Just like crop tops, flannel, and some truly unfortunate JNCO jeans that one of these authors wore in junior high, the trends of the 90’s are upon us again. In the innovation world, this means an outsized focus on tech-based economic development, the hottest new idea in economic development, circa 1995. This takes us back in time to fifteen years after the passage of the Bayh Dole Act, the federal legislation that granted ownership of federally funded research to universities. It was a time when the economy was expanding, dot-com growth was a boom, not a bubble, and we spent more time watching Saved by the Bell than thinking about economic impact. 

After the creation of tech transfer offices across the country and the benefit of time, universities were just starting to understand how much the changes wrought by Bayh-Dole would impact them (or not). A raft of optimistic investments in venture development organizations and state public-private partnerships swept the country, some of which (like Ben Franklin Technology Partners and BioSTL) are still with us today, and some of which (like the Kansas Technology Enterprise Center) have flamed out in spectacular fashion. All of a sudden, research seemed like a process to be harnessed for economic impact. Out of this era came the focus on “technology commercialization” that has captured the economic development imagination to this day. 

Commercialization, in the context of this piece, describes the process through which universities (or national labs) and the private sector collaborate to bring to the market technologies that were developed using federal funding. Unlike sponsored research and development, in which industry engages with universities from the beginning to fund and set a research agenda, commercialization brings in the private sector after the technology has been conceptualized. Successful commercialization efforts have now grown across the country, and we believe they can be described by four practical principles: 

• Principle 1: A strong research enterprise is a necessary precondition to building a strong commercialization pipeline.
• Principle 2: Commercialization via established businesses creates different economic impacts than commercialization via startups; each pathway requires fundamentally different support.
• Principle 3: Local context matters; what works in Boston won’t necessarily work in Birmingham. 
• Principle 4: Successful commercialization pipelines include interventions at the individual, institutional, and ecosystem level.

Principle 1: A strong research enterprise is a necessary precondition to building a strong commercialization pipeline.

The first condition necessary to developing a commercialization pipeline is a reasonably advanced research enterprise. While not every region in the U.S. has access to a top-tier research university, there are pockets of excellent research at most major U.S. R1 and R2 institutions. However, because there is natural attrition at each stage of the commercialization process (much like the startup process) a critical mass of novel, leading, and relevant research activity must exist in a given University. If that bar is assumed to be the ability to attract $10 million in research funding (the equivalent of winning 20-25 SBIR Phase 1 grants annually), that limits the number of schools that can run a fruitful commercialization pipeline to approximately 350 institutions, based on data from the NSF NCSES. A metro area should have at least one research institution that meets this bar in order to secure federal funding for the development of lab-to-market programs, though given the co-location of many universities, it is possible for some metro areas to have several such research institutions or none at all.

Principle 2: Commercialization via established businesses creates different economic impacts than commercialization via startups; each pathway requires fundamentally different support.

When talking about commercialization, it is also important to differentiate between whether a new technology is brought to market by a large, incumbent company or start-up. The first half of the commercialization process is the same for both: technology is transferred out of universities, national labs, and other research institutions through the process of registering, patenting, and licensing new intellectual property (IP). Once licensed, though, the commercialization pathway branches into two. 

With an incumbent company, whether or not it successfully brings new technology to the market is largely dependent on the company’s internal goals and willingness to commit resources to commercializing that IP. Often, incumbent companies will license patents as a defensive strategy in order to prevent competition with their existing product lines. As a result, license of a technology by an incumbent company cannot be assumed to represent a guarantee of commercial use or value creation.

The alternative pathway is for universities to license their IP to start-ups, which may be spun out of university labs. Though success is not guaranteed, licensing to these new companies is where new programs and better policies can actually make an impact. Start-ups are dependent upon successful commercialization and require a lot of support to do so. Policies and programs that help meet their core needs can play a significant role in whether or not a start-up succeeds. These core needs include independent space for demonstrating and scaling their product, capital for that work and commercialization activities (e.g. scouting customers and conducting sales), and support through mentorship programs, accelerators, and in-kind help navigating regulatory processes (especially in deep tech fields). 

Principle 3: Local context matters; what works in Boston won’t necessarily work in Birmingham. 

Unfortunately, many universities approach their tech transfer programs with the goal of licensing their technology to large companies almost exclusively. This arises because university technology transfer offices (TTOs) are often understaffed, and it is easier to license multiple technologies to the same large company under an established partnership than to scout new buyers and negotiate new contracts for each patent. The Bayh-Dole Act, which established the current tech transfer system, was never intended to subsidize the R&D expenditures of our nation’s largest and most profitable companies, nor was it intended to allow incumbents to weaponize IP to repel new market entrants. Yet, that is how it is being used today in practical application.

Universities are not necessarily to blame for the lack of resources, though. Universities spend on average 0.6% of their research expenditures on their tech transfer programs. However, there is a large difference in research expenditures between top universities that can attract over a billion in research funding and the average research university, and thus a large difference in the staffing and support of TTOs. State government funding for the majority of public research universities have been declining since 2008, though there has been a slight upswing since the pandemic, while R&D funding at top universities continues to increase. Only a small minority of TTOs bring in enough income from licensing in order to be self-sustaining, often from a single “blockbuster” patent, while the majority operate at a loss to the institution. 

To successfully develop innovation capacity in ecosystems around the country through increased commercialization activity, one must recognize that communities have dramatically different levels of resources dedicated to these activities, and thus, “best practices” developed at leading universities are seldom replicable in smaller markets. 

Principle 4: Successful commercialization pipelines include interventions at the individual, institutional, and ecosystem level.

As we’ve discussed at length in our FAS “systems-thinking” blog series, which includes a post on innovation ecosystems, a systems lens is fundamental to how we see the world. Thinking in terms of systems helps us understand the structural changes that are needed to change the conditions that we see playing out around us every day. When thinking about the structure of commercialization processes, we believe that intervention at various structural levels of a system is necessary to create progres on challenges that seem insurmountable at first—such as changing the cultural expectations of “success” that are so influential in the academic systems. Below we have identified some good practices and programs for supporting commercialization at the individual, institutional, and ecosystem level, with an emphasis on pathways to start-ups and entrepreneurship.

Practices and Programs Targeted at Individuals

University tech transfer programs are often reliant on individuals taking the initiative to register new IP with their TTOs. This requires individuals to be both interested enough in commercialization and knowledgeable enough about the commercialization potential of their research to pursue registration. Universities can encourage faculty to be proactive in pursuing commercialization through recognizing entrepreneurial activities in their hiring, promotion and tenure guidelines and encouraging faculty to use their sabbaticals to pursue entrepreneurial activities. An analog to the latter at national laboratories are Entrepreneurial Leave Programs that allow staff scientists to take a leave of up to three years to start or join a start-up before returning to their position at the national lab.

Faculty and staff scientists are not the only source of IP though; graduate students and postdoctoral researchers produce much of the actual research behind new intellectual property. Whether or not these early-career researchers pursue commercialization activities is correlated with whether they have had research advisors who were engaged in commercialization. For this reason, in 2007, the National Research Foundation of Singapore established a joint research center with the Massachusetts Institute of Technology (MIT) such that by working with entrepreneurial MIT faculty members, researchers at major Singaporean universities would also develop a culture of entrepreneurship. Most universities likely can’t establish programs of this scale, but some type of mentorship program for early-career scientists pre-IP generation can help create a broader culture of translational research and technology transfer. Universities should also actively support graduate students and postdoctoral researchers in putting forward IP to their TTO. Some universities have even gone so far as to create funds to buy back the time of graduate students and postdocs from their labs and direct that time to entrepreneurial activities, such as participating in an iCorps program or conducting primary market research.  

Some universities have even gone so far as to create funds to buy back the time of graduate students and postdocs from their labs and direct that time to entrepreneurial activities, such as participating in an iCorps program or conducting primary market research.

Once IP has been generated and licensed, many universities offer mentorship programs for new entrepreneurs, such as MIT’s Venture Mentorship Services. Outside of universities, incubators and accelerators provide mentorship along with funding and/or co-working spaces for start-ups to grow their operation. Hardware-focused start-ups especially benefit from having a local incubator or accelerator, since hard-tech start-ups attract significantly less venture capital funding and support than digital technology start-ups, but require larger capital expenditures as they scale. Shared research facilities and testbeds are also crucial for providing hard-tech start-ups with the lab space and equipment to refine and scale their technologies.

For internationally-born entrepreneurs, an additional consideration is visa sponsorship. International graduate students and postdocs that launch start-ups need visa sponsors in order to stay in the United States as they transition out of academia. Universities that participate in the Global Entrepreneur in Residence program help provide H-1B visas for international entrepreneurs to work on their start-ups in affiliation with universities. The university benefits in return by attracting start-ups to their local community that then generate economic opportunities and help create an entrepreneurial ecosystem.

Practices and Programs Targeted at Institutions

As mentioned in the beginning, one of the biggest challenges for university tech transfer programs is understaffed TTOs and small patent budgets. On average, TTOs have only four people on staff, who can each file a handful of patents a year, and budgets for the legal fees on even fewer patents. Fully staffing TTOs can help universities ensure that new IP doesn’t slip through the cracks due to a lack of capacity for patenting or licensing activities. Developing standard term sheets for licensing agreements can also reduce administrative burden and make it easier for TTOs to establish new partnerships.

