Innovation Economics (Pt. 2): “Push” Mechanisms, Mostly Private-Public Partnerships

Innovation Economics (Pt. 2):Innovation Economics (Pt. 2):““Push” Mechanisms, Mostly Push” Mechanisms, Mostly

Private-Public Partnerships Private-Public Partnerships

Stephen M. Maurer

Designing Strategies for Neglected Disease ResearchLaw 284.26

Public Policy 190/290

Introduction

Old Business Hybrid Mechanisms

Push MechanismsGrantsPrivate Public Partnerships & Contract R&D

Contract R&D Opening the Pipeline

Mixing Push and PullInteractions?

Open Source Biology?

< Discussion >

Review: ToolboxBoosted Demand, Prizes, Advanced Purchase Commitments, Grants, Private Public PartnershipsContract 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 valueTaking advantage of rich nation revenuesPolitics

But…High PricesCrowding outMaking claims on sponsor’s future budget

A Possible Solution: Access Price Clauses

Hybrid Solutions

Grants

Grants

Ex Ante EfficiencyNo 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: SponsorsUp-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: ResearchersGrant 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: AccessSee 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 DiscoveryVirtual Pharma Companies

Private-Public Partnerships & Contract R&D

Basic ResearchFinding TargetsOptimizing TargetsFinding Lead CompoundsOptimizing Lead CompoundsProcess DevelopmentPre-Clinical TestingPhase I TestsPhase II TestsPhase III TestsApprovalManufacturingPhase IV TestsMarketing & 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 BoxDifferent Incentives for Different ProblemsAdding 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&DPart 1: Getting the Best Price

Competitive BiddingAccess 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 EfficiencyPart 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 KnowledgeWho 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 newsA history of scandalA 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 EfficiencyThe 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

PoliticsThe 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 ResearchFinding TargetsOptimizing TargetsFinding Lead CompoundsOptimizing Lead CompoundsProcess DevelopmentPre-Clinical TestingPhase I TestsPhase II TestsPhase III TestsApprovalManufacturingPhase IV TestsMarketing & Distribution

Manageable Agency Problems(Researchers)?

LargeAgency Problems(Researcher)

Private-Public Partnerships & Contract R&D

Basic ResearchFinding TargetsOptimizing TargetsFinding Lead CompoundsOptimizing Lead CompoundsProcess DevelopmentPre-Clinical TestingPhase I TestsPhase II TestsPhase III TestsApprovalManufacturingPhase IV TestsMarketing & 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

PitfallsCan 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 PreferredCase 3: Researcher Learns – E2E Preferred

General Case?

Private-Public Partnerships & Contract R&D

E2E

Redecide?

PaYG1 PaYG2

Open Source Biology?

What?

A SpeculationJust Like PPPs were 10 years ago …

Working DefinitionVoluntary, Organized Production

Without Payment!Here: Primarily Non-Corporate

IntuitionDNA = Code, Sitting at Terminals

Open Source Biology?

>Gene CardsShare Prices

On-Line Forums

Database Queries

>>

>>

>

What?Architecture:

Where? In silico DiscoveryPhase IV TrialsPhase I – III Trials???

Open Source Biology?

How? Analogy to Conventional Open SourceMotivations

Ideology & AltruismEducationSignaling

Open Source Biology?

Why?

AdvantagesEx Ante Efficiency

“Free” LaborInadequate Incentives?

Ex Post EfficiencyFree InformationIndirect Effects on Price

TransparencyValley of DeathDrug Company DataFDA Approval ???

Open Source Biology?

Innovation Economics (Pt. 2):Innovation Economics (Pt. 2):““Push” Mechanisms, Mostly Push” Mechanisms, Mostly

Private-Public Partnerships Private-Public Partnerships

Stephen M. Maurer

Designing Strategies for Neglected Disease ResearchLaw 284.26

Public Policy 190/290

Discussion

PrizesAssumptions

Offer $800 millionBare 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?