, could be very, very helpful.” That guarantee wouldn’t substitute for private investment but catalyze it.

Portfolios, with government guarantees, have, in fact, already proven themselves in the health sciences, albeit on a smaller scale and without financing from long-term bonds. Glenn Yago, a founder of the Milken Institute’s Financial Innovation Lab, advised the Israeli government on a life-sciences fund, for which the government put up the first fifty million dollars and agreed to assume the first losses should the fund be liquidated. “A single new investment by Merck into one of the fund’s oncology companies,” Yago said, “has already put the entire fund in the black.”

Lo thinks that “the U.S. government could have played an amazing leadership role at the beginning of this crisis,” if it had securitized a portfolio of this kind for vaccine biotechs, launching “a global covid-19 bond.” He imagines a portfolio that wouldn’t have acquired companies outright but would have infused them with money and taken a portion of their equity. “There are over a dozen late-stage vaccine developers, right?” Lo said. “What if the Administration announced that the U.S. Treasury would issue a fifty-billion dollar, three-per-cent, thirty-year government bond?” It would invest in every vaccine-development program that exists, and “for any one vaccine that’s developed, we sell a billion doses.” The portfolio, Lo added, “would just be incredibly profitable.”

Had a vaccine megafund been established before covid-19, Lo adds, the pandemic might well have been brought more quickly under control. The model could still be useful in the current crisis, given that covid-19 is still far from under control, and could mutate. As my colleague Carolyn Kormann has written, Moderna is working on a revolutionary “messenger-RNA” platform (as is BioNTech). “It is a function of the technology that if mutations occur, we expect to be able to react quickly and match a new vaccine to a new virus,” Moderna’s chief medical officer, Tal Zaks, told me. “The platform is like a digital software that can be optimized for different applications.”

The larger question, though, is how, when the current crisis is passed, such a megafund would help prepare us for the next one. In early May, the Social Science Research Network published a paper titled “Financing Vaccines for Global Health Security,” by Lo and co-authors from M.I.T., Brown University, and various investment companies. The paper appeared after covid-19 had emerged, but the authors had been working on it for two years, and it describes a simulation of how such a megafund would function proactively in normal times. If the notional fund acquired a hundred and forty-one preclinical vaccine programs, targetting the nine most ominous emerging infections (including sars and mers), the portfolio would have needed to raise about thirty-five billion dollars, and its hypothetical bond would have had a fifteen-year maturity. It would have produced perhaps eleven vaccines, each earning approval after five years.

Given how uncertain vaccine markets are, the paper notes, governments (“public-sector interventions,” and so forth), would need to guarantee a vaccine bond by committing in advance to purchase and stockpile vaccines. The paper’s most creative suggestion is for a subscription model, a kind of vaccine Netflix, where governments would pay an annual fee to a new international-development fund, one that could perhaps be managed by the G7. The fund could float a bond to both advance vaccine biotechs and to make market commitments to Big Pharma. The virus, the markets, and the science are global.

Indeed, the paper refers to an already existing candidate for a development fund of this kind, the Coalition for Epidemic Preparedness Innovations (cepi). Headquartered in Oslo, cepi was founded in 2017 by the Bill and Melinda Gates Foundation; the World Economic Forum; the governments of Japan, Norway, Germany, and India; and the Wellcome Trust, a medical charity based in London. cepi’s mandate is to accelerate the creation of vaccines for emerging infectious diseases; it was initially capitalized with about half a billion dollars, and it depends on philanthropic and public funding. It is currently committed to supporting nine covid-19 vaccine programs in various countries; Moderna and other U.S. programs were its beneficiaries before Operation Warp Speed was established. (cepi was set up to complement the work of another initiative, the Global Alliance for Vaccines and Immunisation—gavi—which the Gates Foundation, in conjunction with the World Health Organization and the World Bank, launched in 2000 to purchase vaccines for distribution in poorer nations.)

cepi, Lo told me, is “grossly underfunded,” but it has “the right expertise” and “connections to all the relevant policymakers in the various different countries.” He thinks that, in time, a cepi-like agency—an international “public-private partnership”—might well gain the sponsorship of the G20, including China. In fact, he thinks that a future vaccine bond might be launched in a coöperative venture with the European Investment Bank, the International Monetary Fund, and even the People’s Bank of China.