Instead of TTOs, some universities have established affiliated technology intermediaries, which are organizations that take on the business aspects of technology commercialization. For example, the Wisconsin Alumni Research Foundation (WARF) was launched as an independent, nonprofit corporation to manage the University of Wisconsin–Madison’s vitamin D patents and invest the resulting revenue into future research at the university. Since its inception 90 years ago, WARF has provided $2.3 billion in grants to the university and helped establish 60 start-up companies. 

In general, universities need to be more consistent about collecting and reporting key performance indicators for TTOs outside of the AUTM framework, such as the number of unlicensed patents and the number of products brought to the market using licensed technologies. In particular, universities should disaggregate metrics for licensing and partnerships between companies less than five years old and those greater than five years old so that stakeholders can see whether there is a difference in commercialization outcomes between incumbent and start-up licensees.

Practices and Programs Targeted at Innovation Ecosystems

Innovation ecosystems are made up of researchers, entrepreneurs, corporations, the workforce, government, and sources of capital. Geographic proximity through co-locating universities, corporations, start-ups, government research facilities, and other stakeholder institutions can help foster both formal and informal collaboration and result in significant technology-driven economic growth and benefits. Co-location may arise organically over time or result from the intentional development of research parks, such as the NASA Research Park. When done properly, the work of each stakeholder should advance a shared vision. This can create a virtuous cycle that attracts additional talent and stakeholders to the shared vision and can integrate with more traditional attraction and retention efforts. One such example is the co-location of the National Bio- and Agro-Defense Facility in Manhattan, KS, near the campus of Kansas State University. After securing that national lab, the university made investments in additional BSL-2, 3 and 3+ research facilities including the Biosecurity Research Institute and its Business Development Module. The construction and maintenance of those facilities required the creation of new workforce development programs to train HVAC technicians that manage the independent air handling capabilities of the labs and train biomanufacturing workers, which was then one of the selling points for the successful campaign for the relocation of corporation Scorpius Biologics to the region. At best, all elements of an innovation ecosystem are fueled by a research focus and the commercialization activity that it provides. 

For regions that find themselves short of the talent they need, soft-landing initiatives can help attract domestic and international entrepreneurs, start-ups, and early-stage firms to establish part of their business in a new region or to relocate entirely. This process can be daunting for early-stage companies, so soft-landing initiatives aim to provide the support and resources that will help an early-stage company acclimatize and thrive in a new place. These initiatives help to expand the reach of a community, create a talent base, and foster the conditions for future economic growth and benefits.

Alongside the creation of innovation ecosystems should be the establishment of “scale-up ecosystems” focused on developing and scaling new manufacturing processes necessary to mass produce the new technologies being developed. This is often an overlooked aspect of technology development in the United States, and supply chain shocks over the past few years have shone a light on the need to develop more local manufacturing supply chains. Fostering the growth of manufacturing alongside technology innovation can (1) reduce the time cycling between product and process development in the commercialization process, (2) capture the “learning by doing” benefits from scaling the production of new technologies, and (3) replenish the number of middle-income jobs that have been outsourced over the past few decades. 

Any way you slice it, commercialization capacity is one clear and critical input to a successful innovation ecosystem. However, it’s not the only element that’s important. A strong startup commercialization effort, standing alone, without the corporate, workforce, or government support that it needs to build a vibrant ecosystem around its entrepreneurs, might wane with time or simply be very successful at shipping spinouts off to a coastal hotspot. Building a commercialization pipeline is not, nor has it ever been, a one-size-fits-all solution for ecosystem building. 

It may even be something we’ve over-indexed on, given the widespread adoption of tech-based economic development strategies. One significant reason for this is the fact that entrepreneurship via commercialization is most open to those who already have access to a great deal of privilege–who have attained, or are on the path to, graduate degrees in STEM fields critical to our national competitiveness. If you’ve already earned a Ph.D. in machine learning, chances are your future is looking pretty bright—with or without entrepreneurial opportunity involved. To truly reap the economic benefits of commercialization activity (and the startups it creates), we need to aggressively implement programs, training, and models that change the demographics of who gets to commercialize technology, not just how they do it. To shape this, we’ll need to change the conditions for success for early-career researchers and reconsider the established model of how we mentor and train the next generation of scientists and engineers–you’ll hear more from us on these topics in future posts!

Summary

By establishing a self-sustaining fund to incentivize pharmaceutical companies to develop new and improved treatment protocols using low-cost, off-patent and unmonopolizable therapies, billions of dollars in cost savings could be realized by US government payers and health insurers in a financially “de-risked” manner while improving quality of care —truly a win/win opportunity.  

Currently, pharmaceutical companies do not develop medical therapies unless they can enforce a monopoly price using patents. As a result, thousands of low-cost therapies, such as repurposed generic drugs, nutraceuticals, plant medicines, medical diets, lifestyle interventions, and dose de-escalation protocols, lack private financial incentives for development. Clinically validating the safety and efficacy of these affordable treatments would help many patients while saving billions of dollars. Meanwhile, the largest pharmaceutical companies are earning trillions of dollars in revenue for new patented drugs that often provide limited or no added benefit to patients, while causing significant financial burden on patients and the taxpayer. 

We can solve these misaligned incentives using new payment models such as interventional pharmacoeconomic (IVPE) randomized controlled trials (RCTs) that result in cost savings for healthcare systems, even if RCTs fail, by comparing the efficacy of low-cost therapies to expensive patented drugs. Further, outcomes-based financing mechanisms known as Advance Market Commitments or Pay-For-Success (PFS) contracts, can incentivize the successful development of new low-cost therapies, entirely funded by payer costsavings from reduced reliance on monopoly-priced drugs. 

We propose that the National Institutes of Health (NIH), National Center for Advancing Translational Sciences (NCATS) work together with payers such as Centers for Medicare & Medicaid Services (CMS) and the United States Department of Veterans Affairs (VA) to transfer a fraction of their costsavings from IVPE RCTs and AMCs to create a self-sustaining “prize” fund for development of low-cost therapies under the 2010 America COMPETES Reauthorization Act. 

With these new payment models, it is possible to create a scalable and sustainable business for a sponsor to develop affordable therapies, while improving patient outcomes and saving significant costs. For example,  every 10,000 patients treated under an IVPE RCT + AMC contract comparing off-patent ketamine to patented esketamine, which could be more effective for treatment-resistant depression, would save payers at least $1.8 billion over 10 years until the expiry of the esketamine patent, part of which can be paid back into the fund. The IVPE + AMC contract can also provide revenues of at least $250 million to a sponsor of the clinical trials for development, FDA-approval, and post-approval (Phase IV) pharmacovigilance studies for ketamine (see Appendix). 

Challenge and Opportunity

Patients urgently need more effective treatments that are readily accessible and affordable. For many Americans, treatments are prohibitively scarce or expensive, with an estimated 42% of newly-diagnosed cancer patients losing all of their assets within 2 years. As national health expenditures continue to rise and drug R&D productivity continues to stagnate, it is crucial to rethink private-public alignment by implementing improved incentive design systems to support better health and economic outcomes.

Generic medicines have substantial potential for addressing healthcare costs and improving R&D productivity: low-cost generic drugs saved the U.S. healthcare system $1.67 trillion in the last decade. Thousands of FDA-approved generic drugs—as well as 50,000+ nutraceuticals, plant medicines, diets, lifestyle interventions, and dose de-escalation regimens (collectively known as unmonopolizable therapies)—could be studied to treat diseases significantly cheaper and faster than developing new patented drugs. It costs an estimated $1 billion-plus and takes more than 10–15 years to get a newly patented drug to market, whereas it is significantly cheaper and faster to find new uses for existing drugs and other unmonopolizable therapies that have known safety profiles and mechanisms of action from their use over many years.

However, it is often not economically viable for pharmaceutical companies to pay for clinical trials assessing unmonopolizable therapies, which can be prescribed off-label at relatively low-cost. Generic-drug companies are protected by “skinny labeling” legislation, which makes it difficult or impossible to enforce patents for new uses of generic drugs. While pharmaceutical companies can reformulate generic drugs and re-patent them to charge a monopoly price, this might only be commercially viable if the reformulation is better than the original generic. And where a reformulation involves a combination of generic drugs, compounding pharmacies can prescribe the drug using the original low-cost generics. 

Due to this market failure, there is a lack of funding for large and robust clinical trials for such low-cost therapies; the chance of the original formulation of a generic drug obtaining FDA approval for a new use approaches zero when it goes generic. The same problem applies to funding large clinical trials for nutraceuticals, medical diets, lifestyle interventions, and novel dosing regimens, where it is almost impossible to stop doctors and patients accessing these therapies. Patients who desperately need more treatment options are unable to realize the benefits that existing off-patent, unmonopolizable, or low-cost therapies might offer, and there may be significant harm to the public due to such gaps in patent incentives. 

