Governments will always play a huge part in solving big problems. . . . They also fund basic research, which is a crucial component of the innovation that improves life for everyone.
—Bill Gates1Collaborative Innovation in Drug Discovery: Strategies for Public and Private Partnerships x (Rathnam Chaguturu ed., 2014) (alteration in original) [hereinafter Chaguturu].
The false alarm of a Hawaiian nuclear attack in January 2018 is an example of the lack of U.S. preparedness for attacks using nuclear and other weapons of mass destruction. To address such threats, this Article proposes the establishment of a nationwide integrated defense of health countermeasures initiative (DHCI). DHCI is a multi-prong program to create a defensive triad comprising government, private industry, and academia to develop countermeasures for health threats posed by chemical, biological, radiological, and nuclear (CBRN) attacks. Key elements of our proposal include the use of the government’s Other Transaction Authority to simplify procurement arrangements, the establishment of public-private partnerships with an information commons for the sharing and use of certain information and trusted intermediaries to protect proprietary information pursuant to cooperative research and development agreements, and the creation of a network of incubators sited in ecosystems of excellence. Although our proposal focuses on health countermeasures, it may be applied to other urgent national needs, such as rebuilding U.S. infrastructure.
INTRODUCTION: TWO MINUTES TO THE APOCALYPSE
On January 13, 2018, the Hawaiian government sent a text to its citizens announcing that a nuclear ballistic missile strike was imminent and instructing residents to seek shelter.2 It took more than thirty minutes for the government to announce that the notice was sent in error. Several days later, the Japanese government also sent an erroneous notice of an imminent attack, which it corrected several minutes later.3 Ballistic missile tests by North Korea4 have triggered memories of the Cuban Missile Crisis in 1962, when the United States and the Soviet Union were on the brink of nuclear war. Had the Hawaii alert been accurate, where exactly were residents to seek shelter? Or are we back to the days of “duck and cover?”
In 2018, the Russian government used a weapons-grade nerve agent in an apparent attempt to assassinate a former spy and his daughter in Britain.5 In response, the U.K. Minister of Defence announced that the United Kingdom was spending £48 million to set up a chemical weapons defense center and was vaccinating thousands of British troops against anthrax.6
Anthrax-laced letters killed five and sickened fifteen Americans in 2001.7 Syria used sarin gas on its own citizens in 2017 and 2013.8 If smallpox or other pathogens are weaponized, will we have adequate antidotes and vaccines available? What bacteriological cures or vaccines do we need to fight other weaponized “super bugs” or the spread of Ebola?
The fact is that governments worldwide are woefully unprepared to address threats of chemical, biological, radiological, and nuclear (CBRN) attacks and other emergency events that can cause massive human casualties.9 Such threats come not only from states at war using traditional military means of delivery, but also from non-state sponsored terrorist groups10 and naturally occurring diseases such as antibiotic-resistant bacteria and Ebola. Even though CBRN attacks are a recognized national security hazard and public health concern,11 vaccines and therapeutics are available for only a small number of these threats, leaving large populations in the United States and elsewhere susceptible to such attacks.12 Successfully addressing this threat will require combining the “rapidly growing” and “complex [governmental] science and technology base”13 with the more nimble and innovative research and development capabilities of academic and industry scientists to speed up the adoption of the information technology innovations necessary to address CBRN threats.
Also key to developing effective countermeasures is promoting academic entrepreneurship14 and translational medicine15 by facilitating the movement of medical research and discoveries from “bench to bedside.”16 The pharmaceutical industry is highly concentrated,17 and “[t]he development of new pharmaceuticals is both high risk and high cost,18 with new drugs costing a billion dollars or more to bring to market.”19
There is a critical need to establish a nationwide integrated public health defense infrastructure, platform, and services initiative (the Defense of Health Countermeasures Initiative, or DHCI) to address such threats. The multi-faceted initiative for addressing the threats of CBRN attacks we introduce in Part IV builds on the successes of the Defense Advanced Research Projects Agency (DARPA) and the Biomedical Advanced Research and Development Authority (BARDA), including their use of the federal government’s Other Transaction Authority (discussed in Part III), combined with the use of public-private partnerships20 of the sort currently used by participants in the European Union’s Innovative Medicines Initiative (IMI),21 the European Commission’s Action Plan Against the Rising Threats from Antimicrobial Resistance,22 and by certain U.S. entities under the Bayh-Dole Act.23 Our initiative also includes another component: identifying and generating ecosystems of excellence24 housing incubators that will bring together all the players and resources needed to support breakthrough multi-disciplinary discoveries. This new model will provide platforms, infrastructure, and services for both accelerating developments in countermeasure and creating a data commons.
The need for speed is very real. On January 25, 2018, the Bulletin of American Scientists moved up the Doomsday Clock thirty seconds to two minutes to midnight, its closest to the midnight apocalypse since 1953 when the Americans and Russians tested the first hydrogen bombs. In a 2018 letter, the Union of the Concerned Atomic Scientists’ CEO and President Rachel Bronson stated:
In 2017, we saw reckless language in the nuclear realm heat up already dangerous situations and re-learned that minimizing evidence-based assessments regarding climate and other global challenges does not lead to better public policies.
Although the Bulletin of the Atomic Scientists focuses on nuclear risk, climate change, and emerging technologies, the nuclear landscape takes center stage in this year’s Clock statement. Major nuclear actors are on the cusp of a new arms race, one that will be very expensive and will increase the likelihood of accidents and misperceptions. Across the globe, nuclear weapons are poised to become more rather than less usable because of nations’ investments in their nuclear arsenals.25
President Trump has called for increasing the U.S. defense budget by 7% to $716 billion for fiscal year 2019,26 primarily to increase the offensive power of the U.S. military. This Article focuses on the defensive side of the ledger in a world where not only nation states, but also non-state actors or rogue states, like North Korea, can cause mass destruction and panic.27
Part I provides a brief summary of the role the federal government has played as a powerful market actor, particularly in the areas of public defense and innovation, including the Defense Advanced Research Projects Agency (formerly known as ARPA), the tremendously successful advanced research initiative that led to groundbreaking innovations, such as computer technology, the internet, and self-driving vehicles.
In Part II we discuss several of the most significant government initiatives undertaken after the terrorist attacks on September 11, 2001 (9/11) and their strengths and shortcomings. Lest we repeat the mistakes of the past, Part II explains why many of the federal policies to accelerate the commercial development of countermeasures, especially endeavors to incentivize the biopharmaceutical industry to invest in such developments, had limited success.28
In Part III we propose the creation of the Defense of Health Countermeasures Initiative, a multi-prong proposal to create a defensive triad comprising government, private industry, and academia to develop countermeasures for health threats posed by CBRN attacks. Key elements include the use of the government’s Other Transaction Authority to simplify procurement arrangements, the establishment of public-private partnerships with trusted intermediaries, and the creation of a network of incubators sited in ecosystems of excellence.
Part IV discusses potential challenges to collaboration and our responses thereto. We conclude with a summary of our proposal and a brief discussion of areas for further research.
I. GOVERNMENT AS MARKET ACTOR
Noble Laureate Robert M. Solow identified technological innovation as a fundamental source for productivity and the only reliable engine that drives change and sustained economic growth.29 Paul Romer, who shared the Nobel Memorial Prize in Economic Sciences with William D. Nordhaus in 2018, helped confirm that innovation promotes growth, but Romer went on to theorize that the pace at which the market generates new ideas and “the way in which they are translated into growth depend on other factors—such as state support for research and development or intellectual-property protections.”30
Throughout U.S. history, governments have played the role of catalyst, venture capitalist, beta tester, and early adopter to promote technological research, development, and commercialization.31 As demonstrated by the Manhattan Project during World War II, and projects sponsored by the DARPA and the Central Intelligence Agency’s In-Q-Tel program (both discussed below), the U.S. government is capable of taking bold steps to foster the development of radically innovative technology to protect the American people from artificial and natural national threats. Further, legislation and regulations, such as transferable vouchers for fast-track FDA review (discussed in Section IV.A), the 21st Century Cures Act32 (discussed in Section I.C), and the Global Combating Antibiotic Resistant Bacteria Biopharmaceutical Accelerator initiative (CARB-X) (discussed in detail in Section II.C33), can spur commercial efforts to innovate.
