Innovation Economics (Pt. 2): “Push” Mechanisms, Mostly Private-Public Partnerships Private-Public Partnerships Stephen M. Maurer Designing Strategies for Neglected Disease Research Law Public Policy 190/290

Introduction Old Business Hybrid Mechanisms Push Mechanisms Grants Private Public Partnerships & Contract R&D Contract R&D Opening the Pipeline Mixing Push and Pull Interactions? Open Source Biology?

Review: Toolbox Boosted Demand, Prizes, Advanced Purchase Commitments, Grants, Private Public Partnerships Contract R&D, Open Source. Review Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) ???? Eliciting Privately Held Knowledge Ex Post Efficiency “Access” ?? (Politics:)

Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) ???? Eliciting Privately Held Knowledge Ex Post Efficiency “Access” Discussion ?? (Politics:) Review: Social Challenges

Hybrid Solutions Prizes + Patents???

Why you might want patents after all… Sponsor can’t judge value Taking advantage of rich nation revenues Politics But… High Prices Crowding out Making claims on sponsor’s future budget A Possible Solution: Access Price Clauses Hybrid Solutions

Grants

Ex Ante Efficiency No attempt to judge “c” But: No internal financing problem! Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) Eliciting Privately Held Knowledge Ex Post Efficiency “Access” √ ? (Politics:) ????

Grants Eliciting Privately Held Knowledge Agency Problems: Sponsors Ex Ante Efficiency (v-c) Eliciting Privately Held Knowledge √√ Short-term suppression, but reasonably quick disclosure. Agency Problems: Researchers Ex Post Efficiency “Access” ? (Politics:) ???

Grants Agency Problems: Sponsors Up-front or periodic payments Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) Eliciting Privately Held Knowledge Ex Post Efficiency “Access” √√ ? (Politics:) √ ??

Grants Agency Problems: Researchers Grant budget vs. Idea Quality S. Maurer & S. Scotchmer, “Procuring Knowledge,” in G. Libecap (ed.), Advances in the Study of Entrepreneurship, Innovation and Growth: Vol. 15, at p. 1 (JAI Press 2004). Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) Eliciting Privately Held Knowledge Ex Post Efficiency “Access” √√ ? (Politics:) √ ? √

Grants Ex Post Efficiency: Access See above! Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) Eliciting Privately Held Knowledge Ex Post Efficiency “Access” √√ ? (Politics:) √√√

Private-Public Partnerships & Contract R&D

Private-Public Partnerships (Definitions) DNDi, One World Health, etc. What’s New: Managing Drug Portfolios Drug Discovery is Not Monolithic! How Pharma Organizes Discovery Virtual Pharma Companies Private-Public Partnerships & Contract R&D

Basic Research Finding Targets Optimizing Targets Finding Lead Compounds Optimizing Lead Compounds Process Development Pre-Clinical Testing Phase I Tests Phase II Tests Phase III Tests Approval Manufacturing Phase IV Tests Marketing & Distribution Open Science “Wet” Chemistry & Biology Clinical Testing Off Label Testing In Silico Biology Animal Models Chemical Engineering Irrelevant? Private-Public Partnerships & Contract R&D

Reasons to Open The Black Box Different Incentives for Different Problems Adding a New Tool: Contract R&D Private-Public Partnerships & Contract R&D

Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) ???? Eliciting Privately Held Knowledge Ex Post Efficiency “Access” ?? (Politics:) Private-Public Partnerships & Contract R&D Contract R&D Part 1: Getting the Best Price Competitive Bidding Access to Financing

Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) ??? Eliciting Privately Held Knowledge Ex Post Efficiency “Access” ?? (Politics:) Private-Public Partnerships & Contract R&D Ex Ante Efficiency Part 2: Enforcing the Best Price Buying Power & Repeat Business Economies of Scale √

Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) ?? Eliciting Privately Held Knowledge Ex Post Efficiency “Access” ? (Politics:) Private-Public Partnerships & Contract R&D Eliciting Privately Held Knowledge Who Needs It??? √ √ ?

Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) ?? Eliciting Privately Held Knowledge Ex Post Efficiency “Access” ? (Politics:) Private-Public Partnerships & Contract R&D Agency Problems (Sponsors) Progress payments √ √ √

Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) ? Eliciting Privately Held Knowledge Ex Post Efficiency “Access” ? (Politics:) Private-Public Partnerships & Contract R&D Agency Problems (Researchers) Incentives to suppress bad news A history of scandal A Manageable Problem? √ √ √ √

Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) Eliciting Privately Held Knowledge Ex Post Efficiency “Access” ? (Politics:) Private-Public Partnerships & Contract R&D Ex Post Efficiency The Usual Answer… √ √ √ √ √

Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) Eliciting Privately Held Knowledge Ex Post Efficiency “Access” (Politics:) Private-Public Partnerships & Contract R&D Politics The Usual (Terrible) Answer… √ √ √ √ √ √

Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) Eliciting Privately Held Knowledge Ex Post Efficiency “Access” (Politics:) Private-Public Partnerships & Contract R&D The Case for PPPs/Contract R&D √ √ √ √ √ √

Basic Research Finding Targets Optimizing Targets Finding Lead Compounds Optimizing Lead Compounds Process Development Pre-Clinical Testing Phase I Tests Phase II Tests Phase III Tests Approval Manufacturing Phase IV Tests Marketing & Distribution Manageable Agency Problems (Researchers)? Large Agency Problems (Researcher) Private-Public Partnerships & Contract R&D

Basic Research Finding Targets Optimizing Targets Finding Lead Compounds Optimizing Lead Compounds Process Development Pre-Clinical Testing Phase I Tests Phase II Tests Phase III Tests Approval Manufacturing Phase IV Tests Marketing & Distribution 75% of Costs 25% of Costs Private-Public Partnerships & Contract R&D

Agency Problems: Sponsors Agency Problems: Researchers Ex Ante Efficiency (v-c) Eliciting Privately Held Knowledge Ex Post Efficiency “Access” (Politics:) Private-Public Partnerships & Contract R&D Pitfalls Can Non-Profits Pick Winners? Interactions Between Multiple Incentives √ √ √ √ √ √

Can Non-Profits Pick Winners? Why Is The Private Sector Efficient? Foundations as Shareholders? An Empirical Question Private-Public Partnerships & Contract R&D

Interactions Between Incentives? End-to-End vs. Pay-as-You-Go Private-Public Partnerships & Contract R&D Stage 1 Stage 2 E2E PaYG1 PaYG2

How Are Incentives Affected? Case 1: No Learning End-to-End = Pay-as-You-Go Yooki Park, Essays in the Economics of Innovation Incentives (2006) Private-Public Partnerships & Contract R&D E2E Redecide? PaYG1 PaYG2

How Are Incentives Affected? Case 2: Both Parties Learn – PaYG Preferred Case 3: Researcher Learns – E2E Preferred General Case? Private-Public Partnerships & Contract R&D E2E Redecide? PaYG1 PaYG2

Open Source Biology?

What? A Speculation Just Like PPPs were 10 years ago … Working Definition Voluntary, Organized Production Without Payment! Here: Primarily Non-Corporate Intuition DNA = Code, Sitting at Terminals Open Source Biology?

> Gene Cards Share Prices On-Line Forums Database Queries > > > > > What? Architecture:

Where? In silico Discovery Phase IV Trials Phase I – III Trials??? Open Source Biology?

How? Analogy to Conventional Open Source Motivations Ideology & Altruism Education Signaling Open Source Biology?

Why? Advantages Ex Ante Efficiency “Free” Labor Inadequate Incentives? Ex Post Efficiency Free Information Indirect Effects on Price Transparency Valley of Death Drug Company Data FDA Approval ??? Open Source Biology?

Innovation Economics (Pt. 2): “Push” Mechanisms, Mostly Private-Public Partnerships Private-Public Partnerships Stephen M. Maurer Designing Strategies for Neglected Disease Research Law Public Policy 190/290

Discussion Prizes Assumptions Offer $800 million Bare bones program costs $300 What Happens? What do you tell the first company? A secret program? What do you tell the second company? What do you tell the third company? How much industry effort is elicited?