Increased direct grant funding for clinical trials can also create suboptimal outcomes. During the height of the COVID-19 pandemic in 2020, the Pepcid AC (famotidine) COVID-19 Study raised red flags weeks after a $21 million grant was awarded to study its effects as a potential therapy. Concerns over study integrity, outcome measures, and even administrative protocols were all brought to light. Ironically, such grant funding can lead to even more risk and wasted taxpayer funds, such as $150 million of federal funding on the dietary supplement curcumin studied in more than 120 clinical trials, with no tangible evidence that it is an effective treatment for any medical condition. Further, conservative estimates of publicly funded clinical trials for repurposing phospholipidosis-inducing CADs to treat COVID-19, including hydroxychloroquine, may be over $6 billion. Other than the large and pragmatic RECOVERY and TOGETHER trials initiated by the United Kingdom, which discovered that dexamethasone significantly reduced mortality in COVID patients on respiratory support, funding smaller, low-powered clinical trials did not lead to the development of significantly beneficial COVID therapies for patients. A risk-transferring market mechanism to fund large clinical trials would have been more efficient—or at least not have exposed taxpayers to the risk of failed clinical trials. IVPE RCTs are paid from cost savings, and AMC contracts only pay out when pre-specified requirements are met, so taxpayers and health insurers do not pay for any failures.

To quickly and affordably improve the lives of millions of patients, we propose that Congress should appropriate, and the Biden-Harris Administration should direct, the NIH, CMS, and VA with the support of the NCATS Repurposing Drugs program, to establish a self-sustaining fund utilizing IVPE RCTs and AMCs to fund clinical trials for affordable therapies generating cost savings (“IVPE + AMC Fund”), using their federal authorization to establish market rewards or “prizes” under the 2010 America Competes Reauthorization Act. Private health insurers are fragmented and have limited incentives to reduce the costs of the $4 trillion p/a US healthcare industry in order to justify the high premiums charged to their US customers, while providers earn more revenue by charging higher fees. However, there is some movement away from fee-for-service and towards PFS contracts and Value Based Pricing (VBP). There is also a significant risk of lawsuits (including personal liability for decisionmakers) under ERISA legislation and the Consolidated Appropriations Act of 2021, which impose a fiduciary duty on self-insured employers to reduce healthcare spend. Taxpayer-funded payers such as CMS, VA, United States Army and large self-insured employers can use IVPE RCTs and AMCs to incentivize development of low-cost therapies as a fiduciary and financial risk management mechanism. Their net cost savings would far exceed the cost of administering the IVPE + AMC Fund. 

In particular, IVPE RCTs compare equivalence or superiority of a low-cost repurposed generic drug to an expensive patented drug normally funded by a payer. For example, there was a recent proposal to establish a self-sustaining IVPE fund to determine the optimal minimum dose for expensive oncology drugs to save costs while reducing side-effects. The price difference between the low-cost and expensive intervention can far exceed the cost of running the RCT, which means it pays for itself in cost savings, even if the RCT fails. And if the RCT shows the low-cost treatment provides at least the same standard of care as the patented drug, this can save payers billions of dollars until the patent expires. If some of these cost savings are transferred back into an IVPE + AMC Fund, this will create a scalable business model for developing new low-cost therapies. 

The self-sustaining nature of the IVPE + AMC Fund could be demonstrated, for example, by providing market rewards up to $100 million (which can be pooled between federal agencies) to reimburse a sponsor recruiting patients into IVPE trials comparing low-cost and expensive therapies. The reimbursement amount should ideally be less than the cost of the expensive therapy and the resulting guaranteed payer cost savings from the low-cost therapy substituting the expensive therapy could be paid back to increase the size of the fund. The IVPE clinical trial would require ethics approval and provide valuable data to “de-risk” whether the low-cost therapy works, without requiring additional taxpayer support. AMCs then would act as a “pull” mechanism to reward sponsors of large Phase III Randomized Controlled Trials (RCTs) that result in FDA approval with higher reimbursement price for an otherwise low-cost therapy that would substitute the expensive therapy. For example, a sponsor can partner with a generic drug manufacturer to guarantee supply of a repurposed generic in return for sharing revenue under an AMC. The sponsor can then submit bioequivalence and efficacy RCT data under the 505(b)(2) pathway to obtain a new “label” for the new use, which also provides a 3-year period of data exclusivity. Alternatively, a sponsor can leverage the revenue from the AMC to develop a nominal reformulation (e.g. new mechanism of administration or dose) to disincentivize generic substitution and obtain a 5-year period of data exclusivity under the 505(b)(1) New Drug Application pathway. The sponsor can earn additional revenue from the sale of the repurposed generic or RCT data to other healthcare systems, with the payers backing the IVPE + AMC Fund receiving a lower price or royalties. Payer cost savings from substituting an expensive therapy with the lower-cost therapy can be paid back into the IVPE + AMC Fund to ensure long-term sustainability. 

AMC contracts are already implemented in various other contexts to address market failures. For example, so-called Social Impact Bonds (SIBs), a type of AMC contract, have been used to help fund projects preventing homelessness and prisoner recidivism, with over $700 million in SIBs raised to date. Operation Warp Speed used AMCs to incentivize vaccine development through FDA approval and lab-to-patient stages. Similar methodologies to IVPE RCTs have also been used to prove that a low  dose of bevacizumab (Avastin) could treat age-related macular degeneration rather than patented ranibizumab (Lucentis), which was estimated to save Medicare Part B $18 billion over 10 years. 

Therefore, an IVPE + AMC Fund can generate billions of dollars in revenue from payers due to cost savings through the development of new low-cost therapies that reduce reliance on expensive therapies. It can also address misaligned incentives under the patent system by encouraging pharmaceutical companies to (1) “de-link” profits from maximizing sales of a monopoly-priced drug, (2) ensure that patented drugs are value for money rather than pursuing “evergreening” strategies such as patenting slight modifications of generic drugs to extend the period of monopoly pricing, and (3) pursue the most effective therapies rather than the most patentable. AMCs can also be used to incentivize development of low-cost therapies to address unmet medical needs if an expensive comparator treatment is not available or otherwise, the IVPE methodology can compare usual care. 

A Market Failure Caused by a Tragedy of the Commons

Thousands of potentially safe and effective off-patent and low-cost therapies are currently ignored due to misaligned incentives under the patent system. Core to this tragedy is that the clinical trial data validating the safety and efficacy of treatment protocols is what is valuable to healthcare payers and patients, not whether the drug’s active ingredient is new. In essence, treatment protocols involving new uses for off-patent and unmonopolizable therapies are nonrivalrous and “highly non-excludable” public goods. The co-author Savva Kerdemelidis’s 2014 master’s thesis concluded that because the patent system provides inadequate incentives for the pharmaceutical industry to develop such “unmonopolizable therapies,” alternative “prize-like” incentives are needed. This allows payers to put a price on clinical trial data validating the efficacy of these new and more affordable treatment protocols.

Scaling the Development of Low-Cost Therapies with IVPE RCTs and AMCs

IVPE RCTs and AMCs (see definition in FAQ section) recognize that the value of a therapeutic intervention is not the cost of an active ingredient but the clinical trial data showing it is safe and effective in a particular patient population. To accelerate the development of unmonopolizable therapies through the clinical and regulatory pipeline, we propose that payers—specifically government agencies such as CMS and VA as well as health insurers responsible for pharmaceutical reimbursement (ideally a consortium of payers)—support IVPE RCT pilots to de-risk early-stage clinical research and the use of AMC contracts through the IVPE + AMC Fund. The AMC will incentivize a sponsor fund the Phase III studies need to obtain FDA approval and conduct post-approval (Phase IV) pharmacovigilance studies. It will be self-sustaining if a percentage of savings from the availability of low-cost therapies is paid back into the IVPE + AMC Fund.  

The total amount of outcome payments under an AMC drawn from the IVPE + AMC Fund can be calculated with reference to the level of clinical impact or Quality-Adjusted Life-Years (QALYs) generated, disability-adjusted life-years (DALYs) reduced, or even future cost savings from allowing a low-cost therapy to be substituted for an expensive one or reduce hospitalisation costs. For example, the number of QALYs resulting from an approved unmonopolizable therapy can be calculated in advance by a committee of pharmacoeconomic experts under a similar process to the United Kingdom National Health System’s Subscription-Style-Payment (SSP) model for incentivizing development of new antibiotics. Under an SSP, a fixed amount is paid annually according to the total QALY value of the new therapy, as assessed by an elected, independent Medical Evaluation Committee. Similarly, CMS in Louisiana implemented a “Netflix-subscription” model to guarantee supply of low-cost generic drugs to treat Hepatitis C by agreeing to a fixed annual payment in advance. Pay-for-performance and value-based-payment (VBP) contracts are similar to AMC contracts and often negotiated with payers to provide more cost-effective delivery of healthcare services, where rewards are based on certain conditions being met. Accordingly, using AMC contracts to reward successful RCTs is not a novel mechanism that will require a significant administrative burden for federal agencies to implement. It may only require changing a few sentences in an existing VBP contract to refer to a repurposed generic drug or low-cost therapy.  

