Thailand Law Journal 2009 Spring Issue 1 Volume 12

Below, I systematically examine the PPP as a solution to prevalent government and market failures. In Section I, I describe markets for neglected disease therapeutics and characterize the associated private and public failures. Section II situates public-private partnership in the context of these failures. Section III contains a historic and analytical account of public-private interaction in fostering drug development activity. In Section IV, I demonstrate how modern PPPs relax the constraints inherent in the public and private sectors and embody an organizational form responsive to the challenges of finding new drugs and vaccines for neglected diseases. I also address public-only and private-only partnerships as alternatives to PPP arrangements. This section demonstrates how existing PPPs tailor structure and function to the failures at hand. Lessons to be learned are as follows:

        (i) Partnership is a means to overcome particular failures, not an end in itself: Public and private failures in developing drugs for neglected diseases may be characterized discretely. The five broad types of failure are outlined individually in Section I. Strategy and structure must be tailored specifically to overcome particular public or private failures. Otherwise, those failures will persist.
        (ii) Creative strategic value propositions for partners are imperative: Value created by PPPs to attract private partners may be characterized as integral or peripheral to the transaction. The inclusion of peripheral value in a strategic value proposition expands the whole of resources available to the PPP.
        (iii) Apportionment of value at all stages in the development process must take place ex ante: Capturing value within a PPP can be challenging, as constraining private partners to the public interest is contractually difficult. PPPs must be cognizant of all stages of the drug development process from the time benefits begin to be apportioned in the early discovery stages.

I. Public and Private Failures in Developing Country Health Product Provision

In response to perceived financial demand for a good, a competitive equilibrium will be generated by prospective good providers in line with the degree of risk associated with provision. That is, if the net present value of cash inflows associated with an investment exceeds that of outflows, then the investment is sound. When the costs of investment outweigh the forecasted revenue benefits, then investment is consequently unsound. In such circumstances, it may then be said that the population cannot financially support a market for which investment is being considered.

With respect to drugs in developing countries, this economic reality manifests itself morbidly. Considering that over one billion people live on less than a dollar a day, it is evident that many do not receive the drugs they require because of financial barriers. [FN10] Furthermore, in impoverished countries, family illness is a major cause of household poverty. [FN11] To break this vicious cycle, 189 countries signed the Millennium Declaration in September 2000, at which time OECD countries committed to transfer 0.7 percent of their respective GNPs to combat economic deficiencies in low-income countries. However, to date, this goal has been largely unmet. [FN12]

Therefore, drug companies lack the financial incentives to invest in diseases of the developing world. To the extent that the financial assets of individuals in the developing world represent their consumption allowances, no competitive equilibrium is maintained in these disease markets. Since for-profit corporations require the maximization of shareholder value as their organizational imperative, we cannot expect them to voluntarily solve public crises via underperforming investments.

To be sure, capital transfers from rich countries do exist. More importantly, donations earmarked for research and development into neglected diseases have been made available by such private foundations as the Rockefeller Foundation and the Bill & Melinda Gates Foundation, which has committed close to $4 billion in grants toward global health. [FN13] These philanthropic transfers, which do not require that a rate of financial return be earned and distributed to shareholders, have changed the landscape within which neglected disease investment is considered. However, the rate at which these dollars are invested is insufficient to induce private drug development companies to pursue impoverished market opportunities of their own accord. A number of market failures pervade, precluding private sector leadership in these areas.

A. Market Failures

1. Lack of Internalization of Public Spillovers

Given that private firms only invest capital in projects which carry the risk-adjusted likelihood of positive return, it is unreasonable to expect these firms to invest in all of the resources and capabilities necessary for successful product development to combat neglected diseases. Only in cases where a neglected disease is characterized by an analogous disease pathway to a profitable disease or where a disease threatens both profitable and unprofitable markets will such investments be made at all.

For example, Merck's investment in ivermectin to combat intestinal worms in livestock netted revenues on the order of $1 billion after Ivomec was released in 1978. [FN14] Because such a significant amount of money had already been invested in the development of the animal drug, the cost of developing a human formulation for human river blindness was far less than for developing a new compound. The reduced marginal costs of development led to human-formulated ivermectin; however, such a therapeutic would not have been investigated had no profitable market existed in the first place.

Downstream in the drug development process, the idiosyncrasies associated with clinical trials in infrastructurally-lacking and culturally diverging developing country locations are generally unfamiliar to private firms. Since successful pharmaceutical and biotechnology firms owe their growth to first-world successes, their infrastructure is typically tailored toward developed markets. Impoverished markets which lack basic health infrastructure, transport, and human rights present challenges which traditional pharmaceutical companies do not have sufficient incentives to understand. Even companies with the explicit intent to combat third-world diseases run into trouble. For example, AVANT Immunotherapeutics has almost completed Phase II trials for a cholera vaccine. However, Una Ryan, the company's CEO, has admitted, “We wouldn't even know how to conduct a field trial in Bangladesh.” [FN15]

[FN10]. World Bank, “Implementing the Doha Mandate on TRIPS and Public Health” (2003). Available online: < www.developmentgateway.org/download/191422/TradeNote5.pdf>.

[FN11]. G. Velasquez, Y. Madrid & J.D. Quick, Health Reform and Drug Financing, Selected Topics. Health Economics and Drugs, DAP Series #6. (Geneva: WHO, 1998) WHO/DAP/98.3. Available online: <http:// whqlibdoc.who.int/hq/1998/WHO_DAP_98.3.pdf>.

[FN12]. World Health Organization, The World Health Report 2003-Shaping the Future, (Geneva: WHO, 2003). Available online: < www.who.int/whr/2003/en/Chapter2-en.pdf>.

[FN13]. Bill & Melinda Gates Foundation, “Grant Highlights” available online: <http://www.gatesfoundation.org/Grants/>.

[FN14]. D. Bollier & S. Weiss, Merck & Co., Inc. (A), (The Business Enterprise Trust, 1991) 9-991-021.

[FN15]. See, BIO Ventures for Global Health, “CEO Spotlight: Vaccinating the World” (2004) BVGH Report, Summer 2004. 4. AVANT is partnering with BIO Ventures for Global Health to learn about clinical trials in Bangladesh and to create a business model which will make its product viable.

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.