A. The Defense Advanced Research Projects Agency (DARPA)
DARPA is a prime example of a successful governmental intervention in the market.34 Created during the 1960s following the Soviet Union’s successful and unexpected launch of the first satellite Sputnik,35 DARPA provided funding to members from the scientific community, public sector, university-based researchers, industry syndicates, and private corporations (including start-ups).36 The agency facilitated cooperation and information exchange among visionary and creative technologists from diverse development and research sites, including helping private firms commercialize new discoveries.37 DARPA provided venture capital-like services, including mentoring, strategic planning, and technological and business brokering services. Although the technologists were given wide discretion, DARPA helped determine the course of research and served as a catalyst for innovation.38 According to Erica Fuchs,
[T]he little-studied key to DARPA’s success lies with its program managers. Each program manager, who is temporarily on leave from a permanent position in the academic or industrial research community, is given tremendous autonomy to identify and fund relevant technologies in his or her own field that are relevant to specific military purposes. To carry out their roles, program managers must execute four interrelated tasks: learn about current or forthcoming military challenges; identify emerging technologies that have the potential to address those challenges; grow the community of researchers working on these emerging technologies; and be sure, as this community evolves, to transfer responsibility for the further development and eventual commercialization of these technologies either to the military services or the commercial sector.39
To minimize abuse or waste, DARPA staff transferred resources from unproductive groups to more promising, productive, and profitable ones.40
Through DARPA and other initiatives, the federal government not only established many of the processes that formed the U.S. national innovation system, but also played an active role as a “market-maker.”41 It took a risk-bearing role to create the infrastructure for the high technology world of today.42 Commercial fruits of government participation include not only computers and the internet, but jet planes, rockets, radar, lasers, civilian nuclear energy, GPS, and biotechnology (or biotech) as well.
More recently, DARPA’s driverless car Grand Challenge, initiated in 2004, caused the United States to go “from a car that traveled 7.5 miles in a desert to a car driving itself down the George Washington Parkway in live traffic in 11 years.”43 This was accomplished “at a fraction of the cost and with a far broader set of contributors than a wholly government-driven effort could have supported.”44 DARPA “rewarded a few teams to keep them going but also attracted other teams who used their own resources. It iterated and accepted failures along the way. By providing focus and proofs of concept, it was able to build the critical mass to attract large commercial R&D investments.”45
As discussed further below, DARPA used its “Other Transaction Authority” to remove some of the administrative barriers that previously deterred many commercial companies from participating in the government marketplace.46
The DARPA model thus spurred innovation and competition by providing incentives to commercial companies “that lack the capabilities or desire to perform government-funded research under standard procurement contracts, grants, or cooperative agreements.”47 Thus, the U.S. government has a proven track record as a powerful market actor.48
B. In-Q-Tel
Another successful example of the government as a driver of market competition is the first government-funded venture capital firm, In-Q-Tel.49 Launched in 1999 by the U.S. Central Intelligence Agency (CIA), In-Q-Tel’s charge was to “swim in [Silicon] Valley”50 and invest in emerging technology firms (making small stake investments by utilizing venture-like processes).51 In-Q-Tel allowed the CIA to invest in high technology firms that had not done business with the government before, serving as a bridge between the government (as a customer for innovative products and services) and emerging growth technology firms.52
In-Q-Tel was successful for many reasons, including its geographic proximity53 to Silicon Valley and its ability to simplify the process of federal procurement. The CIA used its Other Transaction Authority (OTA), a flexible contracting vehicle that lowers transaction costs by reducing the disincentives non-traditional government bidders experience when trying to contract with the federal government.54 We discuss OTA further in Section III.C.
“Unlike a true venture capital model, In-Q-Tel is more aptly described as a ‘technology accelerator,’ seeking speed and agility in discovering innovative IT solutions for the Agency.”55 Its value proposition centered on obtaining IT solutions, not foremost on return on equity or assets. Deals always resulted in a product or service (e.g., feasibility assessment, test product, or prototype). As with venture capital (VC) funding, the CIA’s investments were “smart money,” which provided the portfolio companies with not only cash but also “intellectual capital [and] technology-related experience.”56 The CIA also offered “the Agency as a potential test-bed.”57 Consistent with its results-oriented approach, the CIA conducted extensive due diligence before forming a contract comprising an “[i]n-depth investigation into the [potential portfolio] company’s structure and financial status as well as the ability of the proposed technology to meet the Agency problem domain.”58
To encourage recruitment of established managers and staff from the venture capital industry, and to prevent them from leaving In-Q-Tel for more lucrative private positions, the CIA offered a rewarding compensation scheme, which was very unusual compared with typical government jobs.59 “The [compensation] included a flat salary, a bonus paid based on how well In-Q-Tel met government needs, and an employee investment program, which took a prespecified portion of each employee’s salary and invested alongside . . . [the] portfolio.”60
C. 21st Century Cures Act: Big Data and Artificial Intelligence
Acknowledging the urgent need for using big data and artificial intelligence to develop new therapies, President Obama signed the 21st Century Cures Act into law on December 13, 2016.61 The Act established “Information Commons” initiatives to facilitate broad, open, and responsible sharing of data.62 Signaling the value of large data sets comprising information garnered from electronic health records (EHRs), pharmaceutical giant Roche agreed in February 2018 to pay $1.9 billion to acquire Flatiron Health, a privately held New York-based healthcare technology company.63 Flatiron Health collects clinical data on cancer patients and has previously teamed up64 with public parties, including the Food and Drug Administration (FDA)65 and the National Cancer Institute, academic medical centers,66 and private parties such as independent community oncology practices,67 life sciences oncology companies, and others.
D. Need for Additional Government Intervention for CBRN Countermeasures
Notwithstanding existing public support for innovation and new therapies, the U.S. federal government is losing its place as a world leader in generating innovation, technology, and economic growth.68 To successfully compete in tomorrow’s marketplace, promote growth, and protect its citizens, as well as to increase productivity and expand economic and social value,69 U.S. policymakers must institute sweeping innovation policies to modernize the U.S. innovation infrastructure.
In the past, most of the U.S. research and development (R&D) spending, which contributes to innovation, came from the Department of Defense (DoD). For example, according to the Government Accountability Office (GAO), 40% of R&D spending in the United States came from the DoD in 1987. By 2013, the DoD provided less than 20% of the U.S. R&D, whereas commercial R&D increased its spending by 200% between 1987 and 2013.70 Today, however, the military and commercial demands in the United States have diverged drastically,71 resulting in declining civilian-military technology spillovers.72 For example, the U.S. military market no longer plays a strategic role in the computer and semiconductor industries (as compared with its position in the 1960s).73
Government is once again needed to drive the innovation necessary to even begin to seriously address today’s CBRN threats. The need is particularly acute given the closing of major private R&D institutions, such as Bell Labs and General Electric’s R&D enterprise. By investing in knowledge, human capital, and innovation, governments promote knowledge spillovers,74 and thereby encourage the formation (and survival) of new entrepreneurial firms and new lines of business in existing firms.75
The government is not a profit-maximizing entity,76 and is therefore in a better position than private investors to deal with situations of great uncertainty that require long-term investments in radical innovation.77 Government actors are often not as efficient as private firms,78 but they can alleviate market inefficiencies and failures by addressing the tragedy of the commons,79 monitoring economic progress and market trends, and guiding local systems and intra-industrial innovation to meet social and military needs.80 By promoting long-term development strategies, governments can serve as “bridge builders” between the public sector and private businesses and innovative industries.81 Joint collaboration gives government scientists an opportunity to learn from industry and vice versa. Ideally, government participation complements, and does not replace, private efforts to build emerging growth firms.
Public-private partnerships use various methods of collaboration designed to combine the government’s forward-looking policies and funds with the private sector’s innovative efforts. Such efforts often include support from for-profit private intermediaries and nonprofit organizations, such as private disease foundations. There are several financing models of incubators, ranging from public non-profit to quasi-public to private non-profit.82 This Article centers on public-private and quasi-public–private partnerships, given the need for the government to fund basic research and seed companies, in an industry in which the “average time between the ‘key enabling discovery’ and the introduction of a drug is 12–15 years.”83
But governments and industries cannot fill the countermeasure pipeline alone. Institutes of higher learning (and national systems of innovation84) play critical roles in today’s knowledge economy.85 The “standard” growth theory in economics tends to concentrate on the roles of the business firms (including the constraints and incentives that are provided by competition in a market setting), and it is often blind to a wide range of other institutions that have played key roles in stimulating growth and driving innovation.86 In the case of drug discovery, “[p]ublicly funded research, occurring at universities and the National Institutes of Health, over the years has produced a great majority of the key enabling discoveries underlying nearly 80% of the important drugs.”87 Typically, “the academic laboratory . . . identifies the interesting molecular targets that are important enzymes and proteins in various biochemical and physiological processes.”88 The U.S. government funded and made publicly available the sequencing of the human genome, but it took academic researchers to convert the basic science into innovative discoveries, including “the biomarkers of disease identified in genomics, proteomics, and biochemical studies” and the “identification of new messenger molecules and their receptors.”89 For example, the University of California and Stanford University were instrumental in developing the gene sequencing techniques, which biotech companies like Genentech commercialized.90
To develop new treatments, vaccines, and protective devices, government agencies need to collaborate with academia and private industry to identify the specific challenges not being adequately addressed by the private or governmental sectors. The government must then be willing to help fund the cutting-edge public and private research, innovation, development, and commercialization91 necessary to show proof of concept and feasibility.92 Accordingly, the Defense of Health Countermeasures Initiative we propose in Part III is designed to allow the government to make direct equity investments in seed projects through the DHCI Incubators and national platforms for networks of innovation hubs. At the same time, our proposed DHCI encourages private actors to help finance such projects and makes it possible for universities and academic scientists to share in the economic proceeds through the Bayh-Dole Act and the glory through the right to publish novel findings. This defensive triad, comprising government, academia, and industry, should promote effectiveness and, more importantly, reduce political capture (discussed further in Section IV.D) and other distortions.
