Research privatization

Beginning in the early 1980s, several legislative initiatives were undertaken by the US Congress to allow patenting and technology transfer by universities^{7, 8}, which led to swift changes in the commercial orientation of US scientists and their parent institutions⁹. This was accompanied by the storied Diamond v. Chakrabarty decision¹⁰, which broadened the category of patentable subject matter to include "anything under the sun made by man." Combined with consolidation of patent appeals before a single appellate court referred to as the Federal Circuit and restructuring of the US Patent & Trademark Office (USPTO) as a fee-for-service organization¹¹, this decision spurred an explosion in patenting by medical researchers and spawned the global biotech boom¹². In the 1990s, a second and more subtle wave of privatization occurred under the twin banners of translational research¹³ and public-private partnerships¹⁴. The rationale was that medical research was seen to be increasingly complex, global and interdisciplinary, in turn requiring an expanded base of people, infrastructure and resources to translate basic research into commercial products.

Public-private partnerships have also increasingly formed a central component of the US National Institutes of Health (NIH)¹⁵ and the Canadian Institutes for Health Research (CIHR)^{16, 17} science policy. This emphasis on translational research has been mirrored by the US Food and Drug Administration's (FDA) 2004 Critical Path Initiative^{18, 19} and the Therapeutic Products Directorate of Health Canada's recent Blueprint for Renewal²⁰. Together, this basket of legal, regulatory, policy, economic and political initiatives are referred to jointly as the privatization or industrialization^{21, 22} of medical research.

These initiatives have been undertaken by the United States, Canada and other governments as part of a larger economic strategy to enhance domestic competitiveness with nations seen to be effectively capitalizing on their S&T bases^{23, 24, 25}. Because strong domestic and international intellectual property and regulatory (IPR) rights are viewed as central to this endeavor^{26, 27}, broad patent, license, data, warrant and other forms of regulatory rights were instituted by several important federal agencies in the United States, including the US Congress, USPTO, NIH, FDA, Federal Circuit, US Supreme Court and Federal Department of Justice²⁸. The United States also played a major part in setting the global threshold for expanded IPR rights through international trade agreements, such as the World Trade Organization's TRIPS (trade-related aspects of intellectual property rights). A similar pattern of support for broad IPR rights has played out in Canada, supported by policies, legislation and regulations relating to the scope and nature of funding for medical research and product licensure originating from Industry Canada, Health Canada, the Treasury Board and Privy Council²⁹.

Tension between public and private interests

As noted above, governments in many nations have adopted explicit S&T policies whereby public health protection and economic gains from innovative biomedical research are jointly supported. Indeed, this type of 'push-pull' between what has been traditionally thought of as public and private interests permeates the mandates of the NIH and CIHR and their parent public health agencies, the Department of Health and Human Services (DHHS) and Health Canada¹.

The tension is real in the sense that recent increases in the budget of federal funding agencies were premised on the promise of public health benefits¹, even though some aspects of healthcare have become unaffordable to a larger percentage of the public than ever before and the public returns on health research remain difficult to document empirically^{1, 5, 24, 30}. Moreover, the impact of the Bayh-Dole Act in the United States has been to prompt a move away from so-called Mertonian, or communitarian, norms toward profit-seeking norms^{2, 31} on the part of both researchers and university administrators. Nevertheless, there is good evidence^{23, 25, 32} to the effect that universities were never pure ivory towers of basic research and that there has been a strong interplay of public and private interests in the medical research enterprise with the aim of solving practical problems faced by society. With this and Bozeman's⁶ public policy failure theory in mind, we cannot say that public and private interests in commercialization are inherently and irretrievably in conflict. We are in a position, however, to say that public and private interests in commercialization do meaningfully conflict with one another to the degree that the benefits of commercialization are skewed or 'hoarded' by one of the enterprise partners thus giving rise to conditions of policy failure.

Key concerns with privatization

Increased emphasis by federal agencies on IPR-intensive technology transfer has not been without opposition. Chief among the issues raised is the growing frustration that for-profit entities have gained control of government purse strings and national S&T policy. One of the more serious concerns is that policy emphasis on commercialization may lead to ghettoization of research lacking in commercial potential³³, including the demise of true public interest science³⁴. To paraphrase Martone³⁵, once the marketplace has control over the funding, development and licensure of biomedical products, it can shape human needs primarily toward products that the market itself can develop. This is not a trivial concern.

A line of scholarship has demonstrated the importance of 'blue sky' research in that truly breakthrough innovations are dependent on open nonlinear systems of knowledge transfer and are largely serendipitous in nature^{36, 37, 38} (thus less amenable to commercialization-focused S&T policy). Moreover, under market-failure theory, necessarily IPR-intensive commercialization results in a certain degree of erosion of a freely accessible scientific commons, including possible development of an anticommons³⁹ (but see also, refs. 40,41).

