Thailand Law Journal 2009 Spring Issue 1 Volume 12

Unfortunately, it is difficult to evaluate the success of any PPP at managing the third transaction cost component, asset specificity, as success can only truly be measured ex post based on the relative contentment of partners and enforceability of the intentions of the parties. The ability to clearly delineate the public and private interest contractually and clearly is paramount to the ultimate suitability of the partnership as a vehicle for the safeguard of the public interest. Since private parties have typically opportunistically appropriated ex post value through high prices or refused to sell in low-income countries, promising candidates have fallen by the wayside. By characterizing the assets of the partnership and assigning rewards such that the public interest is contractually guaranteed, public-private partnerships may establish a public constraint to private opportunism.

Though no drug has yet been developed through a public-private partnership, the fundamental rationale of such a public constraint model is robust. Concept Foundation, an international non-profit organization chartered in 1989 in Bangkok, Thailand, has successfully embodied the model, albeit through costly trial and error. Concept was originally established in 1990 under the direction of WHO to manage the rights to a monthly injectable contraceptive product sold most recognizably under the name Cyclofem. The strategic value proposition of this product distribution PPP is to offer technology transfer through the guided conveyance of clinical trial know-how, training in good manufacturing practices, and cost-effective access to existing humanitarian distribution networks in order to minimize the costs of doing unfamiliar foreign business. [FN122] By attracting mid-size developing country pharmaceutical companies in need of technology transfer, Concept maximizes the value it may capture through its assortment of propositions to partners. To capture this value, Concept contractually binds its partners to distribute the products in quantifiable quantities, at very high quality, at cost-plus-five percent in the public sectors of stated least-developed countries, in exchange for exclusivity in relatively lucrative private markets. [FN123]

Early generations of Concept's licensing contracts required licensees to put forth their “best efforts” in meeting contractually-indicated public sector demand through a “thorough, vigorous, and diligent program of scale-up, marketing, and distribution.” In the annexes of the contracts were contained specific dated milestones stating at which point particular tasks with respect to regulatory approval and distribution were to be met. Licensees would be required to submit marketing-related reports and plans on periodic bases to confirm attainment of milestones. By 1998, eight million units of Cyclofem had been distributed.

In 2000, Dr. Joachim Oehler was instated as CEO of Concept Foundation. Noticing that one of Concept's licensees had only satisfied public demand in nine of nineteen countries, he sought to terminate the licensing and trademark contracts. After costly arbitration, a panel ruled that the annexed milestones were not central to the agreement and could not be inexorably linked to the “best efforts” marketing requirement. Consequently, the scope for interpretation of “best efforts” was wide enough to yield a negative result for Concept. Though its licensee initially represented itself as a competent distributor in the ten countries in which it neglected to market Cyclofem, these representations were insufficient to bind the company to public sector performance. The public constraint was not enforceable, and the private company proceeded to capitalize upon private demand.

Today, Dr. Oehler trumpets the need for enforceable milestones as essential elements of public-private partnership contracts. [FN124] In particular, he suggests that detailed explicit requirements be outlined in the contract regarding public sector pricing, territory and exclusivity, regulatory work and time to market, royalties, and termination. Instead of using terminology like “best efforts” or “lowest price possible,” schedules with component cost requirements and timelines for manufacturing scale-up and market introduction are attached as annexes to a separate article of the new Concept Foundation licensing contract, entitled Public Sector Rights. The contract is terminable at Concept's discretion following the licensee's failure to attain a milestone. Before finalization of the contract, Concept and its licensee undergo painstaking but necessary attempts at complete contingency claim contracting, so that they may mutually determine the contingencies under which specific milestone requirements should be made variable. Most importantly, this new licensing contract model unambiguously secures the public interest mandated in Concept Foundation's charter.

Undeniably, since Concept Foundation is a distribution, and not a development, PPP, the risk involved in private participation is significantly reduced. Prospective return is also higher, as a first-world market for injectable contraception exists. However, the lessons to be learned from Concept are significant and ought to act as a cautionary tale to PD-PPPs, as the basic model employed in its licensing agreements must be extended successfully to development partnerships' research and develpment and licensing contracts if they are to succeed. Concept has taken a basic concept, the public constraint, and crystallized it in its licensing agreements, asserting the preeminence of milestones immanent in its objectives. For development PPPs, crystallization of objective at the outset is far more challenging, as prospects for a marketed drug initially seem so far along the horizon that only research and development contracts are initially undertaken, with core intellectual property rights residing within individual partnerships.

However, when a manufacturer to distribute into impoverished markets is sought, research and development partners will certainly lay claim to IPRs in lucrative markets: this will have been an essential element of their initial involvement. It will, then, be a formidable challenge to develop any strategic value proposition to induce downstream distribution. All the rewards will have already been allocated, and even a seemingly basic business model like Concept Foundation's will be rendered impossible by private research and develpment partners. For example, MMV's policy is to enter Phase III clinical trials only once a manufacturing partner has been secured. However, the ability of the PPP to negotiate with potential manufacturers at that late stage for a product at low cost in the territories exhibiting greatest need is narrowed as soon as early-stage private partners lay claim to downstream benefits.

In allocating territorial intellectual property rights and licenses, sufficient incentive must be saved for both developers and manufacturers. Manufacturing contracts contingent on successful development must be envisioned when intellectual property rights are initially allocated. Similarly, drug cost requirements would need to be contemplated in development contracts, with stated grounds for cost variability. In addition to balancing the rights and interests of partners, it must be ensured that any drug developed does not have a marginal cost greater than poor countries' ability to pay (incorporating the effects of direct international subsidies). This could be accomplished through a variety of mechanisms, including cost and quality audits. Still, these considerations, yet unaddressed, will require new and creative contractual models which animate the principles inherent in the Concept Foundation licensing agreement model.

For both Concept and MMV, the ability to leverage expertise regarding the public interest both internally and through public partnership is essential to the PPPs' business models. Consequently, both organizations face the full range of public sector failures associated with drug development, in addition to the full range of market failures. By characterizing their strategic value propositions and explicitly addressing transaction cost concerns in their own ways, Concept and MMV find ways for private partners to internalize public spillovers through distribution and development, respectively.

MMV's operations can be viewed through the lenses of the public-private failure framework. Though MMV helps to lower the risk of discovery activities through subsidization and scientific support, the organization does not remove the market failure associated with internalization of scientific contributions through broad patents. By internalizing its experience with the private sector, MMV is moderately building its drug development capacity; yet, it is not attempting to overcome the failure of the public sector to develop drugs itself. Still, by utilizing funds predominantly from private foundations and the private sector, MMV has sidestepped the problem of coordinated government action. Furthermore, through its social venture capital model, business-minded CEO, and inclusive boards of directors and science, the company has managed to create an environment in which it can internalize the benefits offered by its participating private partners.

[FN122]. Joachim Oehler, “A Working Model for Public-Private Partnerships with Industry-Lessons Learned” (Address delivered at “The 10/90 Gap in Health Research: Assessing the Progress” Forum 5, Geneva, October 2001).

[FN123]. Ibid.

[FN124]. For example, see Joachim Oehler, “The Role of Milestones in Licensing Deals to Assure Access to Products (Drugs) in Developing Countries” (2004) 10 IP Strategy Today 59-71.

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.