II. EXISTING MEASURES TO DEAL WITH THE THREAT OF CHEMICAL, BIOLOGICAL, RADIOLOGICAL, AND NUCLEAR ATTACKS
Following the terror events of 9/11, including the anthrax attacks, the federal government and certain states took various measures to protect U.S. civilians from potential CBRN terrorism and other emergency outbreaks. These included financial incentives to mobilize the biotechnology and pharmaceutical industries to pursue the R&D of medical countermeasures, such as diagnostic tests, drugs, vaccines, and other treatments, that can minimize the impact of a CBRN attack.93
Despite these efforts, the current pipeline of new countermeasures is not robust. Many start-up companies continue to find themselves trapped in the “Valley of Death,” populated by firms at the early stage of development that are caught, as in amber, in the “time between a basic science discovery (usually in academic labs) and the decision to commit resources to develop the idea into a drug (almost always by industry).”94
A. The Public Health Security and Bioterrorism Preparedness and Response Act of 2002
The Public Health Security and Bioterrorism Preparedness and Response Act of 2002 (PHSBPRA) specifically authorizes the Secretary of Health and Human Services to “prevent, prepare for, and respond to bioterrorism and other public health emergencies”95 by coordinating the activities of federal, state, and local governments. In accordance with this mandate, the Centers for Disease Control and Prevention (CDC) launched three programs in 2003: (1) the BioSense program, “a nationwide integrated public health surveillance system for early detection and assessment of potential bioterrorism-related illness”;96 (2) the BioShield program, which is charged with accelerating “the research, development, acquisition, and availability of medical countermeasures to improve the government’s preparedness for and ability to counter chemical, biological, radiological, and nuclear threat agents;97 and (3) BioWatch, a program “designed to sample the air in major metropolitan areas for pathogens that terrorists might use.”98
B. BioShield
Of the three programs authorized by the PHSBPRA, this Article will focus on the BioShield initiative. This federal program is designed to address the CBRN threat gap by encouraging private sector development of new CBRN medical countermeasures. Project BioShield established a direct procurement mechanism whereby the federal government can buy a countermeasure up to eight years before the product is likely to be fully developed.99 Although Project BioShield was designed to remove barriers to procurement and to address the market uncertainty faced by countermeasure developers, initial implementation of Project BioShield 1 was not very successful.100
The disappointing results of BioShield 1 were due in part to the lack of adequate monetary incentives101 to motivate private pharmaceutical companies to invest the hundreds of millions of dollars in R&D necessary to successfully produce a new medical countermeasure.102 The following are the five broad stages in the innovation process, as well as the financial sources that are usually available at each stage.103 First is the stage of basic research, for which funding is usually available to entrepreneurs from government sources, such as the National Science Foundation (NSF), National Institutes of Health (NIH), the Small Business Innovation Research (SBIR) phase I (Feasibility and Proof of Concept),104 and from private corporate resources, such as the funds large corporations allocate to R&D. Second is the proof of concept or invention stage, for which financing sources usually include private angel investors, corporate R&D funds, and government funding from SBIR phase II (Research/Research and Development)105 and technology labs. Third is the early-stage technology development stage, which is often termed the Valley of Death because of the entrepreneur’s difficulty in obtaining financing for this stage.106 Fourth is product development, the stage at which private venture capital firms traditionally invest in start-up firms. Fifth, and last, is the production or marketing stage, for which financing sources include private venture capitalists, corporate venture capital, private equity, or commercial debt.
PHSBPRA provided inadequate R&D funding to get private actors across the Valley of Death.107 Even if a private firm was successful developing a new treatment, there tended to be no continuous commercial market for the product. “There is little incentive for publicly-traded drug companies to make products with low profit margins, infrequent use and a high likelihood of liability lawsuits, such as vaccines.”108
Second, the government was unwilling to guarantee that the pharmaceutical companies’ patent and other intellectual property rights would not be compromised if a public crisis required large scale dissemination of their drugs.109 After the anthrax attacks in 2001, the government forced Bayer to lower the already discounted price of the Cipro drug by threatening “to force compulsory licensing of the patent on Cipro in order to enable generic companies to enter the market.”110 The PHSBPRA failed to address this issue.
Third, the PHSBPRA lacked adequate indemnification provisions that would shield pharmaceutical companies from liability for new drugs and vaccines. Wyeth spent millions defending lawsuits related to its smallpox vaccines.111 The fact that vaccines require animal testing and cannot be ethically tested on humans make such concerns particularly acute.112 Fourth, the PHSBPRA did not reduce the lengthy FDA approval process (which can take ten to fifteen years).113 Fifth, the failure of the procurement contract, whereby the small biotechnology firm VaxGen agreed to provide millions of doses of an unproven anthrax vaccine, deterred other small (and large) private companies from collaborating with the government.114
Sixth, the PHSBPRA did not reduce the bureaucratic governmental red tape private firms had to cut through to finalize the government procurement contracts. Indeed, private executives complained that government officials were changing the requirements and delaying contracts.115 Seventh, the PHSBPRA failed to establish an effective delivery system for the distribution of drugs and vaccines in a large-scale crisis even if it had an adequate supply stockpiled.116 Finally, Eliah Zerhouni and Anthony Fauci, the directors of the NIH and National Institute of Allergy and Infectious Diseases (NIAID), were criticized for putting too much emphasis on government research.
C. BARDA and OTA
To address the shortfalls of the BioShield program and further encourage the development and procurement of CBRN medical countermeasures, Congress passed the Pandemic and All-Hazards Preparedness Act (PAHPA) in 2006. PAHPA created the Biomedical Advanced Research and Development Authority (BARDA) and established the position of Assistant Secretary for Preparedness and Response in the Department of Health and Human Services (HHS). Since then, BARDA has made substantial progress closing the innovation gap by stimulating R&D through public-private partnerships with various stakeholders, including industry.
1. Other Transaction Authority
Since 2013, BARDA has provided non-dilutive funding and technical advisory support to its partners pursuant to a flexible government contracting vehicle, the OTA.117 OTA collaborators are not required to comply with the typical lengthy and time-consuming procurement requirements or to change their standard business practices.118 Given the flexibility inherent in collaborations governed by OTA, the federal government can also accommodate the various licensing (and collaboration) terms and conditions that a company may already have in place with its partners, including licensors’ account rights.119
When using its OTA, BARDA is not required to comply with the multitude of laws, regulations, and other requirements that normally apply to standard procurement contracts, grants, and cooperative agreements. As a result, the turnaround time is shorter, “with less internal paperwork than normally would be the case.”120 Thus, used correctly, OTA contracts can attract leading-edge, biotech and pharmaceutical companies and academics to collaborate with federal funding agencies to participate in BARDA-funded R&D programs in situations where they otherwise would not do so.
OTA arrangements permit BARDA to take the “portfolio approach” that industry and venture capitalists use to fund R&D by diversifying investments, funding multiple rounds dependent upon success,121 and not trying to pick a national champion.122 BARDA is accordingly able to support a “company’s [and the government’s] effort to simultaneously and in parallel develop multiple drug candidates.”123
2. Use of OTA to Form Public-Private Partnerships
Both DARPA and BARDA have used OTA to establish public-private partnerships to deal with technological challenges. Public-private partnerships are “contractual agreements between a public agency or public-sector authority and a private-sector entity that allow for greater private participation in the delivery of public services, or in developing an environment that improves the quality of life for the general public.”124 In order to develop a public-private partnership,125 the conventional community of stakeholders is expanded to include the private sector (emerging and established firms); management; academia and research communities; industry and economic development organizations; federal, state, regional, and local governments; and the financial sector, including investment banks, angel groups, and venture capital groups. This is in addition to the traditional stakeholder groups, which include customers, employees, creditors, suppliers, and shareholders.
Agreements reached through the use of a government agency’s OTA have formed the basis for pharmaceutical public-private partnerships with large pharmaceutical companies, such as GlaxoSmithKline (2013), AstraZeneca (2015), the Medicines Company and Hoffmann-La Roche (both 2016), and Pfizer (2017).126 OTAs have also been used to enter into international collaborations with other funding agencies, such as the European Union’s IMI (to co-fund the development of one of AstraZeneca’s lead antibacterial candidates), and to jointly support other product development.127 Finally, OTA contracts have made it possible for the U.S. government and its contractors to enter into consortiums.128
For example, as discussed further below,129 BARDA and the NIH’s NIAID used OTA to create the Global Combating Antibiotic Resistant Bacteria Biopharmaceutical Accelerator (CARB-X).130 In another effort “to accelerate research, development, and availability of transformative countermeasures to protect Americans,” BARDA announced the creation of the Division of Research, Innovation, and Ventures (DRIVe) in June 2018.131 According to Steve Brozak:
Unlike the current funding mechanisms the government uses, it seems that DRIVe will act more like a strategic investor in private and public companies in addition to being a grant maker. This means that the new division may be able to make direct investments into companies BARDA would like to partner with and derive value by holding equity or equity-like instruments in the venture. Investing in opportunities in this manner offers a pathway to renew funds to reinvest into other ventures deemed essential to the national interest.132
Notwithstanding the promise of initiatives like CARB-X and DRIVe, the federal government’s policies in effect since 2001133 have not provided sufficient incentives for private biotechnology and pharmaceutical companies to engage in the development of countermeasures, with few companies advancing “candidates through clinical trials, and fewer still . . . likely to market products.”134
D. The Model State Emergency Health Powers Act
Following the events of 9/11, the Center for Law and the Public’s Health at Georgetown University and Johns Hopkins University prepared and published a Model State Emergency Health Powers Act (MSEHPA).135 As a result of public criticism,136 they subsequently introduced a second draft.137 As of July 1, 2004, thirty-four states and the District of Columbia had enacted some form of the MSEHPA, and it was under consideration by another nine states.138 As with the first version, various civil rights groups criticized the second draft for providing excessive powers to state governors at the expense of individual rights, and for allocating primary responsibility for responding to a bioterrorism attack to underfunded and undertrained individual state health departments ill-equipped to manage the after-effects of such an attack.139 We agree that a national response regime is necessary.
