Before 1980, the U.S. government retained title to all discoveries that arose from federally funded research. However, the government lacked the means to convert inventions into commercial products and had no effective licensing mechanisms to entice industry to bring these inventions to the market. Potentially useful discoveries languished in the laboratories.
In 1980, after intense debate and negotiation, Congress passed the BayhDole Act, which transferred patent and licensing rights for publicly funded inventions to the universities and small businesses that discovered them. (The same rights were formally extended to large businesses in 1987.) The government may use, royalty-free, any inventions and technologies resulting from publicly funded work, but that right applies only to the intellectual property and not to the end product.
With the explosion of technology transfer activities by American universities since the passage of the BayhDole Actmore than 32,000 licensing agreements enacted, according to the most recent survey (2001) by the Association of University Technology Managerssome worry about the specter of conflict of interest and a possible shift of university research toward projects that are potentially more lucrative. An additional concern is that the patenting of research tools, such as DNA sequences, may create roadblocks to future progress. Several organizations, including the National Academy of Sciences, and more recently the American Association for the Advancement of Science and the Presidents Council of Advisers on Science and Technology (PCAST), have taken up these issues in earnest.
Still, many representatives from the research and development communityand Congressembrace BayhDole as a tremendous success that reinvigorated American competitiveness in the world technology market and brought revolutionary technologies and life-saving medicines to the public. Some members of Congress, though, are concerned by the high prices of drugs and diagnostics that, in many cases, were developed at least in part using taxpayers dollars.
Praise for BayhDole
Witnesses at a July hearing before the House Committee on Energy and Commerces Subcommittee on Health provided a snapshot of the general praise for BayhDole. "The British news weekly The Economist recently concluded that the BayhDole Act was possibly the most inspired piece of legislation to be enacted by the American Congress in the past half century. I agree," said Jonathan Soderstrom, Ph.D., managing director of the Office of Cooperative Research at Yale University.
Andrew Neighbor, Ph.D., associate vice chancellor for research at the University of California at Los Angeles, offered examples of technologies developed in whole or in part using federal funds: the Human Genome Project, recombinant DNA tools, and ways to map and fingerprint DNA to identify criminals.
Soderstrom pointed to his own community to demonstrate benefits to local economies. "Based just on Yales strength in the biomedical sciences, we have been able to help build the biotechnology industry in and around an economically depressed area of New Haven, Conn. [This] has resulted in the formation of 25 new biotechnology companies in the greater New Haven area. In the last 2 years alone, those companies have attracted $1.5 billion in private sector investment, all of which is going into the further development of NIH-funded research."
The Taxol Problem
U.S. Rep. Tom Allen (D-Maine), framed the issue that prevents him from accepting BayhDole as an unqualified success. "One part is innovation, and I dont believe theres a single person in the Congress who wants to shut down that innovation. But the other half of the problem is distribution. We believe in BayhDole. We think that this partnership between the universities and the NIH is extraordinarily valuable. But we have to figure out how to make sure the people who need the pharmaceutical products can actually get them."
Ranking member Sherrod Brown (D-Ohio) offered the development of the cancer drug Taxol (paclitaxel) as a case study of an unfair exchange between the government and industry. (Early work with paclitaxel was done largely by the National Cancer Institute. Pharmaceutical company Bristol-Myers Squibb (BMS), in partnership with NCI, further developed paclitaxel into a commercially available product.) In a June 2003 report, the U.S. General Accounting Office estimated that NIHs total investment in the development of Taxol was $484 million. Bristol-Myers Squibb told the GAO that its development costs for Taxol were $1 billion and its worldwide sales of Taxol totaled more than $9 billion through 2002. During the course of their collaboration on Taxol, BMS licensed an NIH invention that both BMS and NIH say was ancillary, and agreed to a royalty rate of 0.5% of worldwide sales. NIH received $35 million in royalties through 2002.
"We have a drug that taxpayers put basically half a billion dollars [into for development]. We have a drug that was [practically] given to a company who has done a good job of further developing it and marketing. They claim $1 billion [in development costs]. That number is probably high. ... It made $9 billion in profits. Government gets a paltry $35 million," said Brown. Brown acknowledged that not every drug has such a large profit margin, but he asked, "If Bristol-Myers or any biotech firm or drug company makes this kind of money ... when the government has done almost all, if not all, the basic research and really discovered this product, is there something we should do differently than the way we do it now?"
