As AIDS and other diseases tear through the developing world, public health advocates are seeking new models to overcome the failure of markets and governments to generate research that would help millions of people suffering from illness and poverty.


The current system rewards research into diseases that afflict rich countries, but creating new medicines for the rest of the world – and finding ways to pay for them – will demand new partnerships, according to panelists at the recent Wharton conference on “Pharmaceutical Innovation in a Global Economy.”


To encourage private companies to find cures for Third World diseases, governments and foundations can push these companies with grants and tax credits, or pull them with market incentives, said Michael Kremer, a Harvard economics professor and senior fellow at the Brookings Institution, a Washington D.C. think tank. He and others participated in a session entitled “Stimulating Research and Development for New LDC (Less Developed Country) Drugs and Vaccines.” The conference was sponsored by the Wharton health care systems department.


Kremer said push strategies are good for basic research. But when it comes to developing specific drugs, companies need to be rewarded for their risk with a long-term market for their goods and a guarantee that nations will not argue later that prices should be reduced on humanitarian grounds, as has happened with AIDS drugs. That argument, he noted, “will wreck our intellectual property rights system.”


According to Sean Nicholson, professor of healthcare systems at Wharton, an examination of alliances between small biotech research companies and large pharmaceutical firms can provide insights into how new partnerships might work. These alliances, Nicholson said, offer biotech firms stable sources of funding to ride out volatile capital markets, provide shared expertise, reduce risk for small firms and serve as a signal to other investors that the biotech company has promising products and strong management. All but the last attribute can be applied to public-private partnerships in which private firms take the role of the biotech while government, or large non-profits, act as the big drug company.


Research, Nicholson noted, shows that alliances improve the odds of a drug making it to market. For example, drugs developed through alliances had a 12% higher success rate in passing through the U.S. regulatory process than drugs developed by individual firms.


Roy Widdus, project manager of the initiative on public-private partnership for health at the Global Form for Health Research in Geneva, suggested that the unwritten partnership – in which rich countries subsidize research for drugs that can also be used in poor countries at lower prices – can only go so far in meeting the need. “I think there’s been an enormous tendency to leave the responsibility of government out of the equation.”


He said that in current public-private partnerships the bulk of the activity is in distribution of drugs and in product development, but there is little work in original research.


Efforts to develop public-private partnerships must consider that member organizations come to the partnership with different sets of accountability, Widdus noted. Private companies are primarily focused on shareholders and short-term profit goals. Public-private partnerships have more long-term goals and are accountable to a wider group of stakeholders.


Structuring a “win-win proposition” for public-private research requires balancing incentives and costs for each partner, he said. For example, if the public component invests money and expertise, it can receive a supply of drugs and the right to use a partnering company’s intellectual property in the field. The private company would invest technology and knowledge to receive intellectual property protection in the rest of the world, along with public and human-relations benefits.


Widdus suggested that non-government aid organizations, which have been vocal in drawing private-sector drug companies into the global debate on access to medicines for the world’s poor, should also focus on governments. “Governments could allocate more resources to help. They have to make the choice: I invest in the armament industry or I invest in the health industry.”


Paula Luff, director of international philanthropy at Pfizer, noted that her firm contributed $447 million in charitable giving last year, the bulk of it in products. Pfizer has learned, she added, that it must take a comprehensive approach to giving. “We don’t just say, ‘Hi, here’s your Zithormax. Good luck.’ [But] I don’t think we are the solution. Medicines are a component of healthcare. We have a role and a place at the table, but we can’t go it alone.” Pfizer programs have already come up against barriers, Luff pointed out. Uganda diverted donated product to medical stores and Tanzania slapped on a 10% tariff.


Pfizer’s giving programs will always be tempered with business reality, she said. “We are very willing to play a role in giving access to people who genuinely need help. But if a company doesn’t perform well in general, there will be very little support for these kinds of things.”


Andrew Metrick, professor of finance at Wharton, outlined lessons from the capital markets that apply to the current problems in supplying medicines to the developing world. “The first lesson,” he said, “is that big pharma has the big money.”


According to Metrick, 411 publicly traded pharmaceutical and biotech companies spent $47.2 billion on research and development last year. The total budget for the National Institutes of Health was $20.3 billion, while private investment in biotech deals was $3.4 billion.