The following example describes how the IVPE + AMC model works:

1. A payer (e.g., CMS) agrees to an IVPE RCT with a sponsor comparing the equivalence or superiority of a repurposed generic drug or low-cost therapy to a patented drug (or expensive standard of care). The payer can reimburse the low-cost therapy at a higher price or per-patient price sufficient to cover the costs of the IVPE RCT. If the higher reimbursement is at a lower price than the patented drug or expensive treatment, it will guarantee cost savings for the payer, even if the RCT fails. If the IVPE RCT is successful, the payer agrees to a AMC worth, say, at least $100 million to purchase a  minimum quantity of the repurposed generic drug in advance or reimbursing the sponsor at the higher price, subject to a sponsor obtaining FDA approval and being responsible for post-approval pharmacovigilance. Notably, because the IVPE RCT is funded from immediate cost savings due to the price difference between the low-cost therapy and patented drug, both parties are financially de-risked. (See Appendix 1 for an example of the IVPE + AMC model using the example of generic ketamine vs. patented esketamine to treat depression.) 
2. The sponsoring pharmaceutical company raises $50 million to conduct the clinical trials needed for FDA approval, on the basis of the agreement to transfer cost savings under the IVPE RCT and the $100 million AMC, subject to FDA approval and post-approval (Phase IV) pharmacovigilance studies showing continued safety and efficacy. 
3. If the IVPE RCT is successful and the generic drug or low-cost therapy is shown to be equivalent to or better than the expensive patented drug, the AMC is triggered: sponsors are guaranteed minimum sales of $100M and also have a “branded” generic or low-cost therapy with new label and data exclusivity for three years by filing an abbreviated new drug application (ANDA) with the FDA. A new drug application (NDA) with five years of data exclusivity is possible if the generic or low-cost therapy contains a new active ingredient. They can also obtain a method of use patent on the optimal treatment protocol, which provides some commercial benefit and leverage to negotiate AMCs with other payers. A payer’s cost savings from updating their reimbursement guidelines to substitute a low-cost generic drug for the expensive patented drug will exceed the $100 million outcome payments under the AMC, which can be used to top-up the IVPE + AMC Fund to make it self-sustaining. In the case that clinical trials fail, the sponsor loses their investment, unless payers agree to transfer part of their cost savings for the duration of the IVPE RCTs to reimburse the sponsor. This is truly a win-win arrangement to fund new RCTs with very limited commercial risks compared to traditional drug development. The main task is finding repurposed generic drugs or low-cost interventions that could reduce reliance on expensive patented drugs by having at least the same safety and efficacy. There are many low-hanging fruits that are already medically “de-risked” (see generic drug repurposing use cases section below). 

Once the repurposed generic or low-cost therapy receives FDA approval and market authorization, the insurer can then market the approved therapy to prescribing medical doctors. Doctors in turn can prescribe the treatment protocol to their patients, who benefit from improved health. Moreover, this payment model that generates revenue from RCT data resulting in costsavings helps redress the conflict of interest and information asymmetry between government and healthcare payers and pharmaceutical companies, who are now incentivized to develop the most effective therapies for the lowest cost. 

Financial and Health Impact of the IVPE + AMC Fund

According to the Office of Management and Budget and the Office of Science and Technology Policy, prize competitions benefit the federal government by allowing federal agencies to:

1. Pay only for success
2. Establish ambitious goals and shift technological and other risks to prize participants 
3. Increase the number and diversity of individuals, organizations, and teams tackling a problem, including those who have not previously received federal funding
4. Increase cost effectiveness, stimulate private-sector investment, and maximize the return on taxpayer dollars
5. Motivate and inspire the public to tackle scientific, technical, and societal problems

There are additional reasons why implementing a self-sustaining IVPE + AMC Fund as a prize-like “pull” incentive to reward development of low-cost therapies is more efficient and scalable than providing grant funding or “push” incentives (although the approaches can be complementary and push incentives can be superior when likely outcomes are known to the grantor). First, IVPE RCTs de-risk sponsors if the payer cost savings are shared by ensuring payer reimbursement of the low-cost therapy is sufficient to cover the costs of the RCT. Under an AMC contract, there is a transfer of risk from payers to the market: payers are not willing to take on the risk and expense of large RCTs, the responsibility of marketing to patients and doctors, and managing adverse events or product recalls. In turn, the market is comfortable taking on this risk and expense, as long as investors can obtain a standard rate of return (e.g., 10-20% p/a). Second, payers and government agencies are often not as well-qualified or equipped as the pharmaceutical industry, which has access to the most experienced staff and latest technological advances, including artificial intelligence. Third, grant programs have high administration costs, both for grantors and grantees, while the latter are not incentivized to deliver successful outcomes. By comparison, the markets are incentivized to fail fast and efficiently allocate capital to those best able to deliver results for the lowest cost. Lastly, repurposed off-patent and unmonopolizable therapies could outcompete patented drugs by providing improved health outcomes for a lower cost to payers. Pharmaceutical companies may also benefit from IVPE RCTs and AMC contracts versus developing novel molecules, due to decreased risk, costs, and time to market.  

The IVPE + AMC Fund creates a clinical trial data marketplace that incentivizes the funding of large-scale clinical trials of unmonopolizable therapies such as low-cost generic drugs that can result in billions, if not trillions, of dollars in healthcare savings for health insurers and governments and, moreover, provide better treatment options and outcomes for patients. Those cost savings can then be reinvested in additional IVPE + AMC Funds to incentivize further development of treatment protocols. Accordingly, the IVPE + AMC model not only incentivizes investment in unmonopolizable therapies, it can also be used to generate a sustainable and scalable business model for additional investment into low-cost therapies that also help improve access to healthcare in the Global South. 

Many Generic Drug Repurposing or Low-Cost Therapy Candidates Exist

Use Case 1: Metastatic Cancer

Hundreds of non-cancer generic drugs have already been tested by researchers and physicians in preclinical and clinical studies for cancer, some up to Phase II trials, and show promise. For example, repurposing the off-patent NSAID ketorolac as a prevention treatment resulting in 10% reduction in breast cancer recurrence would cost $5 million annually (100,000 cases at $50 per case for ketorolac and its administration). The savings could be over $1 billion annually (10,000 patients at approximately $100,000 per patient for the treatment of metastatic disease). These savings would be dwarfed by the cost savings available under an IVPE fund comparing low doses of expensive patented cancer drugs with their standard dose, which can result in fewer side-effects for patients, including nivolumab, abiraterone, trastuzumab, ibrutinib, paclitaxel, and pembrolizumab. The latter (Keytruda) is the top-selling blockbuster drug, with annual sales in excess of $15B; dosing Keytruda by weight could reduce use by 25% in approved indications such as lung cancers. 

Use Case 2: Major Depressive Disorder & Treatment-Resistant Depression

Depression is the leading cause of disability in the United States for people between the ages of 15 and 44. An estimated 12-month prevalence of medication-treated major depressive disorder (MDD) in the United States was 8.9 million adults, and 2.8 million had treatment-resistant depression (TRD). A growing body of evidence has shown that infusions of generic ketamine can be a viable and affordable therapy for both forms of depression, which cost the United States over $320 billion in 2018. Generic ketamine has been used as a general anesthetic since the Vietnam War and costs less than $2 per dose. However generic ketamine is not authorized to treat any form of depression. The patented and FDA-approved s-ketamine or esketamine, has a price at $850 per dose and is used for TRD and MDD with suicidal ideation. 

To date, many clinical trials show that generic ketamine is more effective. Moreover, a 2020 study indicated that esketamine is unlikely to be cost-effective for management of treatment-resistant depression in the United States unless its price falls by more than 40%. And recently, the UK payer NICE declined to reimburse esketamine. With approximately nine million American adults living with treatment-resistant depression, successfully repurposing generic ketamine using the self-sustaining IVPE + AMC Fund could save many lives through improved access and standard of care—and save healthcare payers hundreds of millions of dollars in monopoly prices.

Plan of Action

The IVPE + AMC Fund can be established through the America COMPETES Reauthorization Act of 2010 (P.L. 111-358), which encourages prize competitions by authorizing the head of any federal agency to carry out a competition that has the potential to stimulate innovation and advance the agency’s mission. In 2016, the 21st Century Cures Act (P.L. 114-255) directed the director of the NIH to support prize competitions that would realize significant advancements in biomedical science or improve health outcomes, especially as they relate to human diseases or conditions. IVPE + AMC contracts can act like a “prize-like” incentive that is designed to address market failures but also lower healthcare treatment costs for federal agencies  (e.g., CMS or VA)  by incentivizing the discovery and validation of evidence that low-cost interventions such as repurposed generic drugs may be equivalent to or more effective than expensive interventions such as patented drugs. 

In short, we propose that the IVPE + AMC Fund be established and operate as follows:

The IVPE + AMC Fund is established through the America COMPETES Reauthorization Act of 2010 (P.L. 111-358) to support backing of IVPE RCTs by payers as a self-funding mechanism and authorize outcome payments of up to $100 million under an AMC for successful clinical trials of a repurposed generic drug, nutraceutical, and/or other low-cost unmonopolizable therapy to treat a specific indication of high unmet medical need and cost burden (e.g. cancer, treatment resistant depression, glioblastoma, Crohn’s Disease, Alzheimer’s).