III. DEFENSE OF HEALTH COUNTERMEASURES INITIATIVE
We call on the U.S. government to build on the success of DARPA and BARDA and the effective use of OTA to establish the Defense of Health Countermeasures Initiative. The DHCI builds on the concept that the government needs to be a key risk-taker and invest in knowledge, human capital, and innovation to encourage knowledge spillovers.140
The DHCI includes the creation of a public-private network of “ecosystems of excellence,”141 comprising triads of universities and other research institutions, private pharmaceutical and biotechnology firms and private investors, and government actors, to form incubators for the development of effective CBRN countermeasures (Incubators or DHCIIs). The DHCI is designed to complement, and not to replace, the private market efforts in financing and growing emerging growth firms, new technology, and applications. It allows the government to make direct equity investments in seed projects (ideas that are promising bases for a new company or expansion of an existing firm) within a short period of time (usually within two but sometimes within up to five years), while also encouraging private intermediaries to participate in the financing and management of the funded companies.
Precedents include the National Science Foundation’s University-Industry Demonstration Partnership and the NIH’s Roadmap Initiatives, which have been “integral to engaging academia in drug discovery research and have been effectively leveraged to help bridge the chasm between basic research activities and the commercialization of a drug.”142 More recently, in 2012, the Obama Administration created Partnerships to Accelerate Therapeutics “to identify and resolve bottlenecks and speed the development of life-saving medicines through synergistic alliances involving industry, academia, government, and disease foundations.”143
A. Technology Innovation and Business Incubators: In General
A key element of the DHCI is the use of technology innovation and business incubators to encourage innovation by serving the needs of entrepreneurs (and seed stage companies) and by providing them with access to the resources required to successfully grow their ideas.144 Joseph Mancuso established the first U.S. business incubator, the Batavia Industrial Center in Batavia, New York, in 1959.145 For the purpose of this Article, the term “business incubator program” is taken from the working definition provided by David A. Lewis, Elsie Harper-Anderson, and Lawrence A. Molnar, to mean the following:
Business incubation programs are designed to accelerate the successful development of entrepreneurial companies through an array of business support resources and services, developed or orchestrated by the incubator manager, and offered both in the incubator and through its network of contacts. A business incubation program’s main goal is to produce successful firms that will leave the program financially viable and freestanding. Critical to the definition of an incubator is the provision of management guidance, technical assistance, and consulting tailored to the needs of new enterprises.146
As of 2014, there were an estimated 7,000 incubators worldwide.147
There are different forms of technology and business incubators, which can generally be divided into four types, ranging from “virtual incubators”148 (with no walls), “incubators with walls,”149 and “accelerators,”150 to “international incubators.”151 For the reasons set forth in Section III.C below, we recommend incubators with walls, that is, incubators with shared-use facilities.
For example, the University of Connecticut’s Technology Incubation Program (TIP) operates two of the largest incubators in the United States, one in Farmington, Connecticut, next to its medical, nursing, and dental schools, specializing in life sciences, and a second near its main campus in Storrs, Connecticut, specializing in computer science and related high technology. TIP offers:
- Incubator facilities featuring wet labs and access to instrumentation
- Collaboration with Scientific Experts
- Technically trained employees, fellows, interns and graduates
- The university’s world-class library resources [and]
- Customized business planning and mentoring.152
B. The Israeli Technology Incubator Program
The Israeli government, acting through the Israeli Office of the Chief Scientist (OCS), established the Technology Incubator Program whereby it created twenty-eight technology incubators with shared-use facilities between the years of 1991 and 1993.153 Designed to help build successful firms that could leave the incubator in relatively short order in a financially and organizationally self-sustained and viable state,154 the program spurred the innovation and cross-fertilization necessary to develop Israel’s high technology industry.155 It also provided employment for the engineers and scientists who had immigrated to Israel from the former Soviet Union,156 as well as laid-off engineers from the military sector.157 By providing shared-use facilities and short-term financial and other support to individuals and early-stage companies with a promising idea,158 the incubators “transformed” engineers into technological entrepreneurs.159 Finally, the program forged links and promoted cooperation among entrepreneurs, academic institutions, private industry, and government procurement officials.160 The incubators had no industrial sector designation or limitation, and any university or research institution, local municipality, or large private firm could sponsor a project.161 Their geographic locations ranged from metropolitan areas to more remote regions.162
Each incubator’s manager, often with the assistance of a group of professional advisors, was responsible for selecting eight to twelve projects from multiple applicants who were subject to a rigorous screening process.163 To be accepted, the idea underlying the project had to be based on innovative R&D that was capable of being commercialized and exported to an appropriate market within a reasonable period of time.164
1. Governance
Initially, the Israeli technology incubators were organized as not-for-profit quasi-governmental entities.165 They were governed by an incubator manager, as well as by public actors, such as government officials, municipalities, research institutions, and universities.166
Following the selection process, the incubator’s manager and its professional advisors were responsible for working with the entrepreneur167 to draft a “project folder,” which was then submitted to the incubator’s steering committee for approval.168 The steering committee was typically chaired by the incubator’s manager and usually comprised members from the following stakeholder groups: research institutions and academia, industry representatives, and community leaders.169
2. Financing Mechanisms and Services Provided
The Israeli government provided financial support both to the incubator’s management, as well as to the program’s participants. Annual grants to the incubator’s management of up to $175,000 per year were available.170 The government also provided grants of up to $150,000 per year, for a maximum of two years, to each seed company participating in the program.171
Subject to that upper limit of $150,000, the Israeli government limited the grants it allocated to each seed company to not more than 85% of that company’s approved project budget.172 As a result, the entrepreneur was responsible for obtaining non-government financing for the remaining 15% of the project budget, termed the “complementary financing.”173 The entrepreneur could (1) contribute that amount directly to the project, (2) raise that amount from a non-government party, or (3) provide some combination of self-funding and non-governmental financing.174 Research in 2003 showed that founders had successfully obtained non-government financing for their incubator projects from private investors in exchange for a share of the equity in the project and by collecting fees from “royalties, sale of shares and dividends, and strategic partnerships.”175
If the “incubated” firm was successful in commercializing its project, then it was obligated to repay the government “priming” grant by paying royalties to the Israeli government. If a new venture failed, however, then neither the entrepreneur nor the entity formed to pursue the project was required to repay the money the government had contributed to the project.176
3. Annual Evaluations and Possibility of Additional Governmental Support in Rare Cases
Each of the projects accepted into the incubator program was evaluated on a yearly basis. As noted above, government funding and other support were almost always limited to not more than two years after the venture commenced operations.177 In limited circumstances, mainly when the evaluators concluded that the project was well-managed but was in a field like the biotech that required a longer incubation period, then a third year of government support might be granted.178
4. Privatization in 2002
The Israeli technological incubator program initiated in 1991 was privatized in 2002 and converted into public-private partnerships, which were organized in the form of incubator joint companies.179 Once the private sector was able to provide adequate private capital for the incubators on reasonable terms, policy makers concluded that government funding was no longer necessary.180
The incubator joint company reduced its percentage of equity shares (which were not tradable) by increasing capital from external investment.181 Wholly privately-owned incubator models then started to emerge in Israel.182
After the privatization, there was a dramatic rise in the success rates of entrepreneurial firms that participated in the private or quasi-public technology incubator programs.183 Success rates were measured by the ability of entrepreneurial firms, after graduation from the incubator program, to obtain subsequent funding as well as to continue growing their operations.184 Following graduation, many companies were able to create more jobs and attract international venture capital funds.185
The Israeli government further privatized the programs by establishing a franchise system, whereby the government licensed the public and quasi-public incubators to experienced equity investment firms.186 Such firms extensively invested in the incubator start-up projects, providing both capital and management support.187 Since 2002, the franchise model used a new repayment mechanism.188 Originally, the Israeli government provided funding for projects directly to the public technological incubator program.189 In that way, the program was the agent in charge of transferring the government funding to the individual companies. Moreover, the program, not the start-up firm, was accountable for repaying the grant, usually within a four-year period from the date in which the start-up firm graduated from the program.190 To guarantee that the money would be repaid, the Israeli government held shares in each of the funded start-up firms. If the incubator did not repay the grant on time, the government had the right to decide whether or not to sell its stake in the start-up. According to Yossi Smoler, Director of the Technological Incubators Program, the repayment mechanism was “too complex and wasn’t something in which the government wanted to be involved.”191 Today, the government allocates funds directly to the start-up company, and the company pays off the amount via royalties and interest (usually 3–5% of revenues plus a market rate of interest).192
5. Results
The Israeli technology incubator programs exceeded the initial goals of their founders, facilitating the development of a world-class, high-tech industry in Israel. The execution of the mission of the Office of Chief Scientist (OCS) to encourage cross-regional cooperation on innovation was and continues to be extremely successful. The OCS continues to expand its R&D initiatives with international partners (via bilateral or multilateral cooperation) and contribute to the expansion of global innovative markets. Among these expanding markets are the United States, China, and India.193
C. Proposed Structure of DHCI Incubators
Each of the DHCI Incubators (DCHIIs) will have its own differentiating characteristics, which will depend on its regional and historical influences, as well as its stakeholders and purpose.194 At a minimum, as stated by Ferid Murad, Nobel Laureate in Physiology and Medicine, “the collaborating parties must plan carefully, take the project seriously, define who does what, and honor their commitments in a timely fashion.”195 Although no single incubator structure or practice guarantees favorable results, we believe that, based on the Israeli experience and others studied by a variety of academics,196 the DHCIIs should include the following features.
