A closer look at the WHO EWG endorsed proposals on funding product development partnerships

The World Health Organization’s Expert Working Group on R&D Financing spent scant attention on how to raise money, but showed considerable interest in how to spend it. The clear favorite approach is to give grants to product development partnerships — the approach that has now become the most conventional approach, and one not surprisingly endorsed by the PDPs themselves, and also by the Gates Foundation and the IFPMA — two groups that are often seen as devoted to protecting the status quo in terms of intellectual property and business models for innovation.

The World Health Organization (WHO) Executive Board will soon consider the Executive Summary of the Report of the Expert Working Group on Research and Development Financing, a document, formally identified as EB 126/6 Add.1, but not the actual report itself, which is only available in a draft from that was leaked from the IFPMA, which apparently not only had an advance copy, but was able to influence its contents through its relations with “friendly EWG members.” One successful lobbying effort by the IFPMA was to kill the recommendation to tax repatirated pharmaceutical profits to fund R&D for neglected diseases. Another was to oppose favorable consideration of large prizes to reward successful R&D for Chagas, AIDS, cancer and other diseases.

What the IFPMA, the Gates Foundation and many PDPs wanted was an uncritical endorsement of the PDP business model, which generally includes grants from governments and donors with limited interference with the licensing of intellectual property rights or the pricing of products. The EWG has generally done with this with the recommendations found on pages 12 to 14 of EB 126/6 Add.1, which include in paragraph 32, the following statement:

[T]hree proposals are in circulation to provide reliable, long-term funding to product development partnerships, and to automate or centralize funding decisions across product development partnership portfolios to a lesser or greater degree. These are:

• Fund for Research and Development in Neglected Diseases (FRIND)
• Industry Research and Development Facilitation Fund (IRFF)
• Product Development Partnership Financing Facility. (PDPFF)

Fund for Research and Development in Neglected Diseases (FRIND)

The first proposal was developed by Paul Herrling, the head of research for Novartis, and submitted to the EWG in the first public hearing as a one page memo, with an attached four page article published in the Global Forum Update on Research for Health Volume 5.

The Herrling article from the Global Forum provides this discussion about the management of intellectual property rights:

If any of the entities above apply to FRIND for funding of their project in R or D they in return would allocate an exclusive licence to the fund for the particular neglected disease within the mission of FRIND.

The Herrling proposal is basically that the grants under FRIND would be linked to an exclusive license for the inventions in a particular field of of use and geographic area. This is similar to the proposals for managing intellectual property rights in several of the Bangladesh, Barbados, Bolivia and Suriname prize proposals, with the exception of the greater emphasis on open licensing with a field of use and geographic area in the latter.

Herrling also states:

There are several alternative models in discussion to stimulate R&D in neglected diseases, e.g. Advance Market Commitments (AMC) or Prize mechanisms as proposed by James Love. The current FRIND proposal overcomes a major drawback of the two models discussed above. Any entity that wants to access either AMC or Prize money needs to invest at risk in the full development of its product for neglected disease and as about 7 out of 10 projects in clinical phase one fail before registration all that investment would be lost. This is a major disincentive not only for pharmaceutical companies but is outright unaffordable for many PDPs, academic institutions or small biotech firms. In addition since many advances in the treatment of disease are incremental, the concept of a “prize” for the first successful product is inappropriate and might be a disincentive to parallel activities. In contrast the current FRIND model would fund the individual R&D phases upfront and would bear the risk. An additional benefit is that through FRIND a portfolio management approach across different players might be established that allows more optimal allocation of (scarce) donor resources to the most promsing R&D projects.

The model proposed here and AMCs or Prizes are not mutually exclusive but rather complementary to increase the probability of the creation of urgently needed new therapies for neglected diseases.

Herrling is saying two different things about grants and prizes. First, he is saying that pull mechanisms in general can lead to inefficiencies, such as (1) redundant investments and R&D races, but also (2) under-investment from firms that do not have access to capital markets or are risk averse. These are not criticisms of prizes but criticisms of any pull mechanism that rewards success but not failure.