The IVPE + AMC Fund is furthermore supported by Section 2002 of The 21st Century Cures Act (Division A of P.L. 114-255), which requires the director of the NIH, under authorities in 15 U.S.C. §3719, to support prize competitions for one or both of the following goals:

1. Identify and fund areas of biomedical science that could realize significant advancements through a prize competition; and 
2. Improve health outcomes, particularly with respect to human diseases and conditions that are serious and represent a significant disease burden in the United States. The prize competition may also target human diseases and conditions for which public and private investment in research is disproportionately small relative to federal government expenditures for prevention and treatment activities and those diseases and conditions with potential for a significant return on investment via reduction in federal expenditures.

The director of the NIH elects a Medical Evaluation Board, which oversees and manages the prize purpose held by the IVPE + AMC Fund as follows:

1. Determining the minimum reimbursement price to sponsors for patients receiving a low-cost therapy under an IVPE RCT which is less than the price of an expensive patented drug or intervention that it substitutes. Then determine the minimum purchase order or outcome payments under an AMC contract relative to total QALY / DALY improvement or cost savings, subject to large Phase 3 RCTs resulting in FDA-approval of the low-cost therapy, and further subject to ongoing safety and efficacy shown in Phase 4 pharmacovigilance studies. 
2. The Medical Evaluation Board will be required to collect information on the effect of the IVPE + AMC Fund on advancing biomedical science or improving health outcomes and the effect of the innovations on federal expenditures.

Initially, we propose that Congress should fund the NIH with $2 million to establish a pilot IVPE + AMC Fund program in partnership with the NIH Office of Acquisition Management and Planning and NCATS. The focus of this would be to create a menu of “de-risked” low-cost therapies suitable for reimbursement under an IVPE + AMC Fund, and feasibility studies to show projected cost savings for payers such as CMS and VA and patient access benefits based on existing NCATS translational efforts, including generic drugs or dose de-escalation interventions by comparing them to expensive patented interventions under the IVPE model. For example, for treatment of age-related macular degeneration, generic drugs such as bevacizumab (Avastin) could save Medicare Part B $18 billion over 10 years compared with ranibizumab (Lucentis). Or compare the cost of prescribing the generic fluvoxamine to treat Covid at $6000 per QALY with molnupiravir at $55,000 per QALY, substituting sirolimus for nab-sirolumus to treat locally advanced unresectable or metastatic malignant perivascular epithelioid cell tumors (PEComa), or substituting sirolimus for everolimus in various cancers. Significant cost savings from IVPE RCT de-escalation studies comparing a lower dose of an expensive cancer drug to the standard treatment can fund the development of new unmonopolizable therapies. For example, this includes savings from low-dose nivolumab for head and neck cancer, low-dose abiraterone, and trastuzumab, ibrutinib, paclitaxel, and pembrolizumab for various other cancers, as noted above. The key to this pilot would be a sufficient evidence-based evaluation process to generate a menu of low-cost IVPE use cases. Ideally, at scale the IVPE + AMC Fund would cover a wide expanse of market failures, but we recommend the low-hanging fruit of repurposing generic drugs and dose de-escalation studies for specialist oncology drugs before expanding to other types of unmonopolizable therapies, including medical diets such as ketogenic diet, non-pharmaceutical, and lifestyle interventions that can reduce reliance on expensive therapies.

Conclusion

An IVPE + AMC Fund established under the America COMPETES Act can provide a more flexible, self-sustaining and cost-effective payment model for developing affordable and effective medical therapies, as opposed to the pharmaceutical industry’s traditional model of charging a monopoly price for new patented drugs. Establishing IVPE RCTs that compare low-cost treatments with expensive treatments generates immediate cost savings for payers from reduced reliance on monopoly-priced drugs as well as future cost savings if clinical guidelines are updated to recommend the low-cost treatment. AMC contracts incentivize FDA-approval and help correct misaligned incentives under the patent system by ensuring rewards are de-linked from maximizing the sales of a single monopoly-priced drug. 

If our proposed self-sustaining IVPE + AMC Fund can be implemented, this will create new incentives to leverage the biotech innovations of the last 40 years and optimize the efficient delivery of healthcare, including genetic engineering, personalized medicine (informed by blood tests and low-cost DNA sequencing), artificial intelligence, decentralized clinical trials, and telemedicine. The pharmaceutical industry is not to blame if they can only rely on the patent system to obtain a return on investment for funding medical innovation. New outcomes-based payment models are needed to develop more affordable and effective treatments that can pull the practice of medicine into the 21st century and address significant health inequities. 

Appendix

IVPE RCT + AMC Financial Model Example

This IVPE RCT + AMC financial model uses generic ketamine and patented esketamine as an example of how to leverage immediate and future cost savings by comparing a low-cost intervention to an expensive intervention to incentivize funding of RCTs for unmonopolizable therapies.

Summary

Congress created the Development Finance Corporation (DFC) to finance private sector solutions to the most critical challenges facing the developing world. In parallel, the United States Agency for International Development (USAID) has committed to engaging the private sector and shifting more resources to local market providers to further the impact of U.S. foreign aid dollars. 

USAID is on the verge of awarding its largest-ever suite of foreign aid contracts, totaling $17 billion over the next ten years and comprising nine awards as part of the “NextGen Global Health Supply Chain” (GHSC) contracts. This is a continuation of previous global health supply chain contracts that date back to the 1960s that have grown exponentially in total value but have underperformed and not meaningfully transitioned responsibility for deployment to low- and middle-income country (LMIC) governments and LMIC-based organizations. 

Now is the time for USAID and the DFC to pilot new ways of working with the private sector that put countries on a path to high-impact, sustainable development that builds markets. 

We propose that USAID set aside $300 million of the overall $17 billion package – or less than 2 percent of the overall value – to create a Supply Chain Commercialization Fund to demonstrate a new way of working with the private sector and administering U.S. foreign aid. USAID and the DFC can deploy the Commercialization Fund to:

• Create and finance instruments that pay for results against certain well-defined success metrics, such as on-time delivery;
• Provide blended financing to expand the footprint and capabilities of established LMIC-based healthcare and logistics service providers that may require additional working capital to grow their presence and/or expand operations; and
• If successful, invite other countries to participate in this model, with the potential for replication to other geographies and sectors where there are robust private sector markets, such as in agriculture, water, and power.

USAID and the DFC can pilot this new model in three countries where there are already thriving and well-established private markets, like Ghana, Kenya, and Nigeria. 

Challenge and Opportunity

The world is facing an unprecedented concurrence of crises: pandemics, war, rising food insecurity, and a rapidly warming climate. Low- and middle-income countries (LMICs) are deeply affected, with many having lost decades’ worth of gains made toward the Sustainable Development Goals in only a few short years. We now face the dual tasks of regaining lost ground while ensuring those gains are more durable and lasting than before. 

The Biden Administration recognizes this pivotal moment in its new U.S. Strategy Toward Sub-Saharan Africa. The Strategy acknowledges the continent’s growing importance to U.S. global priorities and lays out a 21st-century partnership to contribute to a strong and sustainable global economy, foster new technology and innovation, and ultimately support the long-envisioned transition from donor-driven to country-driven programs. This builds on past U.S. foreign aid initiatives led by administrations of both political parties, including Administrator Mark Green’s Journey to Self Reliance and Administrator Raj Shah’s USAID Forward initiatives. Rather than creating a new flagship program, the U.S. Strategy Toward Sub-Saharan Africa focuses on improved implementation and better integration of existing initiatives to supercharge results. Such aims were echoed repeatedly during the U.S.-Africa Leaders Summit in December 2022.

To realize a new vision for U.S.-Africa partnerships, the Biden Administration should more effectively fuse the work of USAID and the DFC. A key policy rationale for the DFC’s creation in 2018 was to counter China’s Belt and Road Initiative (BRI) and growing economic influence in frontier markets. By combining this investment arm with USAID’s programmatic work, Congress hoped to accelerate major development impact. However numerous mismatches between USAID and DFC priorities have limited and sometimes actively undermined Congress’ goals. In the worst cases, USAID dollars have been used to pay international aid contractors to perform work in places where existing market providers could. Rather than bolster markets, this can distort them.

This memo lays out a new approach to development rooted in better USAID-DFC collaboration, where the work of both agencies contributes to the commercialization of sectors ready to transition from aid-dependent models to commercial and trade-enabled ones. In these sectors, USAID should work to phase out its international aid contractor-led model and instead scale up the work of existing market participants, including by paying them for results. This set of recommendations also advances USAID priorities outlined in the Agency’s new Acquisition and Assistance Strategy and proposed implementation plan, as well as USAID’s policy framework, which each call for working more closely with the private sector and transitioning to more pay-for-performance models.

The global health supply chain is ideal for USAID and the DFC to test the concept of a commercialization fund because of the sector’s discrete metrics and robust existing logistics companies. Investing in cheaper, more efficient evidence-driven solutions in a competitive marketplace can improve aid effectiveness and better serve target populations with the health goods like PPE, vaccines, and medications they need. This sector receives USAID’s largest contracts, with the Agency spending more than $1B each year on procurement and logistics to get the right health products to the right place, at the right time, and in the right condition across dozens of countries. In the logistics space, only about 25%¹ of USAID’s expenditure supports directly distributing commodities to health facilities in target nations; the other 75% is spent on fly-in contractors who oversee that work. Despite this premium, on-time and in-full distribution rates often miss their targets, and stockouts are still common, according to USAID’s reports and audits.²

A Commercialization Fund can directly address policy goals such as localization or private-sector engagement by building resilient health supply chains through a marketplace of providers that ensures patients and providers access the supplies they need on time. In addition to improving sustainability and results and cutting costs, a well-structured Commercialization Fund can improve global health donor coordination, crowd-in new investments from other funders and philanthropy that want to pay for outcomes, and hasten the transition from donor-led aid models to country-led ones.

