Thailand Law Journal 2009 Spring Issue 1 Volume 12

B. The Strategic Value Proposition and Concomitant Value Capture in the Public-Private Arrangement

Sustainable cooperative strategy requires the creation of value for all parties to a partnership. [FN111] If the rewards from a particular initiative were such that they could be derived by each party through independent action, then the incentive to partner would not exist. The very basis upon which partnership stands is in the ability of partners to create value for each other. Since neither party would enter into a partnership without the likelihood of a reward, a partnership must involve the aggregate creation of value in order for it to be sensible. Furthermore, since private value can be reduced to the excess of discounted revenues over costs, value can come in the form of either expected revenue creation or cost reduction.

Public-private partnerships are essentially not-for profit facilitators of value between public and private parties in the interest of mobilizing the resources and capabilities of both parties toward the development of drugs. [FN112] Once a PPP has determined its health-related task and the organizations with the capabilities which it seeks to internalize, the PPP must craft a strategic value proposition to attract these partners. This proposition must have two essential characteristics:

        (i) It must not interfere with the ability of the PPP to safeguard the public interest by distributing the drug at low cost to poor countries in the future.
        (ii) It must be initially attractive enough to the private party that the private party would be compelled to contract with the PPP even without the ability to freely set profit-maximizing prices in the future.

Value may be characterized in two ways: integral or peripheral. Integral value involves the transfer of value relatively intrinsic to the mutual objective. Examples of integral value include the transfer of funds earmarked for project-specific utilization, an exclusive portion of the rich country market for the drug ultimately developed, or any information peculiar to the development of a drug for the neglected disease in question which is likely not transferable to other projects. These assets have highly specific uses, once transferred. Peripheral value embraces any value offered which the partnering company will have incentive to utilize for other projects. Manufacturing technology transfer, positive public relations, knowledge of emerging markets, and natural substances for license in company compound libraries are examples of peripheral value. Peripheral value typically comes in the form of non-specific assets.

Obviously, a sharp distinction between integral and peripheral is not easy for any particular proposition. However, it is not necessary to generate a thematic value proposition for a private partner. What is necessary is to assemble a collection of propositions tailored to the specific needs of partners sought. By breaking down the drug development process into its sequential components and understanding its own and potential partners' competencies, a PPP can determine what value propositions are likely to attract attention. The reason why the classification is important is that peripheral value may cause companies otherwise disinterested in developing markets to consider a neglected disease transaction on peripheral merits. By creatively expanding the value proposition to include peripheral interests, the PPP can expand the pool of valuable resources available to it.

One PPP which has generated an impressive pipeline of drugs since its inception is the Medicines for Malaria Venture. MMV now has twenty-one drug candidates in its pipeline, relatively dispersed both along the discovery/development process and in terms of the rationale behind the drug. [FN113] MMV has projected the cost of developing one antimalarial every five years to be approximately $30 million per year. [FN114] The partnership has identified its internal expertise as the efficient coordination of malaria projects through its very lean management structure, the expertise of its Expert Scientific Advisory Committee, and the diversity and collective knowledge of its Board of Directors. [FN115] However, from traditional pharmaceutical companies, MMV requires intermediate intellectual property access, toxicology expertise, management know-how, and assets in kind (including plant, equipment, and compound libraries). [FN116]

Part of MMV's partnering strategy is to fund the contributions of its pharmaceutical partners. However, MMV minimizes the magnitude of funds transferred by both creating value for its partners and by deliberately minimizing its transactions costs. First, through in-kind contributions, private partners are able to transfer assets for which the marginal cost is essentially zero. Excess plant and equipment capacity and access to non-rivalrous compound libraries come at little cost for pharmaceutical companies which have these assets to give. In MMV's case, the ratio of paid-for contributions to in-kind contributions is 1:1, halving the opportunity costs of private development. [FN117]

In order to induce these extra contributions, MMV first categorizes the property of the partnership geographically and by application. After appropriating marketing rights in disease-endemic countries, MMV allocates first-world marketing rights to its private partners. Second, MMV typically permits private partners to internalize intellectual property for applications outside the scope of the partnership's mandate. These pull incentives are combined with traditional PPP value propositions, including the goodwill associated with solving massive public health problems and the employee motivation engendered from being involved in such worthwhile work.

If this were all MMV did to attract private partnership, then it would likely be unsuccessful due to the inherently high transaction costs associated with public-private interaction across long distances. However, by understanding the managerial aspects of the drug discovery process, MMV has become the first of the PPPs to successfully orchestrate public-private virtual drug discovery. [FN118] The partnership recognizes that drug development for malaria is subject to relatively low uncertainty, as MMV has a robust predictive animal model, allowing for probability assessments based on stage of development to be predictive. [FN119] To minimize contact frequency barriers, MMV prioritizes a strong team spirit and commitment from the start, enhanced through frequent email and teleconferencing and regular face-to-face meetings. [FN120] Rigorous project team review includes weekly liaising with the Chief Scientific Officer, quarterly reports, and a major annual report, combined with a face-to-face meeting with the scientific advisory committee. [FN121] A lean organizational structure allows for information regarding every ongoing project to diffuse to all key decision-makers rapidly and efficiently. By managing these two elements of the costs of transaction effectively (uncertainty and frequency), MMV has managed to create value and generate the largest antimalarial pipeline in decades.

[FN111]. J. Austin, The Collaboration Challenge: How Nonprofits and Businesses Succeed Through Strategic Alliances (San Francisco: Jossey-Bass Publishers, 2000).

[FN112]. Roy Widdus, “Public-Private Partnerships for Health: Their Main Targets, Their Diversity, and Their Future Directions” (2001) 79(8) Bulletin of the World Health Organization 717.

[FN113]. Medicines for Malaria Venture, supra note 78, at 5.

[FN114]. Ibid. at 24.

[FN115]. Interview of Dr. Chris Hentschel, CEO of MMV (1 July 2004).

[FN116]. Medicines for Malaria Venture, supra note 78, at 58-59.

[FN117]. Interview of Dr. Chris Hentschel, CEO of MMV (1 July 2004).

[FN118]. Nwaka & Ridley, supra note 15.

[FN119]. Interview of Dr. Chris Hentschel, CEO of MMV (1 July 2004).

[FN120]. Nwaka, & Ridley, supra note 15.

[FN121]. Ibid.

This article is published with the kind permission of Nathaniel Lipkus. The article originally appeared in Michigan State University Journal of Medicine & Law, Spring 2006 issue.