Secondly, Herrling says that prizes or other pull mechanisms such as AMCs would “complement” programs of grants, and increase the probability of success. KEI generally agrees with both of these observations. We don’t think that R&D should be funded solely by pull mechanisms, and we think that R&D efforts are also more likely to succeed if there are significant pull mechanisms, of which prize are the most appropriate for cases where high prices are to be avoided.

What is remarkable is the analysis of the EWG, which pits the grant and prize mechanisms against each other, and endorsed one but rejected the other, on the grounds that prizes are not acceptable to the industry. Paul Herrling is the head of R&D for Novartis, and he does not see it that way.

When the Herrling proposal was first made, a number of groups indicated an area of controversy would be the governance and accountability of the new organization, including such issues as transparency, as well as the “portfolio management team,” which in some discussions, seemed to be open to include people working within companies, presenting some issues regarding conflicts of interest. There were concerns that the U.S. and European biomedical companies would use this fund to subsidize their fixed R&D costs, without necessarily being fully committed to developing medicines for developing countries. Some of the PDPs felt it would be an unwanted layer of control over their activities or access to donor funds. There was also a criticism by KEI that it would create an excessively centralized decision making structure, replicating the “group think” problems that seem to plague many big organizations that have performed poorly in terms of stimulating innovation.

The EWG regards the centralized control of funding as “a distinct advantage for global coordination,” however reported there would be resistance from major funders and PDPs.

Product Development Partnership Financing Facility (PDPFF)

The PDPFF is a proposal developed by IAVI developed in conjunction with Aeras Global TB Vaccine Foundation and PATH-Malaria Vaccine Initiative. According to IAVI, “We did not formally submit this to the EWG.” It is not found on the WHO web page, and KEI was unable to obtain a copy of the proposal from three members of the EWG and the WHO Secretariat, all of whom were approached by KEI, so we could examine the details of this highly endorsed proposal.

IAVI kindly provided KEI with a February 27, 2009 paper on the PDPFF, which is attached to this blog, as well as shorter summary of the proposal, that was prepared after IAVI learned that the EWG had included the PDPFF in its work. In the second public hearing, IAVI provided comments on Financing the Accelerated Development of Vaccines for AIDS, TB, and Malaria: Design of the PDP Financing Facility and an Analysis of Its Feasibility, A Report to Aeras, IAVI, and MVI February 27, 2009

While the PDPFF was never actually presented to the EWG, it received a high endorsement in the document sent to the WHO EB. It is therefore useful to review some of the details. The PDPFF proposal is fairly detailed in some areas, but says very little in others. This is not necessarily a criticism of the PDPFF proposal itself, which was developed in discussions outside of the WHO EWG, and was not published.

In the view of KEI, the EWG work should be informed by the WHO Global Strategy (WHA61.21), including the discussions in the Global Strategy on the management of intellectual property rights, access to knowledge, access to products, and technology transfer and capacity building, among other issues, and it is in these areas where the PDPFF often says very little. This is an issue of the EWG itself, including its criteria for evaluating projects, which in many important areas ignored the parts of the WHO Global Strategy that were most focused on transparency, technology transfer, competition, access, affordability and intellectual property rights.

The PDPFF is a vehicle for issuing government-backed bonds to pay for the development of new vaccines, and paying the bonds back from the profits on the sale of vaccines. According to the paper:

The PDPFF represents a significant departure from the current system for financing the PDPs:

1. Donors would support PDPs by providing guarantees and by committing to pay premiums on PDP products when they reach market, as well as through traditional grants.
2. Revenues from sales of PDP products would play a much more important role in PDP financing than in the current system.
3. The new mechanism would require a greater degree of collaboration among the three PDPs. Revenues from royalties and premiums would be pooled to repay debt, and the three PDPs and donors would agree on an initial expenditure and allocation plan.

Although it might be possible to modify one or more of these features, the technical group believes that all three are necessary for the proposed mechanism to succeed.

The PDPFF is in fact a complicated financing mechanism that presents considerable risk to donors. It anticipates that premium prices will be paid on vaccines, to retire the bonds.