1. Shared Use Facilities
The DHCIIs should typically be part of a shared-use facility, where multiple founders of new ventures are physically located. Shared physical space promotes networking, collaboration, and the transfer of both information and tacit knowledge.197
Many entrepreneurs lack the accumulated knowledge, deep networks, and industry peer groups available to seasoned managers of established firms.198 To handle the uncertainties and complexities inherent in many new ventures, entrepreneurs may overuse bounded rationality, be too quick to reject alternative courses of action, and “settle” for what seems like a “good enough” outcome; they may also suffer from confirmation and other cognitive biases.199 Cohen, Bingham, and Hallen found, in a comparative study of accelerators, that by front-loading and concentrating the provision of expert advice, mentoring, and meetings with customers at the beginning of the program, by promoting transparency and information sharing among peer ventures in a cluster of innovation, and by standardizing focus, mentor meetings, peer gatherings, and other activities, the designers of accelerators were able to mitigate the adverse effects of oversized reliance on bounded rationality.200 We would expect a similar dynamic to occur with incubators.201
Consider, for example, LabCentral, in Cambridge, Massachusetts—a shared-use, affordable, move-in-ready laboratory facility suitable for early-stage biotech research. Its founding sponsors include Triumvirate Environmental and Johnson & Johnson Innovation. It is a 70,000 square-foot facility in the heart of the Kendall Square, Cambridge, biotech innovation hub—near Harvard University and the Massachusetts Institute of Technology (MIT)—and was designed as a launchpad for high-potential life sciences and biotech start-ups. It offers fully permitted laboratory and office space for as many as sixty start-ups, comprising approximately 200 scientists and entrepreneurs. It is a private, nonprofit institution, funded in part by two $5 million grants from the Massachusetts Life Sciences Center, with support from its real estate partner, MIT.202
To quote Douglas Crawford, the associate director of a LabCentral affiliate QB3@953:
Once [biotech entrepreneurs] are convinced that they should try to bring their work to market, either with or without bridging-the-gap funding, they are often astounded by the next mental adjustment: the amount [of] effort required to turn their attractive innovation into a useful product . . . .
Besides securing intellectual property and developing a business plan, the budding entrepreneur must find a place[,] . . . supporting services, and access to needed resources.203
2. Sponsors: DARPA and the Proposed Central Health Incubators Bureau
The DHCI requires a federal government agency tasked with spearheading the Initiative and setting up the Incubators in various geographic regions across the United States. We recommend that Congress authorize DARPA, with input from BARDA, the FDA, and the NIH, to create the Central Health Incubators Bureau (CHIB).204 CHIB will be in charge of heading the Initiative and making the final decisions on the projects to be selected to participate in the various Incubators. CHIB should include experts from the private and public sectors, as well as nongovernmental organizations such as the American Civil Liberties Union, the World Health Organization, and the Red Cross. To avoid undue political interference, the members of CHIB should be granted the sort of independent authority given to the civilians chosen to determine which military bases should be closed after Congress decided that the United States no longer needed as many bases as it had during the Cold War.205 Otherwise, each government official would find it politically very difficult to vote to close the base in that official’s own geographic district regardless of its importance to the strategic defense of the United States.
3. Stakeholder Engagement
The shared facilities should be designed to encourage cooperation among not only the participating entrepreneurs but also between entrepreneurs and various stakeholder groups in ecosystems of excellence.206 For the purpose of the Initiative, the term “stakeholders” refers to the following groups of public and private partners that will have a role in forming and operating the Incubator: management, the private sector, academia, industry, government, the financial sector, and other traditional stakeholders.207 Accordingly, preferably, each Incubator will be located near established pharmaceutical and biotech firms, as well as research universities and other academic institutions with strong life sciences, engineering, and business departments, and will have access to military experts. As Robert Urban, Global Head of Johnson & Johnson Innovation, explains, “success requires density and proximity.”208
For example, CARB-X, created pursuant to the Combating Antibiotic Resistant Bacteria (CARB) plan President Obama released in 2015,209 “brings together leaders in industry, philanthropy, government, and academia with the aim of rejuvenating the antimicrobial pipeline for the next 25 years.”210 Its participants include:
- BARDA and the NIH’s NIAID are the U.S.-sponsoring governmental agencies.
- Kevin Outterson, a leading health law researcher at Boston University who has collaborated in global projects to address antibiotic resistance, is the Executive Director.
- The executive team “includes experts with decades of experience in antibiotic drug development, including John Rex, Senior Vice President at AstraZeneca,” and Barry Eisenstein from Merck.
- NIAID “will provide in-kind services, including preclinical services, to projects that CARB-X supports. NIAID also is providing technical support for CARB-X from their internal subject matter experts in early stage antibiotic drug discovery and product development.”
- MassBio and the California Life Sciences Institute “will provide world-class business support and mentoring services to innovative product developers selected for funding. The two accelerators will also share best practices with the Wellcome Trust and AMR Centre.”
- The Broad Institute of MIT and Harvard University “will host a new inter-disciplinary Collaborative Hub for Early Antibiotic Discovery. This hub, aimed at early drug discovery, will work with multiple academic programs to advance promising antibiotic candidates that the CARB-X initiative can pursue.”
- RTI International “will provide technical and regulatory support services to product developers in the partner accelerators as well as build and run the computing systems to identify, track, and monitor all research programs, including a real-time dashboard management information systems. RTI will evaluate all CARB-X operations to identify and share best practices across all partners and supporting continuous quality improvement.”211 Two nongovernmental organizations—the Bill and Melinda Gates Foundation and the Wellcome Trust—will provide funding and other support.212
CARB-X has raised more than $500 million in funding and has more than thirty-three projects underway.213
4. Structure of Incubators
The DHCIIs should be largely autonomous organizations, usually structured as not-for-profit corporations, B corporations, or limited liability companies with (1) limits on the transfer of equity ownership and on the transfer or licensing of assets; and (2) the right to buy back equity or reacquire assets and licensed rights at cost. Such ventures are able to “lock in” their assets by protecting their stakeholders from the risk of shareholders attempting to withdraw assets.214
It should be noted that an incubator for life sciences will be different from, say, a computer software incubator, both because the time from invention to commercialization is much longer and because the incubator will require academic peer review of marketable research to gauge the safety and efficacy of an idea or a project. As a result, it should reinforce the connection between academia and industry while ensuring that funds are distributed to research projects that are deemed worthy by scientists, not just business people seeking short-term profits.215
5. Financing
The DoD, the NIH, the CHIB, and other government agencies will provide seed funding for projects accepted by a DHCI in response to requests for proposals. Such grants will typically be limited to not more than two years.216 Because these projects are from the biotech field, a third year of government support could be granted under special circumstances and after due assessment.217 In contrast, projects supported by an accelerator would usually be funded for five months or less.218
Building on the Israeli incubator model, the funds should be invested in the portfolio companies in the Incubator and not given to the manager of the Incubator. However, in most cases, it will be the new venture, and not the government, that will own the technology with certain residual rights belonging to the academic institution and a portion of the royalties being payable to the inventors in accordance with the Bayh-Dole Act. The incubated firm will be required to repay the government grant once successful, perhaps (if one follows the Israeli model) with royalties equal to 3–5% of revenues plus market rate interest.219 If the new venture fails, however, then the government will not require repayment of the grants.220 Both the public and private participants should understand and acknowledge that it is very likely that entrepreneurs and start-up firms will fail several times before they reach a successful outcome in the biotech industry.