Plan of Action

USAID should create the Global Health Supply Chain Commercialization Fund, a $300 million initiative to purchase commercial supply chain services directly from operators, based on performance or results. USAID should pilot using the Commercialization Fund to pay providers in three countries where there are already thriving and well-established private logistics markets, such as Kenya, Nigeria, and Ghana. In these countries, dozens of logistics and healthcare providers operate at scale, serving millions of people.

With an initial focus on health logistics, USAID should use $300 million from its yet-to-be-awarded suite of $17 billion NextGen Global Health Supply Chain contracts to provide initial funding for the Commercialization Fund. If successful, the Commercialization Fund will create an open playing field for competition and crowd-in high-impact technology, innovation, and more market-based actors in global health supply chains. This fund will build upon existing efforts across the Agency to identify, incubate, and catalyze innovations from the private sector. 

To quickly stand up this Commercialization Fund and select vendors, Administrator Power should utilize her “impairment authority.” Though typically applied to emergencies, the “impairment authority” has been used previously during global health events like the COVID-19 pandemic and the Ebola response and could be used to achieve a specific policy priority such as localization and/or transforming the way USAID administers its global health supply chains. (See FAQ for more information regarding this authority).

The creation of this Fund, which can be fully budget-neutral, requires the following steps:

Step 1. USAID and DFC take administrative action to design and capitalize the $300 million, five-year, cross-cutting, and disease-agnostic Supply Chain Commercialization Fund. A joint aid effectiveness “tiger team” within USAID and the DFC should:

1. Spearhead the design and implementation framework for the Fund and stipulate clear, standardized key performance indicators (KPIs) to indicate significant improvements in health supply chain performance in countries where the Commercialization Fund operates.
2. Select three countries to adopt the Commercialization Fund, chosen in coordination with overseas USAID Missions and the DFC. Countries should be selected and prioritized based on factors such as analyses of health systems’ needs, the existence of local supply chain service providers, and countries’ desire to manage more of their own health supply chains. As a follow-on to the U.S.-Africa Leaders Summit, we recommend USAID and the DFC direct initial Commercialization Fund funds to support activities in Africa where there are already thriving and well-established private markets such as Ghana, Kenya, and Nigeria.
3. Set pricing for each KPI and product in each Commercialization Fund country market. For example, pay-for-performance indicators could include percent of on-time deliveries. USAID and the DFC should set high expectations for performance, such as 95+ percent on-time delivery, especially in geographies where existing market providers can already deliver against similarly rigorous targets in other sectors. USAID bureaus and missions, partner country governments, and in-country private sector healthcare and logistics leaders, as well as supply chain and innovative financing experts, should be consulted during this process. 
4. Choose funding mechanisms that pay for results (see Step 2 for details).
5. Provide blended financing to vendors that may need additional resources to scale their footprint and/or increase their capabilities.
6. Select a third-party auditor(s) to audit the results upon which providers are paid.

Step 2: USAID structures financial instruments to pay service providers against results delivered in selected Commercialization Fund countries

USAID should pay Commercialization Fund providers to deliver results, consistent with the KPIs set in Step 1 by the joint aid effectiveness “tiger team.” Pay-for-performance contracts can also provide incentives and/or price assurances for service providers to build infrastructure and expand to areas they don’t traditionally serve.

Structuring pay-for-performance tools will favor providers that can demonstrate their ability to deliver superior and/or more cost-effective results relative to status quo alternatives. Preference should be given to providers that are operational in the target country where there is existing market demand for their services, as evidenced by factors such as whether the host country government, national health insurance program, or consumers already pay for the providers’ services. USAID should work with the host country government(s) to select vendors to ensure strong country buy-in.

To maximize performance and competition, USAID should explicitly not use cost-reimbursable payment models that reimburse for effort and optimize for compliance and reporting. The red tape associated with these awards is so cumbersome that non-traditional USAID service providers cannot compete.³

USAID should consider using the following pay-for-performance modalities:

• Fixed-price, milestone-based awards that trigger payment when a service provider meets certain milestones, such as for each delivery made with a 95% on-time rate and with little-to-no product spoilage or wastage. Using fixed-price grants and contracts in this way can effectively make them function as forward-contracts that provide firms with advanced price assurances that, as long as they continue to deliver against predetermined objectives, the U.S. Government will pay. Fixed-amount grants and contracts are easier for non-traditional USAID partners to apply for and manage than more commonly-used “cost reimbursement” awards that reimburse vendors for time, materials, and effort and have enormous compliance costs. Because pay-for-results awards only pay upon proof of milestones achieved, they also increase accountability for the U.S. taxpayer.
  
  As USAID’s proposed acquisition and assistance implementation plan points out, “‘pay-for-result’ awards (such as firm fixed price contracts or fixed amount awards) can substantially reduce burdens on [contracting officers] and financial management staff as well as open doors for technically strong local partners unable to meet U.S. Government financial standards.”
  
• Innovation Incentive Awards (IIAs) that pay providers retroactively after they meet certain predetermined results criteria. This award authority, expanded by Congress in December 2022, enables USAID to pre-publish its willingness to pay up to $100,000 for certain well-defined, predetermined results; then pay retroactively once a service provider can demonstrate it met the intended objective.
  
  Unlike a fixed-price award, which establishes a longer-term relationship between USAID and the selected vendor, USAID can use the IIA modality to provide vendors with one-time spot payments. However, USAID could still use this payment modality to move more money at scale provided a vendor(s) can successfully meet multiple objectives (e.g. USAID could make multiple $100,000 payments for multiple on-time deliveries).
  
• USAID could pursue Other Transaction Authority (OTA) opportunities without additional authorization, but the Agency may also benefit from consultation with the White House, the Office of Management and Budget (OMB), and The Office of Information & Regulatory Affairs (OIRA), as well as Congress, to secure additional authorities or waivers to disburse Commercialization Fund resources using innovative pay-for-results tools, including OTA, which other federal agencies have used to invite greater private sector participation from nontraditional U.S. Government partners.

Step 3: USAID and DFC should provide countries with additional technical assistance resources to create intentional pathways for selected countries to contribute to the design and management of program implementation. 

To ensure these initiatives support countries’ needs and facilitate country ownership and increase voice, USAID should also consider establishing a supra-agency advisory board to support the success of the Commercialization Fund modeled after DFC’s Africa Investment Advisor Program that seats a panel of experts that can continually advise both agencies on strategic priorities, key risks, and award structure, etc. It could also model elements of the Millennium Challenge Corporation’s compact model to ensure participating countries have a hand in the design of relevant aspects of the Commercialization Fund. 

USAID should additionally provide participating Commercialization Fund countries with Technical Assistance resources to ensure that host country governments can eventually take on larger management responsibilities regarding the administration of Commercialization Fund pay-for-performance contracts.

Step 4: As needed, USAID and the DFC should collaborate to provide sustainable pathways for blended financing that allows existing market providers to access working capital to scale their footprint. 

While the DFC and USAID have worked on blended finance deals in the past, the Biden Administration should explicitly direct the two agencies to work together to identify and scale the footprints and capabilities of logistics and healthcare providers in targeted Commercialization Fund countries.

Many of the existing healthcare and logistics providers that could potentially manage a greater share of global health supply chains could need additional financing to expand their operations, increase working capital, or grow their capabilities, but they often find themselves in a chicken or the egg problem to secure financing from financial institutions like the DFC. 

Traditional banks and DFC investment officers often consider these companies to be potentially risky investments because their revenue in health supply chains is not assured, especially because one of the largest healthcare payers in many LMICs is the U.S. Government, but USAID (and other global health donors) have historically funded international aid contractors to manage countries’ health supply chains, not local firms or alternative service providers. However, at the same time, USAID and other donors have not relied more on existing logistics service providers to manage health supply chains because many of these providers do not operate at the scale of larger international aid contractors.

To break this cycle, and to enable the DFC and other lenders to offer better financing terms to firms that need it to grow their capabilities or secure working capital, USAID could provide identified firms with more blended finance deals, including guaranteed eligibility to receive pay-for-performance revenue using the funding modalities described above. It could also provide unrestricted early-stage and/or phased funding to cover operational costs associated with working with the U.S. Government.

Increasing available credit to firms via the DFC and using a USAID pay-for-performance contract as collateral would also enhance firms’ overall ability to raise credit from other sources. This assurance, in turn, reduces the cost of capital for receiving firms, resulting in more significant, impactful investments from private capital in the construction of other supply chain infrastructure, including warehouses, IT systems, and shipping fleets.

Step 5: Pending success, USAID and the DFC should replicate the Commercialization Fund in additional countries. Congress should codify the Commercialization Fund into law and authorize larger-scale commercialization funds in additional geographies and sectors as part of the BUILD Act reauthorization in 2025.