Talk of any new international agency may seem nostalgic in the era of Donald Trump, who, as the pandemic still rages, has announced his intention to withdraw from the W.H.O. Nevertheless, Jeremy Farrar, the director of the Wellcome Trust, who is one of cepi’s founders and sits on its board, seems undaunted. He is a former professor of tropical medicine at the University of Oxford, and from 1996 to 2013 he directed Oxford’s clinical research unit in Ho Chi Minh City. (In 2004, he and his colleague Tran Tinh Hien identified the reëmergence of the deadly bird flu H5N1 in humans.) He has gotten to know Lo and the work of his lab, and, just before the coronavirus pandemic struck, he met with a group of fund managers to discuss how cepi, in acquiring a biotech portfolio, might diminish its reliance on intermittent government largesse.

“This is a once-in-a-hundred-years crisis,” he told me. “We need private as well as philanthropic and public support. They each come with their own challenges.” Public money brings “all sorts of problems”—bureaucracies, nationalism. cepi, he said, needs “the discipline of the commercial sector,” although with the longer time horizon typical of bond markets, which attract far more money than equity funds, and, with interest rates plummeting, have few attractive offerings just now. The opportunity for the next few years is “a portfolio as opposed to individual assets.” Philanthropy, he added, cannot bring the scale to this. “Working with people like Andrew gives us the intellectual underpinning,” he said.

Farrar would also like to help organize governments to purchase vaccines together, thus enabling “a distributed model” of manufacturing. “Countries like Denmark—with just five million people, but fantastic manufacturing capacity—could be making hundreds of millions of doses,” he said. According to Kendall Hoyt, my colleague at Dartmouth, who has been a consultant to cepi and is the author of the book “Long Shot: Vaccines for National Defense,” joint purchases would also prevent price gouging and bidding wars. Working from calculations she developed with the Dartmouth economist Christopher M. Snyder, Hoyt projects that rival countries could “bid-up the price of a vaccine by a factor of thirteen.” Glenn Yago would like to see a cepi-like agency establish an insurance fund into which Big Pharma paid premiums; the insurance would require the companies to build manufacturing facilities while a vaccine is still in Phase III, and would indemnify losses in the event that the vaccine fails to win approval. That would help guarantee that distribution began as soon as approval was granted. If, as one might expect, more vaccines fail than succeed, the fund “could be subsidized with ‘warrants’ ” to acquire equity “in successful vaccine programs,” he said.

Still, it’s hard to advance any such plans as long as the United States remains aloof. As Farrar put it, “A U.S. election year, already in tense relations with China, and then this virus coming out of there, destroying the global economy for a period of time—one could not have envisaged a worse sort of scenario.” On the present course, he said, “Vaccine nationalism is inevitably going to rise.” Martin Murphy, the founding head of the C.E.O. Roundtable on Cancer, and a China expert, is similarly concerned. “We may need multiple types of vaccine, including China’s own, and will certainly need China’s manufacturing capacity,” he told me. Without a different U.S. approach, he fears “something really bad—the beginnings of a vaccine cold war.”

There is a worse scenario, which is that Trump gets reëlected. Joe Biden, for his part, has announced that he would recommit the United States to the W.H.O. That’s a good sign, but his campaign Web site also promises steps “to produce American-sourced and manufactured pharmaceutical and medical supply products” and “reduce our dependence on foreign sources.” As Lo said, “The U.S. government has been writing checks like there’s no tomorrow,” and, when you have a budget in the trillions, “the government should be able to put twenty million dollars into a biotech and say, ‘Show us what you’ve got.’ ” But, he added, it would be much better for the government to say that the money is not from taxpayers. “We’re borrowing it from the rest of the world. And if and when you succeed, or any of the other hundred and fifty projects—that could have been funded, but aren’t being funded right now—succeeds, all the bond holders will get paid. That would be great. Everybody earns a return.

Brooks Brothers to Proceed With $325M Sale to SPARC Group

The centuries-old retailer will be sold to SPARC, the ABG-Simon Property Group joint venture, but vendors and employees ponder their future.

Brooks Brothers will be sold to SPARC Group, the tie-up between licensing company Authentic Brands Group and mall operator Simon Property Group.

At a hearing Friday, the Delaware bankruptcy court overseeing the case approved the deal, in which SPARC said it intends to keep at least 125 stores open.

Advisers to the retailer, as well as its employees and vendors, generally lauded the outcome, which will keep the 202-year-old company in business despite the COVID-19 pandemic — a uniquely devastating time for retail.

“The proposed transaction provides $325 million, subject to certain adjustments, in proceeds for the benefit of the debtors’ estates, the assumption of certain of the debtors’ liabilities, the continued operation of a minimum of 125 Brooks Brothers North American stores, the preservation of the debtors’ global operation, the opportunity for thousands of jobs and a long-term contract counterparty for the debtors’ vendors,” said Garrett Fail, partner at Weil Gotshal & Manges LLP, and attorney for Brooks Brothers, at the hearing.