It will usually be necessary to raise additional funding from various local and regional stakeholder groups (such as colleges or universities, other government agencies, economic development groups, private industry, angel investors, venture capital and hedge funds, and any other potential sponsors of the Incubator). According to a study by Lewis, Harper-Anderson, and Molnar, public sector support contributes to the success of projects nurtured in an incubator.221 Moreover, incubators that enjoy larger budgets (in terms of both revenues and expenditures) outperform incubators that have to deal with budget constraints.222
Accordingly, the top managers of each Incubator should be expected to work with the entrepreneurs to line up investments from other private and public sources representing roughly 15% of each portfolio company’s approved budget.223 Getting private capital to supplement the government investment will increase the total capital introduced into the market, as well as provide networking opportunities for the portfolio companies, which may result in follow-on investments in the companies from such sources. As discussed below, the project managers of the firms in the incubators should also be expected to contribute funds, property, or sweat equity.
6. Other Governmental Actors and their Roles
Governmental actors can perform various tasks. Regional, state, and federal governments can generally be expected to provide R&D grants and other funding. Various agencies, such as the DoD, Department of Commerce (DOC), HHS, and Department of Labor, may be called upon to oversee and help carry out initiatives and projects funded by regional, state, or federal governments whereas economic development companies will usually represent the local government. Any government entity may serve as a future client or supplier for portfolio firms in the Incubator at prices tied to fair market value.
The following are four additional significant roles that government can play, as suggested by economists Muro and Katz.224 First, federal policymakers can provide Incubator stakeholders around the nation with information and foundational resources.225 This implies that the managers of the Incubators should recruit the involvement of federal agencies, and, in particular, the following: DOC (particularly, the National Institute of Standards and Technology); DoD; Education (ED); Energy (DOE); NASA; and the National Science Foundation (NSF).
Second, at the state level, policymakers should strategically invest resources in life science clusters and encourage regional collaboration.226 Regional clusters are defined as “geographic concentrations of interconnected companies and institutions in a particular field,” which include “governmental and other institutions.”227 The state government should encourage university-industry partnerships to leverage federal and academic research funds, to build a technically educated workforce, and to ease regulations to create a more fertile ground for technology.
Third, regional leaders should coordinate all the cluster participants and identify the various challenges facing clusters in that region.228 Finally, local policymakers will need to implement the strategic cluster-oriented economic development policy, as well as help gauge the clusters’ effectiveness and their possible expansion.229 By working together, federal, regional, and local governments can foster the creation of ecosystems of excellence.230
7. Management
The DHCI requires two sets of managers—a top program manager (or top management team)231 for each Incubator and a project manager (or project management team) for each portfolio company. Both the top program managers and the top project managers would report to the steering committee (discussed in the next Section).
a. Selecting the Top Program Managers for the Incubators
The Incubators could be managed in one of two ways—by internal executive managers hired to manage the program or by external trusted partners or intermediaries that contract to perform the top management function. Regardless of the selection process, the top program managers of the incubators would be tasked with facilitating the collaboration and coordination efforts essential for a successful Incubator.
i. Selecting Internal Executive Program Managers
The CHIB or an existing agency, such as DARPA, could hire internal executive program managers for each Incubator. Prospective executive managers would be required to compete for the right to participate in the DHCIIs.232 To the extent that such matters have not otherwise been specified by the relevant government agency in its request for OTA proposals, applicants for the position of top program manager would be expected to address the following in their bids.
First, they should state which industry sectors they believe should be represented and identify the incubator’s potential clients (that is, the entrepreneurs and firms that are likely to want to participate in the program). They should describe the potential clients’ level of development233 and evaluate their level of management skills.
Second, they should specify the region they believe is best suited to physically house the incubator and explain their selection criteria. Factors to be considered include whether the proposed region is a technology or non-technology-oriented region; whether it is considered a central or peripheral geographic area; and what is the industrial capacity of the region.234 It is further proposed that the Incubators should be sited in ecosystems of excellence that offer affordable and comfortable housing in order to attract talent.
Third, the applicants should identify the various stakeholders and potential sponsors (and partners) in the region and explain how they vary in terms of resources, missions, and requirements.
When selecting the program managers for the Incubators, the CHIB (or other government agency) should consider the reputation and experience of the managerial candidates, particularly with regard to the region in question; the industries (or research) that the agency would like to promote; the applicant’s experience with seed investments, developing entrepreneurs and helping them convert their ideas into viable firms; and the applicant’s ability to marshal additional investments and resources from local and regional stakeholders. The vetting and bidding process could also take into account the maximum amount of capital that the proposed executive program manager (or management group) would be willing to invest in the Incubator’s portfolio companies and the equity or executive compensation expected in return, as well as the size of Incubator that the applicant seeks to establish.
The program managers will be paid a base salary for the managerial services that they provide, in addition to a certain equity stake in the portfolio companies (as equity compensation, in return for a cash investment in the portfolio company, or both).235 The percentage of equity will be determined by the steering committee and will take into account private industry practice (not public government practice or wage standards), the region, and the fields of R&D. The Incubators’ program managers will also be subject to the oversight of the private market, because if the portfolio firms are successful in the future and complete an acquisition or an initial public offering, then the managers will be compensated when the value of their equity stake increases.
ii. Selecting Trusted Partners or Intermediaries to Serve as Top Program Managers
Alternatively, the federal government could use the relevant agency’s OTA to contract with trusted partners and third-party intermediaries. Many of the criteria used for selecting trusted partners and intermediaries are similar to those applicable to candidates for an internal executive position. They include expertise vetting potential projects and ensuring that the cooperation, coordination, exchange of information, incentives, operational pieces, quality controls, and ethics and compliance systems necessary for a successful incubator are in place. Trusted partners and intermediaries will, like internal candidates, be expected to respond to a request for proposals, but their applications will not be nearly as extensive as what applicants for internal executive positions are required to submit. In addition, trusted partners and intermediaries will not be required to invest any of their own funds. They would, however, have the option of acquiring an equity stake in a specific portfolio company on terms acceptable to the project manager and the steering committee unless such an investment would create conflicts of interest.
b. Selection of Project Managers of Portfolio Companies
The process for selecting the project manager for a proposed portfolio company is extremely important.236 When entrepreneurs are applying to join an Incubator, they will be required to provide a detailed account of their management experience and their perceived need for hiring others to serve on the top management team for the firm created to undertake the proposed project. The program manager of the Incubator for which an entrepreneur is applying will take this information into account when deciding whether to accept a project. Under certain circumstances, approval may be conditioned on a different project manager or an augmented project management team.
c. Business Plans for the Incubators and Portfolio Company Operations
Subject to approval by the CHIB (or other authorized government agency) acting pursuant to its OTA, the top program managers of the Incubators will be expected to set forth in a business plan or similar document clear (and well-defined) mission statements, investment processes, and goals for the Incubator, including a robust schedule of the fees that will be payable by the portfolio companies for the rental of facilities and equipment and the provision of other services, such as hazardous waste removal. The plan should also address the items required in the applications for executive program managers discussed above. Ultimately, the Incubator program manager will be expected to work with the most promising project applicants to help them craft a brief business plan (or pitch deck) for their proposed project. That business plan should meld the Incubator’s program plan and the proposed project description in the participating entrepreneur’s application into project specifications acceptable to the governing agency and the steering committee.
Once the government agency and the steering committee approve the project specifications, it is critical for the Incubator managers to ensure that the portfolio companies have project managers who are largely autonomous, as is the case with DARPA projects. Subject to approval by the steering committee, the top managers of the firms in the Incubators should have the authority to set goals, supervise staff, and take other appropriate steps to limit and mitigate the dangers of political pressures and abuse.237
The Incubators’ program managers should, however, encourage the project managers and other stakeholders to promote collaboration between academic and industry researchers and scientists, given the key roles institutions of higher learning and research institutes play in a knowledge economy.238 These include doing the basic and applied research necessary to understand various natural and technical phenomena and thereby contributing to the development of innovative commercial solutions. Academic partners can also provide guidance to the businesses fostered by the Incubator and help provide the tacit knowledge often necessary for successful commercialization. In addition, academic institutions are often well-suited to addressing the particular needs of the core industries in the region where the academic laboratories and other facilities are located. The Incubators’ managers should also encourage open innovation,239 shared-use facilities, and technology transfer from the participating research institutions to firms capable of converting basic and applied science into marketable products and services or manufacturing processes.
8. Steering Committee
Each Incubator will have a steering committee which, according to the Israeli experience, would typically be chaired by the executive manager of the Incubator’s management group.240 The steering committee should include a technology transfer specialist; an executive from an incubator graduate firm;241 accounting, intellectual property (patent assistance), and general legal experts;242 representatives from research institutions and academia; industry representatives; local government and economic development agency officials;243 and representatives from any other stakeholders involved with the incubator.244
9. Key Elements of the Public-Private Partnership Management Contract
The relationship among the various participants in an Incubator will typically be memorialized in a public-private partnership agreement. To increase the likelihood of success, all parties should do their best to couple a mutual relationship of trust predicated on honesty, integrity, transparency, and fair dealing with a long-form contract that ensures that the proper incentives are in place.245 Commons theory posits that private arrangements can be effective to govern shared resources such as information and data.246 In this respect, our proposal incorporates aspects of the work of Nobel Laureate Elinor Ostrom on a commons framework whereby consortia can share certain data pursuant to contracts that structure their interactions by taking into account the knowledge and information resources that they create and exploit.247 Unlike the nongovernmental governance structure for commons contemplated by Ostrom, however, our proposal includes aspects of the Information Commons contemplated by the 21st Century Cures Act, and it contemplates that the government will be one of the contracting parties and confer economically efficient intellectual property rights.248
To promote trust and cooperation and reduce the risk of defection, the contract should include clauses to the following effect:
- The parties shall together pursue a strategic alliance by joint initiatives and optimization for the benefit of the project. The parties recognize that achieving joint optimization requires specific legal clauses.