A second concern relates to distributive allocation—the distribution of benefits resulting from commercialization-based ST&T policies. Benefit sharing has received much attention lately, largely in the context of genetic research. Even so, the notion that the benefits of medical research should be shared equitably can be legitimately extended to cover all biomedical research owing simply to the evolution of clini-cal science itself from a relatively communitarian activity aimed at the global public good to an increasingly commercial one.

The alternative is 'benefit hoarding' whereby the benefits of a policy designed to provide aid to the general public are captured preferentially by a subset of the population. Under such conditions, 'policy failure' is said to occur⁴. Here, benefit hoarding would refer to asymmetric capture of benefits from publicly funded research by public or private actors. Policy failure occurs when neither the market nor public sector provides needed goods and services required to achieve core public values or when public values are not reflected in social relations

This differs from a market-failure approach in that it requires of government something more than a focus on achieving market efficiency. It accords with the view⁴² that goods which society deems necessary are not, and should not, be freely tradable commodities. Obviously, the strength of this argument will vary between jurisdictions, depending on the emphasis on free market economy and how strongly regulated are the generation, licensure and marketing of medical products. Even so, most liberal democracies promote equitable access to needed social goods, based in part on the notion that egalitarian justice requires market forces to be restricted in some capacity to promote their distribution. This idea, referred to as 'complex equality'⁴², is rele-vant to the issue of public health, given that clinical research is generally seen to be aimed at the common good^{43, 44}.

Distributive reallocation is therefore a timely issue for scientific, political and economic leaders, as the changing face of medical research is being accompanied by a similar shift in public expectations with regard to the results of medical research, due in part to controversies relating to the safety and efficacy of marketed drugs^{29, 45}. Although it is true that much innovation in clinical research would not occur in the absence of some form of government subsidy, the question remains as to whether allocation of the risks and benefits from publicly funded IPR-intensive research are sufficiently skewed to the for-profit sector so as to attract policies based on the principle of reciprocity.

Asymmetric distribution of benefits

A wide variety of political, economic, legal, regulatory, social and ethical grounds favoring some type of distributive reallocation scheme have been discussed previously (for a review, see ref. 1), and it is not our intent to reiterate them here. It is sufficient to say there is an array of legitimate grounds on which to support distributive reallocation (Box 1), despite vigorous opposition to the notion^{46, 47, 48}.

However, as biomedical research becomes increasingly privatized, the distinction between public and corporate contributions will become increasingly onerous owing to the legal nature of public-private partnerships and the effect of this on disclosure of confidential information. Past US Congressional and legal hearings into the research and development (R&D) costs of drug development compared with marketing and other costs⁴⁹ and the difficulties encountered by the NIH in its response to the request by DHHS for a plan to ensure taxpayers' interests are protected in the context of publicly funded research⁵⁰ have illustrated quite clearly that—in the absence of a legislative mandate—protection of confidential information will benefit for-profit entities far more than the public when it comes time to assess the relative R&D contributions of each partner to product development.

In addition, there is the question of equitable access to essential medication and therapies⁵¹. An important consideration for the present purposes is the norm in liberal democracies that products deemed to be a socially recognized need should not be freely tradable, not least because biomedical products have so successfully become a massively important feature of contemporary life. This is particularly relevant to the issue of public health, given that clinical research, patenting, licensing and marketing of biomedical products is strongly regulated in most developed nations and because biomedical products are generally derived from publicly funded research aimed at the global common good (Box 1). That Canada, the United States and other nations seeking to leverage their S&T bases in medical sciences toward enhanced national productivity may be nearing or in a major 'phase transition' with regard to their systems of public-private health³⁹ serves to underscore the need to understand the complex nature of innovation in the medical sciences and the manner in which this is embedded in a host of scientific, political, economic and other interests³⁷.

Distributive reallocation

Considerations such as these have critical rami-fications for the privatization of biomedical research. Governments in most liberal democratic states have accepted the principle that biomedical products and healthcare in gene-ral are needed goods and that under certain conditions (e.g., old age, disability, poverty) market forces can and should be preempted by the needs of the state more so than would otherwise occur in a completely free market. In particular, the state frowns on 'exchanges of desperation', in which people are forced to bargain without adequate resources for their very means of life. Even so, this is precisely the condition in which great swaths of the public now find themselves^{1, 4}.