While this initial Commercialization Fund will focus on building sustainable, high-performing global health supply chains in three LMICs, the same blueprint could be leveraged in other countries and in other sectors where there are robust private sectors, such as in food or power.

1. Congress should require USAID and DFC to report overall Commercialization Fund performance every six months for a minimum of three years.
2. If the Commercialization Fund proves successful after the first year, USAID and the DFC should proactively invite other countries to participate to expand this model to other geographies, where appropriate.
3. If successful with healthcare supply chains, the Commercialization Fund should also be expanded to cover additional sectors and geographies and included in the BUILD Act 2025 reauthorization.

Conclusion

Continued reliance on traditional aid in commercial-ready sectors contributes to market failures, limits local agency, and minimizes the opportunity for sustainable impact.

As a team of researchers from the Carnegie Endowment’s Africa Program pointed out on the heels of the U.S.-Africa Leaders Summit, “A persistent humanitarian approach to Africa…creates pathologies of unhelpful dependency, insufficient focus on the drivers of inclusive growth, and perverse incentives for the continuation of the status quo by a small coterie of connected beneficiaries.” Those researchers identified 18 new initiatives announced at the Summit supported with public money in economic sectors that can facilitate trade, investments, entrepreneurship, and jobs creation, signaling an unprecedented readiness in this Administration to prioritize trade alongside aid. 

The Commercialization Fund outlined in this memo — a market-shaping mechanism designed to correct market failures that conventional aid models can perpetuate — has the potential to become a model for accelerating the transition of other key economic sectors away from the status quo and toward innovation, investment, impact, and long-term sustainability.

Summary

Operation Warp Speed (OWS) was a public-private partnership that produced COVID-19 vaccines in the unprecedented timeline of less than one year. This unique success among typical government research and development (R&D) programs is attributed to OWS’s strong public-private partnerships, effective coordination, and command leadership structure. Policy entrepreneurs, leaders of federal agencies, and issue advocates will benefit from understanding what policy interventions were used and how they can be replicated. Those looking to replicate this success should evaluate the stakeholder landscape and state of the fundamental science before designing a portfolio of policy mechanisms.

Challenge and Opportunity

Development of a vaccine to protect against COVID-19 began when China first shared the genetic sequence in January 2020. In May, the Trump Administration announced OWS to dramatically accelerate development and distribution. Through the concerted efforts of federal agencies and private entities, a vaccine was ready for the public in January 2021, beating the previous record for vaccine development by about three years. OWS released over 63 million doses within one year, and to date more than 613 million doses have been administered in the United States. By many accounts, OWS was the most effective government-led R&D effort in a generation.

Policy entrepreneurs, leaders of federal agencies, and issue advocates are interested in replicating similarly rapid R&D to solve problems such as climate change and domestic manufacturing. But not all challenges are suited for the OWS treatment. Replicating its success requires an understanding of the unique factors that made OWS possible, which are addressed in Recommendation 1. With this understanding, the mechanisms described in Recommendation 2 can be valuable interventions when used in a portfolio or individually.

Plan of Action

Recommendation 1. Assess whether (1) the majority of existing stakeholders agree on an urgent and specific goal and (2) the fundamental research is already established. 

Criteria 1. The majority of stakeholders—including relevant portions of the public, federal leaders, and private partners—agree on an urgent and specific goal.

The OWS approach is most appropriate for major national challenges that are self-evidently important and urgent. Experts in different aspects of the problem space, including agency leaders, should assess the problem to set ambitious and time-bound goals. For example, OWS was conceptualized in April and announced in May, and had the specific goal of distributing 300 million vaccine doses by January. 

Leaders should begin by assessing the stakeholder landscape, including relevant portions of the public, other federal leaders, and private partners. This assessment must include adoption forecasts that consider the political, regulatory, and behavioral contexts. Community engagement—at this stage and throughout the process—should inform goal-setting and program strategy. Achieving ambitious goals will require commitment from multiple federal agencies and the presidential administration. At this stage, understanding the private sector is helpful, but these stakeholders can be motivated further with mechanisms discussed later. Throughout the program, leaders must communicate the timeline and standards for success with expert communities and the public.

Criteria 2. Fundamental research is already established, and the goal requires R&D to advance for a specific use case at scale.

Efforts modeled after OWS should require fundamental research to advance or scale into a product. For example, two of the four vaccine platforms selected for development in OWS were mRNA and replication-defective live vector platforms, which had been extensively studied despite never being used in FDA-licensed vaccines. Research was advanced enough to give leaders confidence to bet on these platforms as candidates for a COVID-19 vaccine. To mitigate risk, two more-established platforms were also selected.

Technology readiness levels (TRLs) are maturity level assessments of technologies for government acquisition. This framework can be used to assess whether a candidate technology should be scaled with an OWS-like approach. A TRL of at least five means the technology was successfully demonstrated in a laboratory environment as part of an integrated or partially integrated system. In evaluating and selecting candidate technologies, risk is unavoidable, but decisions should be made based on existing science, data, and demonstrated capabilities.

Recommendation 2: Design a program with mechanisms most needed to achieve the goal: (1) establish a leadership team across federal agencies, (2) coordinate federal agencies and the private sector, (3) activate latent private-sector capacities for labor and manufacturing, (4) shape markets with demand-pull mechanisms, and (5) reduce risk with diversity and redundancy.

Design a program using a combination of the mechanisms below, informed by the stakeholder and technology assessment. The organization of R&D, manufacturing, and deployment should follow an agile methodology in which more risk than normal is accepted. The program framework should include criteria for success at the end of each sprint. During OWS, vaccine candidates were advanced to the next stage based on the preclinical or early-stage clinical trial data on efficacy; the potential to meet large-scale clinical trial benchmarks; and criteria for efficient manufacturing.

Mechanism 1: Establish a leadership team across federal agencies

Establish an integrated command structure co-led by a chief scientific or technical advisor and a chief operating officer, a small oversight board, and leadership from federal agencies. The team should commit to operate as a single cohesive unit despite individual affiliations. Since many agencies have limited experience in collaborating on program operations, a chief operating officer with private-sector experience can help coordinate and manage agency biases. Ideally, the team should have decision-making authority and report directly to the president. Leaders should thoughtfully delegate tasks, give appropriate credit for success, hold themselves and others accountable, and empower others to act.

The OWS team was led by personnel from the Department of Health and Human Services (HHS), the Department of Defense (DOD), and the vaccine industry. It included several HHS offices at different stages: the Centers for Disease Control and Prevention (CDC), the Food and Drug Administration (FDA), the National Institutes of Health (NIH), and the Biomedical Advanced Research and Development Authority (BARDA). This structure combined expertise in science and manufacturing with the power and resources of the DOD. The team assigned clear roles to agencies and offices to establish a chain of command.

Mechanism 2: Coordinate federal agencies and the private sector

Coordinate agencies and the private sector on R&D, manufacturing, and distribution, and assign responsibilities based on core capabilities rather than political or financial considerations. Identify efficiency improvements by mapping processes across the program. This may include accelerating regulatory approval by facilitating communication between the private sector and regulators or by speeding up agency operations. Certain regulations may be suspended entirely if the risks are considered acceptable relative to the urgency of the goal. Coordinators should identify processes that can occur in parallel rather than sequentially. Leaders can work with industry so that operations occur under minimal conditions to ensure worker and product safety.

The OWS team worked with the FDA to compress traditional approval timelines by simultaneously running certain steps of the clinical trial process. This allowed manufacturers to begin industrial-scale vaccine production before full demonstration of efficacy and safety. The team continuously sent data to FDA while they completed regulatory procedures in active communication with vaccine companies. Direct lines of communication permitted parallel work streams that significantly reduced the normal vaccine approval timeline.

Mechanism 3: Activate latent private-sector capacities for labor and manufacturing

Activate private-sector capabilities for production, supply chain management, deployment infrastructure, and workforce. Minimize physical infrastructure requirements, establish contracts with companies that have existing infrastructure, and fund construction to expand facilities where necessary. Coordinate with the Department of State to expedite visa approval for foreign talent and borrow personnel from other agencies to fill key roles temporarily. Train staff quickly with boot camps or accelerators. Efforts to build morale and ensure commitment are critical, as staff may need to work holidays or perform higher than normally expected. Map supply chains, identify critical components, and coordinate supply. Critical supply chain nodes should be managed by a technical expert in close partnership with suppliers. Use the Defense Production Act sparingly to require providers to prioritize contracts for procurement, import, and delivery of equipment and supplies. Map the distribution chain from the manufacturer to the endpoint, actively coordinate each step, and anticipate points of failure.

During OWS, the Army Corps of Engineers oversaw construction projects to expand vaccine manufacturing capacity. Expedited visa approval brought in key technicians and engineers for installing, testing, and certifying equipment. Sixteen DOD staff also served in temporary quality-control positions at manufacturing sites. The program established partnerships between manufacturers and the government to address supply chain challenges. Experts from BARDA worked with the private sector to create a list of critical supplies. With this supply chain mapping, the DOD placed prioritized ratings on 18 contracts using the Defense Production Act. OWS also coordinated with DOD and U.S. Customs to expedite supply import. OWS leveraged existing clinics at pharmacies across the country and shipped vaccines in packages that included all supplies needed for administration, including masks, syringes, bandages, and paper record cards.