At the same time, employees, vendors and landlords — though they did not object to the sale itself — raised concerns that the deal could potentially still leave them in limbo for months. At the time of its bankruptcy, Brooks Brothers said in court filings that it had furloughed some 2,900 employees as a result of the pandemic.

On Friday, attorneys for employees and the firm’s largest unsecured creditor, Swiss Garments Co., which makes approximately 70 percent of the suits that are sold in the Brooks Brothers stores, said the deal leaves their own futures with the brand in question.

Richard Seltzer of Cohen, Weiss and Simon, an attorney for the Workers United union, which represents hundreds of Brooks Brothers employees, told the court that the buyers had not committed to hire any of the employees in the bargaining unit.

“These bargaining unit employees, many of them long term, have special and unique relationships with customers that are essential to bringing forth the best of the old Brooks to the new Brooks,” Seltzer told the court.

“As I said, it’s unfortunate that as of now, the buyer, described as a going concern buyer, has yet to commit to rehire a single Brooks Brothers employee,” he said. “Going concern sales may be about rejection or assumption of contractual obligations. But they should not be about the rejection of talented, loyal, experienced human beings.”

An attorney for Swiss Garments Co., which is also on the unsecured creditors committee, similarly told the court that the company fears a potentially months-long delay in knowing for sure if it would continue to be a vendor to the new Brooks Brothers. Having certainty on that would help them ship their fall and winter merchandise to Brooks Brothers as soon as possible, said Swiss Garments’ attorney Erika Morabito of Foley & Lardner.

“So many of us are left with a great deal of uncertainty about what the future holds for them in this case,” Morabito told the court. “And I know that that’s not uncommon in bankruptcy cases, but there’s also a lot of uncertainty, as my colleagues pointed out, with the deadlines to assume or reject contracts.”

“That leaves them in a great deal of uncertainty in terms of ordering raw materials, manufacturing goods, shipping products, paying their vendors and suppliers,” she added.

Kelley Cornish, partner at Paul Weiss Rifkind Wharton & Garrison LLP, who represents SPARC Group, said at the hearing the company would be deciding over “the coming months” which 125 stores it would be keeping open.

“I would simply say your honor, in response to all of the various statements that have been put on the record, that we look forward to closing this transaction very quickly by the end of the month, and moving forward as expeditiously as possible under the circumstances,” Cornish said.

Advisers for vendors and landlords also argued Friday that they may not be adequately protected if the sale and debtor-in-possession financing leave insufficient funds to pay administrative claims, which is money owed for goods and services provided during the bankruptcy.

Unlike general unsecured claims, which are payments a bankrupt company owes from before it filed for bankruptcy and which are not entitled to full repayment, the bankruptcy code prioritizes repaying administrative claims. Swiss Garments, for instance, is owed $5.2 million in general unsecured claims from before the bankruptcy, but is also owed $500,000 in administrative claims for products it provided during the bankruptcy.

Bankrupt companies that cannot pay their bills incurred during their Chapter 11 proceedings risk what is known as administrative insolvency, which would prevent a final plan from being confirmed, though it wouldn’t affect a sale that has already been approved.

But in any case, Delaware bankruptcy judge Christopher Sontchi he was persuaded that the debtors’ faced relatively low odds of an administrative insolvency. Judge Sontchi also signed off on the final approval for the $80 million in DIP financing in the case, which was also provided by ABG and Simon.

Brooks Brothers’ attorneys told the court that so far, the company has used $60 million of that sum to run its business and fund the Chapter 11 proceedings. They said that the remaining $20 million of DIP facility would give the company enough liquidity to close the sale to SPARC in the coming weeks.

Judge Sontchi said the terms of the agreement and financing, and the lending budget presented by the company, showed enough assurance that the company could pay its administrative expenses during the case, and particularly so under the strained circumstances of the pandemic.

“Debtors do not have to be guarantors of administrative solvency, and secured lenders don’t need to be insurers of administrative solvency,” Judge Sontchi said at the hearing. “I think the particular facts and circumstances of the case matter very much, and they’ve never mattered more than in the last six months.”

Causes include higher food prices, school closings; expiration of federal jobless benefits deepens distress

The number of Americans who say they can’t afford enough food for themselves or their children is growing, according to Census data, and it is likely to get larger now that some government benefits have expired.

As of late last month, about 12.1% of adults lived in households that didn’t have enough to eat at some point in the previous week, up from 9.8% in early May, Census figures show. And almost 20% of Americans with kids at home couldn’t afford to give their children enough food, up from almost 17% in early June.

