Thailand Law Journal 2009 Spring Issue 1 Volume 12

In the US, taxpayer-financed medical research, whether in NIH labs or through government grants to academic and non-profit medical centers, reached $27 billion in 2003, almost equal to industry spending. [FN61] In fact, economist Alfonso Gambardella in the 1980s declared that, “the generation of new drugs depends in large measure on activities that occur at the outset of the research-and-development process. Early research stages play a more meaningful role than in other industries, and they are the most creative steps of the drug innovation cycle.” [FN62]

Whereas private firms subject investment decisions to private profit requirements, public organizations subject investment decisions to domestic public resource allocation decisions. Yet, with few exceptions, research institutions and universities have not prioritized investment in internal capacity for publicly-integrated drug development. Therefore, private sector cooperation is essential for ultimate fulfillment of public objectives.

Public organizations are subject to the same regulatory capture risk as international agencies; however, governments typically facilitate an environment conducive to public-private contracting, in order to reduce the cost of private projects. [FN63] Still, attempts to contract with the private sector for the research and development of drugs which are accessible to the marginalized poor have either failed or been unforeseeably costly to the procuring agency. [FN64] For example, the U.S. National Institute of Health committed $484 million toward the early development of Taxol, with Bristol-Myers Squibb committing $1 billion. Of the $9 billion in revenue earned by BMS through 2002, only $35 million was received by NIH in royalty payments. Since Medicare payments for Taxol totaled $687 million from 1994 through 1999, it is hard to make the case that the public return was commensurate with its undertaken risk. [FN65]

In fact, nowhere is the incapacity of the public sector to capture the benefits of its own research more evident than in the search for AIDS drugs and vaccines. There is no question that the most important discoveries in AIDS research were publicly-funded findings. Robert Gallo of the NIH's National Cancer Institute and Luc Montagnier of France's Pasteur Institute jointly discovered the virus. [FN66] Howard Temin of the University of Wisconsin and David Baltimore of MIT determined that reverse transcriptases were the operative mechanism in retroviruses. [FN67]

In 1987, Laurence Pearl and William Taylor of Cambridge University determined the inner workings of the HIV protease scissors. [FN68] This finding led to the flurry of research toward developing protease inhibitors to render HIV protease impotent. Any one of an assortment of privately-developed protease inhibitors now constitutes an essential element of the drug cocktails used routinely in developed countries and seldom in poor countries.

In total, it is estimated that the U.S. government has accumulated expenditure of $10 billion in AIDS research, in contrast with $2-5 billion spent by U.S. industry. [FN69] However, when Merck identified the x-ray crystallographic structure of HIV protease, the private firm kept important three-dimensional data points proprietary. When the National Cancer Institute completed the same work, the public institution published detailed information regarding protease interaction with other proteins and actively pursued pharmaceutical companies to use the NCI data in their applied research. [FN70]

Even in working cooperatively with the NIH, pharmaceutical companies have been known to ruthlessly internalize the public benefit. For example, one NIH grant concerning basic science behind HIV protease involved 35 NIH researchers and 3 Abbott Laboratories researchers. Once a marketable drug seemed likely, Abbott reimbursed the NIH for $900,000 in an effort to terminate the relationship and proceeded to conduct clinical trials in Europe without the help of the NIH. [FN71] A patent for ritonavir, a protease inhibitor, was sought two weeks after the five-year NCI research grant expired, and the drug was first marketed in 1996.

In December 2003, Abbott raised the price of a daily dose of its drug from $1.75 to $8.57, setting off a firestorm of protest from doctors and AIDS activists. [FN72] The 1980 Bayh-Dole Act gives the NIH so-called march-in authority to ensure scientific discoveries funded and supported by the federal government are properly used by companies by permitting the U.S. government to issue additional licenses if the licensee misuses the patent. The government has never taken such a step, and the NIH stated in August 2004 that it would not seek a remedy, citing drug pricing as an issue for Congress. [FN73]

Abbott has declared that its expenditures of $300 million developing the drug dwarf the $3.5 million grant awarded by the NIH. However, though late-stage clinical trials are far more expensive than basic research, they are far less risky. As well, NIH researchers possess tacit knowledge regarding HIV/AIDS of value to the pharmaceutical company in collaboration. In this example, in valuing the contributions of industry and the public sector toward the ultimate outcome, dollar contributions were not risk-adjusted and in-kind contributions have not been valued appropriately. Still, many pharmaceutical companies have spoken out in favor of Abbott, suggesting that willingness of the NIH to enforce the public interest will have a chilling effect on private investment in innovation.

Though the utilitarian calculus of the public sector differs from that for private firms, public organizations are still subject to the same economic framework in which to evaluate transaction costs. Any cost associated with transacting with the private sector associated with asset specificity, uncertainty, or frequency which negatively impacts the ultimate public health outcome acts as a barrier to effective partnership. In cases where the private partner opportunistically appropriates as much of the pie as possible, ineffectuality in contractually specifying the contributions and concomitant benefits on the public side acts as a cost continually borne by the public partner. Uncertainty engendered by unfamiliarity with private sector culture and lack of a clear scientific and administrative blueprint for success also makes it more costly to transact, due to the high risk associated with sought outcomes. Finally, as with any partnership, an environment in which only the long-distance cooperation of public and private sectors is facilitated does not permit the knowledge transfer necessary for value-added success in innovation. Therefore, despite an environment in which the public sector is under great commercialization pressure, efforts to make partnership successful have been unfruitful.

Until the rise of PD-PPPs, no model existed to handle the provision of goods which both the market and the public sector had previously failed to deliver. The rest of this paper will be focused on characterizing neglected diseases and PPPs in the context of public and private failure in order to demonstrate the success of innovative solutions and the challenges yet to be met in the neglected disease drug arena.

[FN61]. Goozner, supra note 46, at 8.

[FN62]. Alfonso Gambardella, Science and Innovation: The U.S. Pharmaceutical Industry During the 1980s, (Cambridge: Cambridge University Press, 1995) at 14.

[FN63]. Much literature exists highlighting the issues surrounding public and private incentives in public procurement laws and policy. For example, see Ronald J. Daniels & Michael J. Trebilcock, “Private Provision of Public Infrastructure: An Organizational Analysis of the Next Privatization Frontier” (1996) 46 University of Toronto L.J. 375; Clive Harris, “Private Participation in Infrastructure in Developing Countries: Trends, Impacts, and Policy Lessons” (2003) Private Sector Advisory Services, The World Bank.

[FN64]. Goozner, supra note 46.

[FN65]. United States General Accounting Office, supra note 41.

[FN66]. Goozner, supra note 46.

[FN67]. Ibid.

[FN68]. Ibid.

[FN69]. Ibid. at 160.

[FN70]. Ibid. at 109.

[FN71]. Ibid. at 125.

[FN72]. Leila Abboud “NIH Rejects Move Against Abbott” Wall Street Journal (5 August 2004) D4.

[FN73]. 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.