Mark Rorbaugh, Ph.D., director of the NIH Office of Technology Transfer, explained: "What we license ultimately is typically a small part, or only part of the final product. Even if we have a chemical entity that becomes ultimately a drug developed by a company, the company may usually provide an awful lot of other important proprietary technology in formulating it, in encapsulating it, in developing it, in finding ways to make it better and cheaper, in bringing it to market."
Rorbaugh said the NCIBMS partnership resulted in an important drug being made available to the public and used to treat more than 1 million cancer patients. "From the perspective of our mission to benefit the public health, this has been a great success," he said.
When the GAO report was released, U.S. Senator Ron Wyden (D-Ore.) blasted NIH for failing, in his view, to use its statutory privileges to negotiate a better licensing agreement with BMS, and for failing to assure that Taxol was affordably priced. "The report shows that patients and taxpayers could have gotten a better deal under existing lawbut for a failure of will at the National Institutes of Health," Wyden said in a press statement. Wyden indicated that if NIH does not change its policies, he will attempt to mobilize the Congress to produce a legislative solution. During negotiations on the 2001 Departments of Labor, Health and Human Services, and Education appropriations bill, Wyden proposed an amendmenteventually withdrawnthat would require a 1% fee paid back to the NIH on proceeds from the sales of blockbuster drugs.
Other remedies proposed in the past include imposing a reasonable pricing clause in licensing agreements for commercial products developed using public funds. Witnesses at the July hearing said that any kind of price control was unacceptable to industry. "Investors in industry are reluctant to invest and companies are reluctant to take on technologies at a very early stage, as our technologies are, if we have some financial control over the final price of the product. Its too far downstream, they have to invest so much money into it, ours is a small part of the final product; they just will not work with us under those conditions," explained Rorbaugh.
Ellen Sigal, Ph.D., chairperson of Friends of Cancer Research, added, "Companies who can undertake the risky and expensive process of drug development, estimated at over $800 million per product, do not want agreements that have disadvantageous terms when they can invest those resources in [other] consumer products without strings attached. Any steps to assure fair prices should be applied uniformly to all products, rather than penalize products created from the NIH," she said.
Calculating Costs
One problem that may confound the discussion of this issue is the difficulty in calculating the costs to industry for research and development of new drugs. Pharmaceutical Research and Manufacturers of America (PhRMA) offers a figure of $802 million for the total average cost of developing a new prescription medicine. At the July hearing, Allen challenged that number. "Half of that $800 million, according to the study, was opportunity costs," he said. "That is what the money could have earned by being invested somewhere else. But theres no more profitable industry in the country than the pharmaceutical industry."
The number in question comes from a study published last January by Tufts University economist Joseph DiMasi, Ph.D., and colleagues. The study surveyed research and development costs of 68 drugs from 10 different manufacturers. They calculated that the industry average for pre-tax costs was $403 million in 2000 dollars; capitalizing that number to the point of drug approval brings the total estimate to $802 million. This figure includes expenditures on compounds that failed to reach the market.
It is also difficult to quantify exactly the contribution of public resources to this process. NIH, in a 2001 report to Congress, lamented that it was nearly impossible to cross-reference particular grants and contracts with any resultant patents or licenses that contributed to a commercial product. Further, even when they are able to link grants and contractsand the associated dollarswith commercialized inventions, determining the actual cost of a biomedical discovery would require teasing out which part of a large projects budget was devoted to the discovery, as well as the contributions of previous work (and its budget portion). This task may be impossible.
Given the difficulties in attaching numbers to the public investment, the exact cost of commercialization, and the return to society, any action by lawmakers will derive more from philosophy than from fact. At the moment, according to observers, Congress is in a contemplative mode on this issue and may look to evaluations from PCAST as well as GAO. PCAST recommendations were expected at the end of September, according to the White House Office of Science and Technology Policy, although the release date has been a moving target for several months. Draft recommendations that were circulated in March did not indicate a call for major legislation overhauls for technology transfer. The Congress is not expected to make sweeping changes to BayhDole in a stand-alone bill, but appropriations negotiations, under way at press time, may provide lawmakers who are so inclined an opportunity to introduce amendments to the Health and Human Services appropriations bill that could impact what many view as a perfect balance between market incentives and the public good.
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