The data come from weekly surveys conducted by the Census from April to July in which researchers asked respondents whether their households were getting enough to eat.

Food banks also say they have seen demand surge in the past few months. And the number of people receiving benefits through the Supplemental Nutrition Assistance Program, commonly known as food stamps, rose almost 16% between March and April, according to the U.S. Department of Agriculture, a far more rapid increase than during the last recession, when the biggest one-month increase was 7.3% in September 2008.

“It is clear to me that there is a big problem here, and the problem seems to be worse than it was at the height of the Great Recession,” said Diane Whitmore Schanzenbach, a Northwestern University economist.

That number is set to grow now that unemployed workers no longer receive an extra $600 in weekly federal benefits. Talks to extend the program broke down as Democrats sought to continue the $600 payments and Republicans wanted to spend less. President Trump is seeking to keep some of the money flowing through executive actions.

Katie Fitzgerald, chief operating officer at Chicago-based Feeding America, expects more people to show up now at the group’s network of 200 food banks or to apply for federal nutrition assistance. In most cases, the extra jobless benefits had pushed family incomes above the threshold of eligibility for food stamps.

“We have already responded in an extraordinary way to the elevated demand,” Ms. Fitzgerald said. “Our fear is that we very much need federal supports to continue, because we may be struggling to respond if we have to go much higher than that.”

Feeding America has distributed 1.9 billion meals since March, about 50% more than normal, she said. The group expects to see demand for more than 14 billion meals through next June, more than twice the number it will be able to offer.

In Virginia, the Department of Social Services is bracing for a surge in SNAP applications, said Commissioner Duke Storen. He estimates about 33,000 households could become eligible for food stamps with the expiration of extra jobless benefits. A total of 384,686 Virginia households received SNAP benefits in June, up from 333,669 in February.

“We’re trying to scrape together money for overtime and temp workers,” he said.

Congress temporarily made it easier to apply for food stamps and gave all recipients the maximum benefit allowable, regardless of whether they qualify for it. House Democrats have pushed for a 15% increase to the maximum benefit. Republicans didn’t include an increase in SNAP funding in their latest proposal but have indicated a willingness to discuss the idea.

Researchers point to several possible explanations for the rise in food insecurity related to the pandemic. First, it can take a while for laid-off workers to begin receiving unemployment benefits. Getting enough food can be a challenge during that interval.

Second, some schools and child-care facilities that provided free meals are closed. Paying for those meals can be expensive, even for parents with jobs.

Lauren Bauer, a researcher at the Brookings Institution, estimates that almost 12% of adults with kids at home who maintained their income still couldn’t afford to buy enough food for those children in the week ended July 21.

Third, supply disruptions have pushed up food prices. They rose 4.1% in July from the previous year, much faster than the overall 1% rate of inflation, according to the Labor Department. Ground beef prices jumped 15%.

Federal efforts to bolster food security have seen some success. Expanded jobless benefits reduced the likelihood of eating less due to financial constraints among households with incomes below $75,000 by 42%, according to research by Julia Raifman and Jacob Bor of Boston University and Atheendar Venkataramani of the University of Pennsylvania.

A Brookings Institution study found between 2.7 million and 3.9 million children were kept from going hungry thanks to a program that reimbursed them for reduced-price or free school lunches they missed because schools were closed. But that program expired over the summer.

“Each of these pieces has shown to be a little bit effective, but we’re nowhere near solving the problem,” said Ms. Bauer, one of the study’s authors.

In Washington, D.C., the Salvation Army hands out around 400 grocery bags of canned beans, rice and other nonperishables every month at its Sherman Avenue center, up from 100 before the pandemic, said Indrani Bhatnagar, who runs the center. Many recipients are getting donations for the first time.

One of them is Estefani Iraheta, a mother of two who has been receiving donated food since April, when she lost her job at a restaurant. Her husband, who works at a store, has had his hours reduced.

“Every time, there are more people in line,” she said one recent morning as she stopped by the center. “We’ve never lived in a situation like the one we’re in now.”

Betting on a wave of market volatility straight through to the inauguration

The presidential election is three months away, but some traders are preparing for the possibility that prolonged political uncertainty will stoke stock-market mayhem.

The investors are going beyond the normal hedging ahead of a potential change in power in Washington. Instead they are betting on volatility and a possible market tumble later in the year. Among their concerns: President Trump could try to delay the election or disrupt mail-in voting, as well as the chance that a result remains unclear for weeks after polls close.