Distributive reallocation presents an opportunity to reshape the interface between science, politics and economics based on a more nuanced understanding of the complex systems-based interaction of various elements and feedback loops comprising the current commercialization regime³⁹. As such, it does not detract from the critical importance of a vital market in innovative products (indeed just the opposite), provided that separation of scientific, political and economic interests in medical product development and regulation are properly bounded by, among other things, justice and the operation of law. Indeed, distributive considerations of this nature are the very reason that national and international legal instruments increasingly recognize through the right to life, liberty and physical integrity that access to healthcare is a fundamental human right^{52, 53}. A reworking of this claim in the context of privatized biomedicine is that the successes and failures of the current commercialization regime must be interpreted not just from an economic perspective, but from a public policy purview that respects both the altruistic nature of biomedical research and the severity of the risks assumed by the public when participating in clinical research. In jurisdictions that embrace some degree of public healthcare and regulation of biomedical product development, distributive reallocation of asymmetric benefits can be justified on legal and political grounds.

The compulsory government royalty—a solution?

There is some precedent for distributive reallocation in international public health instruments, including allocation of a percentage of net profits to support national healthcare infrastructure⁵⁴ by means of trust funds, licenses⁵⁵ or a general innovation tax⁵⁶.

However, a more focused alternative to distributive reallocation would be to apply a compulsory government royalty¹ (CGR) on technologies commercialized using the public purse.

As discussed in detail elsewhere²⁵, a 'recoupment' provision was originally contained in the Bayh-Dole legislation, only to be removed just before the bill was signed into law over concerns relating to the administering agency, form and costs to universities and firms. Even so, these, and other concerns expressed by university administrators, firms and the NIH over the years are mitigated (if not obviated) by three decades of successful university-firm contracting and commercialization efforts and the growing privatization of the biomedical research enterprise. Moreover, as demonstrated by the $206-billion settlement between US Attorneys General and 'big tobacco' in 1998 (ref. 57) and more recent settlements with pharmaceutical firms⁵⁸, public agencies have not shied away from recovering public health costs from firms when they see fit and have proved adept at successfully reinvesting these funds to finance public health research, primary care and other relevant public health programs.

Royalty revenue could be used to ensure equality of access to essential medical goods, with surplus funds used to fund innovative medical research and support clinical trials and other innovative commercialization efforts for niche markets where few firms currently operate¹. As such, a CGR provides stability to the research enterprise by pulling both market push and pull levers. This argument is supported by a 2001 National Research Council report to the effect that market push-pull instability is particularly hard on small and medium-sized biotech enterprises⁵⁹. Royalties could also be used to promote independent regulatory review of biomedical products once they enter the approval process, thus addressing a significant concern associated with commercialization⁴⁵. Importantly, the proposed model is aligned with, and works to mitigate, the tension in the mandates of major public health agencies to protect public health while simultaneously stimulating the economy through medical research. The proposed CGR would, therefore, operate to balance public and private interests in the privatization of innovative research and thus ensure that taxpayers' (as opposed to universities', firms' or even the NIH's) interests in securing an appropriate return on federally funded research are protected⁵⁰.

The terms and conditions of the CGR could parallel those in traditional license agreements between universities and firms comprising standard boilerplate or negotiated clauses. Royalties could be triggered by either a threshold public contribution and continue on at that level or be split into an initial cost recovery component similar to that currently used by many technology transfer offices, followed by a traditional royalty structure contingent on some combination of revenue and other milestones (for example, animal model validation, phases 1 to 3, new drug applications and regulatory approval). The required institutional jurisdiction and the formal right or interest in commercialized products could be created through enabling legislation, with a five-year review and mandatory audit period.

The CGR could be plausibly structured in a multi-level, value-added, cascading format (similar to a goods-and-services tax), thus avoiding royalty duplication during the course of product development. This comports with the nature and time course of biotech inventions, which—unlike their traditional small-molecule predecessors—are often the cumulative result of several convergent technologies. Royalties would likely be treated on the balance sheet as a business expense by for-profit entities, rather than a capital expense or even income per se. Finally, payments could be offset by a cascading, research-based, tax credit system, which could easily be incorporated into existing federal, state and provincial R&D tax credits in the United States and Canada. Credits could be weighted to early adoption of technologies to facilitate a faster aggregate translation of products to market. The interplay of economic and public interest factors, including determination of the threshold level of public input that would trigger royalties and the scope of offsetting tax credits, would depend on the nature of the trade-off viewed by policymakers between the goal of providing maximal profits to monopo-ly holders and the degree of acceptable market distortion from monopoly pricing.

A major argument favoring the proposed CGR is that government is the party traditionally responsible for administering public health. Government administration of the CGR makes good policy and administrative sense, as government agencies, such as the DHHS and Health Canada, have accumulated substantial expertise in administering public health matters under their jurisdiction and thus would be in an excellent position to receive and reinvest revenues targeted to public health. As noted earlier, CGR payments could be implemented in a similar manner to how several US states have put large damage awards from tobacco and pharmaceutical litigation directly back into health-related research and infrastructure. Relevant government agencies could place similar restrictions on revenues accrued through the CGR stream.