- The parties agree to fulfill their obligations in accordance with the agreed binding clauses setting forth the common goals and the value added by joint optimization.
- The parties agree to work and conduct research together in the spirit of the project with openness, trust, and collaboration.
- A copy of the contract shall remain on the table in the lab. The parties shall use the contract on a daily basis and educate the involved staff, researchers, and legal back office in a joint optimization spirit. The parties acknowledge that the contract is a necessary tool to create added value.
- The parties shall take the steps necessary to optimize the value of the project. Accordingly, all parties have the obligation to warn each other of any error, omission, or discrepancy of which they become aware and shall immediately propose solutions designed to jointly optimize the successful completion of the project.
- It is a requirement that all relevant information be made available to all parties because it generates transparency, trust, and confidence. Accordingly, all parties shall open up their books and calculations concerning the project.
- The parties must ensure each other a healthy business case and optimal research conditions and recognize that they have different economic yields from the project.
- Due to the above clauses, the parties shall establish, develop, and implement a strategic alliance relationship in the lab and other shared facilities with the objectives of achieving:
- Delivery in accordance with Key Performance Indicators (KPIs) and timetables. Any research, added value, risk, pain, and gain identified by the parties shall be subject to incentive payments.
- The parties shall investigate all possible positive incentives to fulfill the value-added transaction. The parties shall be awarded for and encouraged to maximize their effort for the benefit of the project and to allocate the added value in accordance with the key factors in paragraphs (8) and (9).
- Any dispute shall be resolved as soon as possible and the parties shall apply the following specific strategic alliance guideline: When a problem arises, the first responsible director shall gather the parties and, based on the objectives set forth in the contract, launch a procedure to solve the problem. If the problem persists, the next director in the hierarchy shall be given responsibility for the problem; then, if necessary, a mediator and finally an arbitrator shall be appointed. At every stage, the above points shall be observed. All parties recognize that even when they experience conflict, common goals and optimization lead to added value for the project.249
10. Selection and Evaluation of Projects and Portfolio Companies
The Incubator’s management team, including the executive director and other professional advisors, will propose to the steering committee one or more (depending on the size and capital of the Incubator) projects or portfolio companies to participate in the Incubator.250 Once the steering committee has approved a project or portfolio company, the CHIB will be responsible for making the final decision on which projects and companies will participate in the program and receive funding. Before making its final determination, the CHIB will, absent exigent circumstances, be expected to obtain peer review of the proposals, as happens now with both NIH and IMI grants, and to request additional advice from independent experts, depending on the industry and research objectives.251 To ensure that only truly innovative projects are approved, regardless of the publishing history or established reputation of the inventor, we advocate following the process developed by Thomas Sinkjær, whereby each member of the review committee is given a “golden ticket” that can be used to green-light a project even if it is not approved by the other members of the review committee.252
To be accepted into the program, the project (business, technical, or scientific idea) must be innovative, based on sound R&D, and capable of being commercialized and exported to the appropriate market. The industry scope is the core activity or common denominator that links the participating actors.253 An Incubator may concentrate on a specific sector, such as biotechnology or defense needs, but under certain circumstances the managers might be encouraged to go beyond the industry scope and support different projects from various industries.
A general objective of the DHCI is to encourage the adoption of the stakeholder approach to strategic management,254 which is intended to give managers a framework within which to deal with constant changes in the environment, society, technology, and industry.255 Accordingly, the Incubator managers will be able to actively design a new direction for the Incubator,256 as needed to take into account how the Incubator can affect the environment, in addition to how the environment may affect the Incubator,257 subject to the approval of the steering committee and CHIB. The managers should be free to select projects that might take a long time to produce results because they will not be subject to the threat of losing their jobs if the projects do not produce short-term results and profits.258 Such emphasis on investment in long-term R&D will provide current and future generations with the ability to enjoy the wealth generated from the innovative projects.259
Each of the projects in the Incubator program should be evaluated on a yearly basis.260 If a project is running over budget or behind schedule or otherwise not meeting expectations, then the program manager should give the portfolio company management a reasonable time to get it back on track. If the program manager or CHIB is still not satisfied after the portfolio company’s management has been given an opportunity to meet expectations then either the program manager or CHIB should have the power to terminate the project, with all intellectual property rights not already licensed to third parties reverting to the portfolio company.
11. Management Incentives to Prevent Adverse Selection, Conflicts of Interest, Shirking, and Political Capture
To avoid “waste” (i.e., management getting paid by the government no matter how well the projects do) and political capture (i.e., management being pressured by local stakeholders to accept friends, relatives, or political allies into programs or to otherwise take actions not in the best interests of the Incubator),261 the following incentives are designed to encourage the management to be diligent in selecting the companies that will join the Incubator portfolio.262
First, the management of the Incubator must be autonomous so it can set clear and well-defined strategic long-term goals for running the Incubator. Its duties will include supervising the funding from the various stakeholder groups, and providing accelerator- and venture capital-like support services to the portfolio companies, such as assisting in the development of the R&D and commercialization strategy; helping to prepare the business plan and the pitch deck; introducing the entrepreneurs to members of the Incubator management’s network, including potential mentors, investors, collaborators, and customers; and providing clerical services, organizational analysis, and legal and accounting guidance.263 Additionally, to accelerate the formation and growth of the seed companies, the management will need to integrate education and workforce training functions into the Incubator’s operations, which is where academia and the research community can also play important roles.
Second, based on lessons learned from the Israeli experience and following the recent successful market trend of the accelerator model, the management of the Incubator should be expected to invest a certain amount of their own capital in the portfolio companies, in cash or as sweat equity, in return for an equity stake in the companies.264 Managers who have invested their own capital in the portfolio Incubator companies will have a stake in making sure that they do not pick “lemons.”265 Having an equity stake also reduces the dangers of management shirking266 and not acting in the best interests of the companies and their investors.267 It may also lessen the effects of political pressures from the government agencies involved.
12. Open Innovation and the Creation and Governance of a Commons
The DHCI is based on the “open-innovation”268 and “commons”269 paradigms, which enable the participating early-stage firms in the Incubator to use internal and external ideas to develop their biotechnology, product, or process, as well as to take advantage of the shared-use facilities. Firms using open innovation are able to leverage the basic research that was done by other firms while exploiting both external and internal sources of innovation,270 thereby reducing the cost of carrying out R&D271 and increasing the likelihood of developing products or services that would otherwise not exist or would remain untapped in the economy.272 Both open innovation and the creation of an information commons encourage knowledge spillovers and collaboration among the participating firms and stakeholders. They can also facilitate the early incorporation of customers in the development process273 and boost the accuracy of customer targeting and market research. Finally, they increase the potential for viral marketing.274 Firms that have successfully used open innovation include Intel, Cisco, and Microsoft.275
If, however, there is proprietary information that a private firm will eventually want to patent or otherwise protect, then a trusted intermediary may be used to match up promising discoveries and needs without disclosing the proprietary information to a rival firm or institution. This is already being done with a high throughput program whereby promising small molecules or biologics owned by pharmaceutical and biotech firms are matched against pathogens and pathways or genes identified by academic scientists pursuant to cooperative R&D agreements. Alternatively, the OTA contract could specify that the government is the sole owner of the technology and has the sole right to use it. If, for example, the government decided to offer a $1 billion prize to the first firm to successfully develop an antibiotic effective against “superbugs,” the government would want to keep it as a drug of last resort to prevent the development of antibiotic-resistant strains. In such a case, the drug might be manufactured by a large pharmaceutical firm but the government would be the sole customer.276
13. Ecosystems of Excellence
If our initiative is properly implemented, it should lead to the formation of “ecosystems of excellence,”277 sometimes called “clusters,”278 with the following positive results. First, it can foster geographic connections between the various regions where the Incubators are located.279 Second, it can boost new enterprise formation280 and help firms survive the Valley of Death281 by stimulating low-cost collaboration between early-stage companies and various stakeholders, including customers, employees, creditors, suppliers, and other non-shareholder groups, which will supply the enterprise with resources (such as funding, labor, expertise, infrastructure, and the like).282 Third, it can foster innovation and commercialization through dense knowledge flows and spillovers, including networking, data gathering, and sharing.283 Finally, it can foster competition and encourage firms to innovate.284
CHIB should be in charge of developing platforms that will allow the various Incubator program managers to meet; share their progress, difficulty, and achievements; and share their resources, so that they can create a public-private “National Network for Innovation Incubation” to successfully deal with natural or terror events in the future. During previous events of this sort, there were deficiencies in both the local public health response and the federal government’s ability to manage it.285 For example, in 2001, respondents complained that “they did not have all the necessary agreements in place to put the plans into operation rapidly,” ran into trouble reaching clinicians to provide them with guidance, and had not anticipated the number of entities with which they would have to communicate.286
We note that there is controversy concerning the issue of whether foreign companies or entrepreneurs should be able to participate in programs funded by American taxpayers. However, in today’s global economy, such collaborations are necessary and even inevitable.287 Therefore, international firms should be able to participate (as partners of American firms) unless their involvement would pose a threat to national security.