The election worries amplify existing concerns about the weak economy, a possible second wave of coronavirus infections in the fall and the highflying market. The bearish bet is that turmoil around the election hits the already fragile economy as the cooler months bring on more infections, all hitting the stock market that is priced for a recovery. The S&P 500 has advanced 4.4% this year to close at 3372.85 Friday. Its recovery since its March lows has powered the best 100-day stretch since 1933.

Eric Metz, chief investment officer at investment firm SpiderRock Advisors, has tapped a stock-options trade for clients that would profit if the S&P 500 drops up to 25% from its current level through early next year. The hedge involves buying one bearish put option tied to the S&P 500 while selling another. Concerns about the broader economy and the stock market’s recent rally also are fueling interest in such trades, he said.

“We’re focusing on January,” said Mr. Metz. “Giving yourself a little bit more time…will prove prudent for all the unforeseen or unknown things that could happen.”

The main driver of the market right now is the economy and uncertainty of a new stimulus package in Washington, which could hurt the slow recovery recently seen in retail sales and jobs. Next week, traders will be tracking new data on jobless claims and home sales, though many are expecting light trading volumes through the end of the month.

Paul Britton, founder of Capstone Investment Advisors LLC, said his firm has been using derivatives tied to a popular gauge of expected volatility, the Cboe Volatility Index, or the VIX, as well as options contracts, to bet on volatility through the end of the year in one of its strategies. His clients, which include endowments and pension funds, have sought insurance-like trades to protect against a downturn.

“You always get this interest ahead of an election,” said Mr. Britton, whose firm is one of the biggest specializing in trading volatility, overseeing roughly $7 billion in assets. “You’ve got a greater interest because of the added uncertainty.”

Bridgewater Associates, the giant hedge fund with $140 billion in assets, told clients last month it believes there is a risk there will be no clear election winner. “The real uncertainty that could confront investors is if there is material concern over the legitimacy of the process to decide a winner,” Bridgewater told clients. “Given President Donald Trump’s personality, his statements about the likelihood of fraud, and the relatively untested and unclear process for reaching resolution, it is a possibility in our minds.”

A spokesman for Bridgewater declined to comment further.

Some of the largest options positions outstanding on the S&P 500 would profit if the index plunges through December, according to data provider Trade Alert. These include bearish put option contracts pegged to a strike—or the level at which the contracts can be exercised—of 2500 or 2000, at least a 26% drop from Friday’s closing level of 3372.85.

Call options give the right to buy shares at a specific price, later in time. Put options confer the right to sell. Traders can tap options to make directional bets or hedge portfolios.

To profit from a rocky presidential election, RBC Capital Markets recently recommended investors buy bullish options that expire in January on one of the biggest exchange-traded funds tracking gold. Goldman Sachs Group Inc. analysts said in a July note to clients that they preferred putting on hedges that expire in December because of the prospect of delayed election results, pointing to the 2000 contest between Democrat Al Gore and George W. Bush when the fate of the race was unclear until December.

Markets tend to be volatile ahead of elections, and October and November tend to be the wildest months of the year anyway. The VIX has risen an average of about four points ahead of the past seven elections since its inception.

Fear surrounding the election appears even more intense this time around. Investors are paying more for VIX futures tied to October than September than they have in the past four election cycles going back to 2004, according to Stuart Kaiser, head of equity derivatives research at UBS Group AG . This extra premium is more than double what it has been historically, UBS data shows. These derivatives cover the coming Nov. 3 election.

The anxiety is evident in the market for VIX derivatives going out to January, well after election day. Typically, futures contracts that expire later in time are priced higher than those expiring in earlier months as investors brace for the unknown. That relationship has been slightly inverted around the beginning of the year, indicating traders expect more volatility around January than they do in the following months.

Meanwhile, gold prices have surged to records recently, driven higher by investors nervous about the world economy. Some of the largest options positions outstanding tied to the $78 billion SPDR Gold Trust are bullish calls expiring in January, a bet that the exchange-traded fund will jump another 10% toward $200 or $235, Trade Alert data show.

Jack Ablin, chief investment officer at Cresset Capital in Chicago, says he is searching for ways to hedge against postelection chaos. Mr. Ablin is focusing on structured notes, which are customized investments sold by banks that promise to protect the original investment while providing some potential upside. There can be high fees and other restrictions related to these products, however.

He is also buying a series of put contracts, or options that figure to profit if the market falls, traded on the Cboe Global Markets Inc., while selling contracts that bet on a market climb.

“We’re selling upside opportunity in exchange for downside protection,” Mr. Ablin says. “The possibility of a contested election could wreak havoc in both the country and our financial markets, as Americans question the viability of our nation’s democratic process.”