The UK Wellcome Trust (London) offers a useful precedent for how contractual rights relating to revenue sharing might be accrued in the course of funded research. The Trust is one of the largest charitable sources of funding for biomedical research in the world. It has institutionalized acquisition and exploitation of IPR rights arising from research it funds, and it obliges all researchers receiving funds to sign contracts relating to equity- and revenue-sharing when Trust-funded technologies are successfully commercialized⁶⁰. Other existing examples include equity assumption and royalties levied by US⁶¹ and Canadian^{62, 63} governments on profits from publicly funded oil and gas exploitation, based explicitly on policies designed to promote commercial development while concomitantly providing government with a fair share of the value of the commercialized resource.

From a public policy perspective, the proposed CGR has the advantage of a clear and direct structural (legal), functional (economic) and institutional (administrative) nexus between the scope of public input to product development and the scope of bene-fits derived from this input. Unlike a general innovation tax, which would levy past, present and future innovation, the proposed CGR yields a royalty stream only on past innovative activity that is undertaken by publicly funded researchers or their agents and assumed by firms relative to the commercialized product at issue. As such, it offsets the effective 'excise tax' levied by firms on products arising from strong patent protection and resulting monopoly pricing⁶⁴ and the associated deadweight loss (DWL) on national economies (see Box 2; ref. 65).

Finally, a frequently expressed criticism of 'recoupment' by the academic community is that it would destroy research agreements between firms and universities⁵⁰. This criticism does not tally, however, with the explosion in university-based biomedical research and its wide of range of clinical applications combined with both the well-documented push by most governments in the developed world for enhanced productivity and competitiveness through innovation and the well-described slowing down of traditional pharmaceutical pipelines. Consequently, in the presence or absence of a short nadir in university-industry agreements following institution of a CGR supported by strong leadership, it is likely that patenting, technolo-gy transfer, licensing and commercialization efforts by universities and in-licensing and outright acquisition of publicly funded medical technologies by pharmaceutical and biotech firms will continue apace well into the future.

Conclusions

There is little question that substantial benefits accrue to society from publicly funded biomedical research. It is questionable, however, whether these benefits are distributed equitably among the parties responsible for generating, for capitalizing and for consuming the products of this research. We submit here they are not, and that there are good grounds on which to base a claim by the public for a direct interest in the profits of an increasingly privatized biomedical research enterprise. Given the scope of frustrations expressed over perceived inequities in the risks and benefits of commercialization, it is becoming increasingly plausible that the current regime constitutes policy failure from a public health perspective.

The degree to which governments participate in distributive reallocation will, however, depend on answers to a series of deeply existential questions for the public health branch of national governments¹. Is the primary function of public health agencies to protect the public? Is it to stimulate the economy through biomedical research commercialization? And, if both, where does the balance lie on the scale of public to private concerns? The answer to this third question will dictate the direction of future privatization efforts, whether and how benefits from privatized research should be equitably distributed, as well as the degree of risk assumed by the public should governments vacate their traditional consumer protection role in favor of economic development.

Moreover, as federal health agencies consult with the private sector over many issues relevant to research, commercialization, licensure and marketing of biomedical products, it will be imperative to maintain not only the integrity of government-industry relations, but also to be seen to be doing so publicly. This will be necessary for governments to avoid charges of bias and unfairness in discharging their public health responsibilities. Distributive reallocation therefore takes on exigency in proportion to the degree that public-private partnerships and other forms of government–industry partnering enhance, or are seen by the public to enhance, the politi-cal influence and market power of firms over competing social spheres. This may be a significant concern for jurisdictions that lack the cultural, fiscal and human resources necessary to underpin a more arm's-length relationship between government and industry⁶⁶.

Even so, we should strive to harness the formidable capabilities of for-profit entities to achieve improvements in public health in a manner consistent with the principles of equity, justice and equality and the notion that innovation in the medical sciences occurs in a complex system more akin to an organic systems-based 'innovation ecology'⁶⁷ rather than in a linear 'basic' to 'applied' direction²³. Public–private partnerships can be particularly valuable in circumstances involving large transaction costs associated with novel biomedical inventions aimed at the global public good. That said, a combination of self-interest and anxiety in the face of globalization has led to wide swings of the pendulum of S&T policy and scholarship in recent years, with argument for expansive IPR rights on the one hand and their abolition in favor of a completely open source model on the other. Neither position is likely to be balanced or workable over the long term, as both may skew too far to private or public interests.

If governments are truly shifting emphasis away from a primary focus on public health protection toward equally facilitating the economy on the back of public health research—and if the public truly understands and supports this position—then a solution more in the manner of a middle or 'third way' will be necessary to protect the interests of for-profit entities and those of the public, for whom government is an agent. A reallocation scheme typified by the proposed CGR model may be a step in the right direction.