Mechanism 4: Shape markets with demand-pull mechanisms

Use contracts and demand-pull mechanisms to create demand and minimize risks for private partners. Other Transaction Authority can also be used to procure capabilities quickly by bypassing elements of the Federal Acquisition Regulation. The types of demand-pull mechanisms available to agencies are:

• Volume guarantees: Commits the buyer (i.e., a federal agency) to purchase a minimum quantity of an existing product at a set price from multiple vendors.
• Advance purchase agreements: Establishes a contract between a single buyer and a single supplier in which the buyer provides advance funding for resources to manufacture a product or provide a service.
• Advance market commitments: Engages multiple suppliers or producers to produce a product or service by providing advance funds.
• Prize competitions: Solicits the development of creative solutions for a particular, well-defined problem from a wide range of actors, including individuals, companies, academic teams, and more, and rewards them with a cash prize.
• Challenge-based acquisitions: Solicits creative solutions for a well-defined problem and rewards success by purchasing the solution.
• Milestone payments: Provide a series of payments contingent on achieving defined objectives through the contract timeline.

HHS used demand-pull mechanisms to develop the vaccine candidates during OWS. This included funding large-scale manufacturing and committing to purchase successful vaccines. HHS made up to $483 million in support available for Phase 1 trials of Moderna’s mRNA candidate vaccine. This agreement was increased by $472 million for late-stage clinical development and Phase 3 clinical trials. Several months later, HHS committed up to $1.5 billion for Moderna’s large-scale manufacturing and delivery efforts. Ultimately the U.S. government owned the resulting 100 million doses of vaccines and reserved the option to acquire more. Similar agreements were created with other manufacturers, leading to three vaccine candidates receiving FDA emergency use authorization.

Mechanism 5: Reduce risk with diversity and redundancy

Engage multiple private partners on the same goal to enable competition and minimize the risk of overall program failure. Since resources are not infinite, the program should incorporate evidence-based decision-making with strict criteria and a rubric. A rubric and clear criteria also ensure fair competition and avoid creating a single national champion. 

During OWS, four vaccine platform technologies were considered for development: mRNA, replication-defective live-vector, recombinant-subunit-adjuvanted protein, and attenuated replicating live-vector. The first two had never been used in FDA-licensed vaccines but showed promise, while the second two were established in FDA-licensed vaccines. Following a risk assessment, six vaccine candidates using three of the four platforms were advanced. Redundancy was incorporated in two dimensions: three different vaccine platforms and two separate candidates. The manufacturing strategy also included redundancy, as several companies were awarded contracts to produce needles and syringes. Diversifying sources for common vaccination supplies reduced the overall risk of failure at each node in the supply chain.

Conclusion

Operation Warp Speed was a historic accomplishment on the level of the Manhattan Project and the Apollo program, but the unique approach is not appropriate for every challenge. The methods and mechanisms are best suited for challenges in which stakeholders agree on an urgent and specific goal, and the goal requires scaling a technology with established fundamental research. Nonetheless, the individual mechanisms of OWS can effectively address smaller challenges. Those looking to replicate the success of OWS should deeply evaluate the stakeholder and technology landscape to determine which mechanisms are required or feasible.

Acknowledgments

This memo was developed from notes on presentations, panel discussions, and breakout conversations at the Operation Warp Speed 2.0 Conference, hosted on November 17, 2022, by the Federation of American Scientists, 1Day Sooner, and the Institute for Progress to recount the success of OWS and consider future applications of the mechanisms. The attendees included leadership from the original OWS team, agency leaders, Congressional staffers, researchers, and vaccine industry leaders. Thank you to ​​Michael A. Fisher, FAS senior fellow, who contributed significantly to the development of this memo through January 2023. Thank you to the following FAS staff for additional contributions: Dan Correa, chief executive officer; Jamie Graybeal, director, Defense Budgeting Project (through September 2022); Sruthi Katakam, Scoville Peace Fellow; Vijay Iyer, program associate, science policy; Kai Etheridge, intern (through August 2022).

Summary

To clear a path for the innovations that will fuel our nation’s economic recovery, the Biden-Harris Administration should streamline the patent application process by improving the correspondence between patent claims and the specification, supporting search clarity, and ensuring concise specifications. Not only would this reduce the time lost to bureaucratic paperwork, but these efforts would also give innovators a more efficient road to acquire patents. In turn, applicants, examiners, and the public at large would benefit from the new industries and innovations to come.

Summary

Beneficial investment organizations (BIOs)—such as public pension funds, endowments, and the investment arms of charitable organizations—are a cornerstone of American welfare and the foundation of our modern capitalist system. American BIOs manage tens of trillions of dollars in pursuit of their goals, and this financial capital serves to power the American economy. But hundreds of billions of dollars are wasted by BIOs every year due to insufficient portfolio transparency, which contributes to BIOs paying excessive fees, assuming unnecessary and uncompensated risks, and chronically underperforming. Insufficient BIO transparency thus harms not only their direct beneficiaries (e.g., retirees, universities and charities), but it also harms America. Due to this opacity, billions of investment dollars are artificially diverted away from long-term projects that could have widespread social and economic benefits. In short, poor transparency on portfolio attributes, such as costs and sustainability, prevents beneficial investment organizations from actually benefiting their stakeholders and America.

Increasing BIO transparency through enhanced reporting and disclosure could unlock hundreds of billions of dollars in beneficial capital for long-term projects that would aid large segments of American society. Improved transparency would allow stakeholders to better understand BIOs’ investment decisions and their long-term consequences, which could then underpin design changes (e.g., better governance and regulatory structures). Transparency is thus a catalyst to make BIOs more willing to change and improve how they invest, which will unlock capital for long-term, large-scale projects that America desperately needs and drive high risk-adjusted returns. Launching a Presidential Advisory Commission is the best first step for the Biden-Harris Administration to take to improve transparency among BIOs and unlock substantial volumes of long-term beneficial capital.

Summary

The COVID-19 pandemic has exacerbated the challenges faced by millions of Americans in accessing healthy, prosperous, and resilient neighborhoods. However, the ability for all Americans to afford to live, work, play in, and benefit from these neighborhoods, also known as Communities of Opportunity, has been in crisis for decades. Whether in urban, suburban or rural markets, demand for walkable and resilient communities with affordable housing and transportation options, great amenities, and a sense of place continues to outstrip supply. Despite broad recognition of the enormous economic and environmental benefits of walkable communities, particularly transit-oriented development (TOD), communities face many federal, state, and local barriers to meeting this demand. 

To help communities meet the pent-up demand for affordable housing and businesses in walkable, resilient communities, and to accelerate an equitable economic recovery, the Administration should establish a national equitable transit-oriented development policy. The policy should promote and coordinate federal investments and action to support equitable transit-oriented development and community revitalization projects that lead to more mixed-income housing, new revenue streams for budget-constrained public transportation agencies, climate change mitigation and a stronger and sustainable post-COVID-19 economic recovery.

Summary

Personal Protective Equipment (PPE) is a critical component of medical care that ensures the safety of both the patient and the provider, as well as the general public. During the COVID-19 pandemic, a global shortage of PPE left many providers insufficiently protected, resulting in infection, increased spread, and even the deaths of providers. To assist, the World Health Organization urged for a 40% increase in production. Treatment of those infected was further hampered by critical shortages of necessary medical supplies such as ventilator parts. The fragility of the supply chain also left civilians without immediate access to PPE, and later widespread use of disposable masks has created a significant environmental hazard. Innovation in PPE has remained stagnant and reliant on single use options which are vulnerable to manufacturing shortcomings and harmful to the environment. This need for improvement also applies directly to other medical equipment, where focus has largely been on single use parts. A collaborative panel and acting body is needed to drive changes forward for the current pandemic, next pandemic, the next critical part shortage, the next wildfire, or even for our agricultural workers who use protective gear every day but still face harmful exposures while ensuring our collective safety.

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Summary

Emerging technologies developed in the United States are routinely scaled up overseas due to a lack of domestic engineering skills, manufacturing know-how, investment capital, and supply chains.  A new national initiative is needed to ensure that discoveries and inventions made in the United States are manufactured at scale in the United States. Such an initiative will create good-paying jobs, strengthen defense preparedness, and protect intellectual property (IP) created through federally funded research. Building a strong manufacturing base at home will also strengthen the domestic innovation cycle, as the knowledge gained through manufacturing supports process improvements and new product iterations. We propose the creation of a new agency—a National Manufacturing Foundation (NMF)—to address this gap.

Summary

Closing critical gaps across the interconnected ecosystem that supports discoveries in science and technology (S&T), developing discoveries into promising inventions, and commercializing inventions into thriving businesses should be of top priority for federal policymakers. In brief,  intentional focus and dedicating resources to discovery and commercialization of inventions ensures that the United States maintains and expands its economic vitality, its global leadership in S&T innovation, and its strategic entrepreneurial advantages. This proposal presents a rationale and vision for the launch and deployment of a national plan—called Innovate the Future: The American Inventors Initiative—to provide comprehensive support and acceleration paths for postdoctoral researchers, early-stage entrepreneurs, and S&T investors, in order to advance domestic economic growth.