But very little drug company spending goes to research medicines for the developing world. “If we can push that up by a little bit we’re talking about a lot of money,” he noted. “If there is any way to push or pull money from pharma it can make an enormous difference.”


Metrick pointed out that capital markets are fickle and less inclined to back long-term research into the medical needs of the world’s poor. “Biotech is famous for having windows that are wide open, then slam shut. But most R&D is funded by pharma profits which are not so fickle. Their funding is stable. They can afford to be patient.” Pull strategies, such as the Orphan Drug Act, which provides incentives – including protection from competition – can be effective policy, he said.


Metrick also cited problems with delivery of vaccines to poor populations as an indication of the challenges ahead. He pointed out that not only are vaccines difficult to make, there is usually enormous political pressure to lower their price. Even in the United States, companies are slowing or discontinuing vaccine production. “It’s not just an R&D problem.”


Farhad Riahi, senior associate with McKinsey & Co., cited the limited opportunities opening up for private investment in health care in emerging markets. The perception that these markets are small, risky, and unprofitable has kept them off the radar screen of senior management. “Reality, as always, is more interesting than this stereotype, but more challenging to deal with. These markets are not that small anymore. Risk is there, but risk is not a monolith.”


Riahi said there are large and rapidly growing markets, including China, Turkey, Mexico and Taiwan, where health-care systems are beginning to improve along with discretionary income and property-rights protection for companies. “Not all of these drivers are operating all of the time in all of these countries. It’s necessary to understand which are operating at the country level and to what extent.”


The International Finance Corp. (IFC), a member of the World Bank Group, has been underwriting a growing number of pharmaceutical investments in emerging markets, according to Stewart N. Hicks, senior industry specialist at IFC. “IFC is relatively new in life sciences. Traditionally we were in steel mills and big manufacturing operations, but now increasingly we are investing in technology companies.”


So far, he said, IFC has invested $453 million in 14 life science projects around the world, including a bulk drug plant in India, a biotech fund in South Africa and formulation facilities in Macedonia and Costa Rica. And with India and China required to comply with World Trade Organization intellectual property rules by 2005, pharmaceutical investment in emerging markets is expected to increase.


Hicks said India and South Africa have generated the most business plans for IFC consideration. He forecast that the Indian pharmaceutical industry, with 6,000 companies, is about to undergo a major consolidation. However, he added, owners of these life science firms are demanding high valuations for their companies, because they view them as technology firms. “I am surprised to see investors giving huge valuations as if the tech boom is still flowering. News travels slowly to some countries.”


In Brazil, there is a steady stream of scientists lining up for funding, and while their ideas are sound, they have little understanding of how to commercialize their products, said Luciano Vilela, a principal in FIR Capital Partners, a Brazilian life sciences investor. “On the plus side, the valuations of these start-up companies looking for investors are low so that decreases the risk.” Exchange rates are also attractive for foreign investors.


The problem, he added, is that Brazil lacks a “culture of entrepreneurship … People arrive willing to invest a lot of technological knowledge, but with very small entrepreneurial visions. They sometimes look very naïve.” He said Brazil, and other developing countries need to build their own pharmaceutical sectors. “In the long run we have to take solutions within the countries, because if we don’t do so, 100 years from now we will still be discussing how to increase the availability of drugs to solve our own problems.”


Sanjay Sehgal, a partner with Schroeder Capital Partners, suggested that investment in life sciences has been slow in Asia because of disregard for intellectual property, government protection and price controls, a lack of health insurance coverage and problems conforming with global manufacturing standards.


Despite that, he said a large number of brand-name drug patent expirations in the United States will create new opportunities for generic manufacturers to seek out low-cost Asian production. “We are going to live in a world of low-cost generics,” he predicted, adding that global drug companies will begin to outsource research to Asia where governments are aggressively developing science parks to build life science companies.

However, as long as Asian incomes remain low, pharmaceutical companies there will produce largely for overseas markets. “A lot of these companies have looked overseas to make big bucks – quick money – to get up to scale,” he said. “Then, at a later stage, maybe they will focus inward.”