While the proposal was not submitted to the EWG, it was evaluated in the November 20, 2009 leaked draft report. The evaluation was based upon the work of Dr. Mary Moran (who doubled as the coordinator of the evaluations and the author of the highest rated proposal). In the draft report, the PDPFF was rated lowest of the PDP proposals, but nonetheless ended upon with a high recommendation in the summary report sent to the WHO EB. The November 20, 2009 draft report offered a number of negative comments about the PDPFF, such as these:

Data gaps for the PDP-FF . . meant [it] could only be partially assessed. . . The PDP-FF has more fundamental difficulties, as reflected in its lower scores for both DC impact and operational efficiency and feasibility. The key problem lies with its inclusion of HIV, TB and malaria vaccines, since it is unlikely that a sufficiently effective HIV or malaria vaccine will be available in the next 10 years to provide the planned 7-10% royalty-based revenue streams from Western markets. As a result, TB vaccine revenues may need to cross-subsidise other areas. Alternatively, developing country markets will be squeezed for margins on less commercially successful vaccines (e.g. initial lower efficacy malaria and HIV vaccines) Since poor countries may not be able to pay higher prices (or only at the cost of reduced patient access), donors will likely need to pay the price premium on their behalf (their willingness to do so being a moot point). Bond purchasers, looking at these figures and delivery timelines, may also be disinclined to risk their funds. We note though that, if restricted to more commercially attractive Type II vaccines that are already in development (e.g. TB, pneumonia, meningitis), the PDP-FF would likely perform substantially better.
Draft Report, page 77-78.

While the WHO Global Strategy calls for new R&D incentives that address the “de-linkage of the costs of research and development and the price of health products,” the PDPFF works in the opposition direction, linking the costs of R&D to the price of health products. While the EWG did not specifically mention the de-linkage issue in the analysis, it did give the PDPFF its lowest rating for “developing country impact.”

Industry Research and Development Facilitation Fund (IRFF)

The Industry Research and Development Facilitation Fund (IRFF) was never submitted to the EWG in the public hearing process, there is no copy of the proposal itself on the WHO web page, and the EWG has refused so far to provide a copy. We believe the proposal is the same as a 5 page section of a report that was prepared by Dr. Moran, a member of the EWG who was evidently in charge of coordinating the evaluations of the proposals.

Specifically, the IRFF was recommendation 3.2.1 of a longer report on neglected diseases entitled “New Landscape of Neglected Disease Drug Development” that was published in 2005. The text of the proposal runs from pages 68 to 73. The IRFF was the highest rated PDP proposal by the EWG, which was not surprising since the author of the proposal was also the coordinator of the evaluations. The November 20, 2009 draft report described it as follows:

A long-term fund (supported by donors) that automatically reimburses a fixed percentage (e.g. 80%) of the funds that PDPs disburse to Western or DC companies. Designed to encourage industry partnering with public-health driven PDPs, and thus provision of low or cost-price final products. Automatically allocates funds across all PDP drug portfolios globally, with most funding going to those who advance their portfolios most efficiently. PDPs retain portfolio management.

The fund is basically an entitlement program for PDPs, with governments writing no-ask checks for 80 percent of the expenditures with private pharmaceutical companies. There are no concrete asks regarding intellectual property rights or pricing of products, and indeed also no details of where the money will come from, what happens when it runs out, who will manage the fund, or determine which PDPs get the 80 percent subsidy.

The EWG analysis that was done by Dr. Moran gave this proposal, which was authored by Dr. Moran, its highest rating for developing country impact and for operational feasibility. Perhaps a more appropriate rating would be the highest rating for private industry, since the subsidy could only be used to buy their services.

The IRFF is billed as something that would only offer new money to PDPs, but this is fairly naive, as funding for public health is hardly unlimited, and allocations that are earmarked for private industry will at some point reduce funding opportunities for non-industry actors. The 2005 IRFF proposal addresses this issue in the following manner:

PPPs that choose not to use industry assistance in areas where it is shown to improve performance, in optimising academic leads or preparing regulatory submissions, are free to do so but this choice would not be subsizied by public funds via the IRFF.

KEI has criticized the EWG criteria for project selection, on the grounds that it penalizes change, overemphasizes continuity with the status quo, and ignores important elements of the Global Strategy such as those that deal with affordability, access, technology transfer, competition, intellectual property rights and de-linking R&D costs from drug prices. The following table examines the three recommended PDP proposals, to see how they address some of these issues.

How do the three EWG recommended PDP Proposals compare in terms of 9 criteria?