IV. CHALLENGES AND SOLUTIONS
There are many challenges associated with introducing change into an existing organization, especially a massive bureaucratic organization like the U.S. government or a complex system such as the patchwork of physicians, nurses, researchers, hospitals, clinics, insurers, and others responsible for the provision of healthcare in the United States.288
A. Reluctance to Deal with the Government
Individuals and companies in the private sector are often reluctant to sell to and collaborate with the government.289 Reasons include the federal government’s inflexible fight for control over intellectual property rights and software warranties;290 unreasonable, time-consuming, and very costly delays in funding due to such things as shifts in government priorities and changing strategies and procurement needs;291 complex cost accounting requirements; and the “long, onerous and costly federal acquisition process.”292 According to one GAO report that compared the process of submitting proposals for sale to the government with submitting bids to private parties, it took one company twenty-five full-time employees, twelve months, and millions of dollars to prepare a bid for the government.293 In contrast, it took only three part-time employees, two months, and thousands of dollars to prepare the same bid for a private firm.
There are also cultural differences between the private industry, business, and government in general and with respect to public health in particular. There is a lack of familiarity with one another’s values, metrics, resources, constraints, lines of accountability, management styles, lingo, and modes of operation. Private parties often view government management styles as inefficient and wasteful. Entrepreneurs and business leaders are concerned about the need to follow misinformed or opaque government regulations. Public leaders in the public health area may see their role as constraining businesses from promoting unhealthy products, harming the environment, or threatening the health of workers and patients—not as taking risks to find new therapies or finding ways to fund all the compounds and biologics that never find their way to a patient.
But there is precedent for the public-private partnerships we propose, including the Manhattan Project and DARPA. The surprise attack by the Japanese on Pearl Harbor, Hawaii, gave birth to the field of operations research as the country scrambled to arm and clothe its soldiers and build fleets of ships, submarines, tanks, and aircraft. Given the threats posed by CBRN attacks and diseases like influenza, we call on President Trump to order a review by operations research experts of how the FDA assesses and approves new drugs and medical devices. Queuing theory suggests that backlogs can be reduced by incremental increases in resources. The markets have already signaled what expedited FDA approval is worth; major pharmaceutical firms, which are often seeking approval of a “me-too drug” (one that is only slightly different from other drugs on the market), have paid hundreds of millions of dollars to acquire the transferable fast-track vouchers provided to the developers of cures for orphan diseases.294
We applaud the FDA’s willingness to consider accepting aggregated patient data, of the sort gathered by Flatiron Health, based on electronic health records to be used in lieu of expensive and time-consuming clinical trials.295 This may be particularly appropriate when a drug already approved for one clinical use is being considered for another (so-called repurposing).
B. Lack of a Unified Healthcare Infrastructure
Some (including certain members of Congress) maintain that the first BioShield initiative failed because the enabling act did not address the United States’ healthcare infrastructure problems. Our DCHI ameliorates this by calling for centralized collaboration and coordination between and among local, state, and federal authorities, universities and research institutes, public and private hospitals and medical centers, private industry, and nongovernmental organizations for the purpose of defending U.S. residents from CBRN attacks and naturally occurring diseases like antibiotic-resistant bacteria. Given the gravity and widespread nature of such threats, our hope is that our modest proposal will be able to withstand the partisan politics that have resulted in the partial dismemberment of the Affordable Care Act.296
C. Uncertainty, High-Risk, and Asymmetric Information Barriers
Uncertainty, high-risk, and asymmetric information barriers are associated with investing in early-stage pharmaceutical, medical device, and biotech firms.297 The markets for allocating risk capital to early stage ventures are inefficient.298 Private investors often cannot obtain adequate information about which inventions and companies are likely to succeed. It is particularly difficult to quantify market uncertainties when an innovation is radical and technologies and markets are constantly evolving, changing, and becoming ever more complex. Even venture capital investors, who are special financial intermediaries that have found a way to address at least some of these information challenges, have abandoned early-stage biotech investments in favor of later stage investments,299 in part because they cannot capture the full benefits of such technologies.300 Additionally, many large public firms are closing or relocating their R&D labs to sites outside of the United States, and are shying away from “Moon Shot” investments in R&D initiatives with uncertain returns.301
The DHCI is designed to address many of these challenges by having the government intervene in the market, as it did after the Soviet Union launched Sputnik, by creating DARPA and giving it OTA to harness the power of the private sector and the university research community. Providing seed capital for public-private incubators that together form an ecosystem of excellence reduces at least some of the financial inefficiencies and helps bridge information gaps associated with investment in R&D. Perhaps, most importantly, it will serve as a catalyst for encouraging and stimulating the private development of innovative solutions (including funding early-stage companies) as happened with the Israeli Technology Incubator program.
D. Political Capture of Business Objectives
A primary argument for the privatization of state-owned firms or state-financed ventures has been the political capture of business purposes and objectives. Politicians concerned with being re-elected have a strong personal interest in making their constituents happy. Therefore, they have a tendency to push for more recruitment than necessary in order to create jobs and spend more (in excess) than the private market would on an initiative,302 such as construction of a new public university campus. Moreover, politicians can also push for initiatives, projects, and corporations that will essentially be tools to transfer wealth to their supporters, partners, or relatives.303 This results in the misallocation of scarce government resources to the detriment of the taxpayer, as well as to those who would be better served by a more efficient process for funding innovation.304 Moreover, governments can elect to pay higher wages to government workers than are customary in the private market, which often surpass the public worker’s productivity level.305
We seek to address the risk of political capture by calling for largely independent and autonomous incubator management teams who have their own funds or sweat equity invested in the projects or portfolio companies being provided seed capital by the government. In addition, by following the successful Israeli example and requiring that at least 15% of the necessary funding be provided by nongovernment sources, our proposal provides a form of market check on the choice of investments.
CONCLUSION
This Article calls on the U.S. government to enact policies for institutional innovation that will encourage public and private sector experimentation and collaboration by reducing bureaucracy and promoting sustainable relationships and open innovation, while preserving the possibility of obtaining the intellectual property rights that are usually required to give private industry the incentive to innovate and commercialize novel therapeutics and medical devices. Properly harnessing the resources of private industry, universities and research centers, and government, will, we submit, lead not only to improved readiness to respond to CBRN attacks and epidemics, but also to improvements in societal health and overall well-being.
In particular, we propose that Congress and the president enact and implement the Defense of Health Countermeasures Initiative, a multi-prong program that builds on the successes of DARPA and on the Biomedical Advanced Research and Development Authority, including their use of the federal government’s Other Transaction Authority to create a national network of public-private incubators governed by contracts306 of the sort currently used by participants in the European Union’s Innovative Medicines Initiative307 and by certain U.S. inventors, universities and research institutes, and for-profit firms working together with the NIH and other government funders under the Bayh-Dole Act.308 Our initiative incorporates aspects of the work of Elinor Ostrom on a commons framework, whereby consortia can share certain data pursuant to contracts that structure their interactions by taking into account the knowledge and information resources that they create and exploit.309 However, unlike the nongovernmental governance structure for commons contemplated by Ostrom, our proposal includes aspects of the Information Commons contemplated by the 21st Century Cures Act, CARB-X, and DRIVe. To provide adequate incentives for private firms to participate, members of a consortium will have the ability to keep certain information and downstream inventions proprietary, by allocating the patent rights by contract, as contemplated by Nobel Laureate Paul Romer, or by disclosing them only to a trusted intermediary pursuant to a confidentiality agreement that preserves future patentability and licensing rights.
We assert that the DHCI will not only help to protect U.S. residents from CBRN attacks and naturally occurring deadly diseases, but will also promote economic growth and increase productivity by ensuring that U.S. biotechnology start-ups can successfully compete in tomorrow’s marketplace.310 We recognize that even this modest proposal will require policymakers to design and institute sweeping innovation policies that will embrace new approaches to management, technologies, and operating methods.311 Input and assistance from experts in academia, industry, and government will be needed to turn this skeletal proposal into the legislation, regulations, and contracts necessary to give our proposal life. Areas for further research and reflection include, but are not limited to: the application of the competition laws in the United States and the European Union to the partnerships, consortia, and networks we propose; government appropriations; interagency coordination; countermeasure prioritization; bilateral and multilateral opportunities for cooperation; the pricing mechanisms for inventions and equity funded through the DHCI; the appropriate use of government prizes and vouchers to spur innovation;312 and the provisions necessary to protect basic human rights, especially the right to privacy. At the risk of sounding grandiose, we hope that this Article will help further the dialogues and work necessary to effect real change.