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Hunting Bayh-Dole Vampires


Written by Joseph Allen
Allen & Associates
Posted: Mar 23, 2014 @ 12:30 pm

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Steel yourself, gentle reader.  This month we go hunting the living dead:  arguments that keep climbing out of the grave to bite and infect the unwary.

Four months after NIH rejected the latest attempt to misuse the Bayh-Dole Act to control drug prices zealots have risen from the crypt claiming the law should be used to haunt drug developers. March-in rights were designed to force universities to issue additional licenses if effective efforts are not being made to commercialize a federally funded invention; if the licensee cannot meet national health, safety or regulatory needs; or if the licensee fails to make the product in the U.S. despite a pledge to do so.

Critics claim there’s another trigger: if they don’t like the price of a drug.  While the cost of new drugs is a concern, their solution sucks the life blood out of a system leading the world in protecting public health. It’s time to drive a stake through that spectre.

The latest incarnation appears in the Journal of the American Medical Association (JAMA). It’s another spawn of a law review article by Professors Arno and Davis.  These enterprising academics proclaimed a major discovery:  they had unearthed a hidden provision in the Bayh-Dole Act— a secret formula to control drug prices.  Their op-ed in The Washington Post got prominent coverage.  Shortly thereafter the first price control petition was filed by “public interest” groups to NIH.

There’s one problem:  the theory is bogus.  So let’s review the Arno-Davis theorem with stake and hammer in hand.

We encounter this threadbare mummy wailing the government funds drug development so the public is “Paying Twice for the Same Drugs as Arno/Davis titled their op-ed. The JAMA piece claims the government has “funded a great deal of the seminal research leading to a particular product.”

A stake to the heart: The government is funding basic research at universities, not drug development.  Bayh-Dole allows schools to own resulting inventions and license them for commercialization.  These discoveries are more like ideas than products.  The expense and risk of development falls on the private sector.  A study in Nature Biotechnology on drugs commercialized from federally-funded inventions finds: “the private sector spends 100-fold or more to bring the product to market than the PSRI (public-sector research institution) spends in research directly leading to the invention.

Here’s why: for every 10,000 compounds about 250 make it to preclinical testing, 5 go on to clinical trials, and one enters the marketplace.  Of these just 20% turn a profit– and they must pay for all those which died in the pipeline.

Company costs for drug development have risen from $140 MILLION per approved drug in the 1970’s at least $1.2 BILLION today. The Truly Staggering Cost of Inventing New Drugs unveils a Forbes study finding: “The average drug developed by a major pharmaceutical company costs at least $4 billion, and it can be as much as $11 billon.”

Whichever estimate you chose that’s a lot of money and it’s provided by companies, not government grants.  And unlike the public sector, when commercial drug development fails people lose jobs.

Now to the crypt of a voodoo queen who cries:  Bayh-Dole intended its march-in rights to regulate the price of drugs.  When that provision refers to “reasonable terms” it means price control.

A stake to the heart: Untrue.   March-in rights apply to specific situations where products are not being developed for public use. Then the government can require universities to license “responsible applicants”… “upon terms that are reasonable under the circumstances” to develop the invention.  Reasonable terms means the university must issue the new license upon conditions conducive to development.  It does not refer to the price companies charge for resulting products.

The first march-in petition to NIH seeking price controls incorporated key quotes from Arno/Davis. This roused Senator Birch Bayh to testify:

It was first brought to my attention that attempts were underway to rewrite history when I saw an article in The Washington Post … entitled Paying Twice for the Same Drugs.  The crux of the article was that:

Bayh-Dole… states that practically any new drug invented whole or in part with federal funds will be made available to the public at a reasonable price. If it is not, then the government can insist that the drug be licensed to more reasonable manufactures, and if refused, license it to third parties that will make the drug available at a reasonable cost.’

That view mistakes how our law works. Bob Dole and I responded in a letter to the editor… setting the record straight.

You can imagine my surprise when I see that the same arguments were being formally presented to NIH in an attempt to control drug prices. The quotations in the petition flagrantly misrepresent the legislative history supporting Bayh-Dole. The petition shows complete lack of understanding of how the legislative process works. The current petition says: ‘The clear language of the Bayh-Dole act (sic) requires reasonable pricing of government supported inventions.’ It later adds: ‘The legislative history evidences an intent to require that the government supported inventions be priced reasonably.’

All but one of the citations in the petition used to conclude that march-in rights were intended to control prices actually refers to hearings on bills other than Bayh-Dole. While perhaps interesting, these are not pertinent legislative history.  I could find only one citation from the real legislative history.  Here is the petition language:

‘The consensus was recorded in the Senate’s Committee Report on the bill, which explained that march-in rights were intended to insure that no ‘windfall profits,’ or other “adverse effects result from retention of patent rights by these contractors.’

The petition footnote on this section adds “statement of Senator Bayh that the march-in provisions were meant to control the ability of ‘the large, wealthy corporation to take advantage of Government research and thus profit at taxpayers’ expense.’”

Rather than being a statement of fact, my quotation is actually taken from a question I asked the Comptroller General on another topic altogether. The petition language taken from the Committee report mixes up references to two different sections of the law so that the original meaning is unrecognizable.

Let’s see what happens when the petition quotes are placed in their proper context. I highlighted the following language referred in the petition as it actually appears in the legislative history… Here it is:

Mr. Bayh:  The other criticism comes from those that feel that this bill is a front to allow the large, wealthy corporation to take advantage of Government research dollars and thus to profit at the taxpayer’s expense. We thought we had drafted this bill in such a way that this was not possible. Would you care to comment on this scenario as a valid criticism?

Mr. Staats: Of course, this is a key question. There is no doubt about that. In my opinion, the bill does have adequate safeguards…”

The petition also mixes up Senate Judiciary Committee report language describing two unrelated parts of Bayh-Dole. Here’s how the report actually reads with the petition extract highlighted:

The agencies will have the power to exercise march-in rights to insure that no adverse effects result from the retention of patent rights by these contractors.

That was the language on section 203, the march-in rights provision. The report continues:

The existence of section 204 of the bill, the Government pay back provision, will guarantee that the inventions which are successful in the marketplace reimburse the Federal agencies for the help that led to their discovery.  Although there is no evidence of “windfall profits” having been made from any inventions that arose from federally-sponsored programs…

Thus, it is only by inappropriately combining language describing an entirely different section of the law that the words “windfall profits” can be made to refer to march-in rights. They clearly do not. Such a representation is highly misleading.

NIH agreed with Senator Bayh and rejected the petition. They rejected each subsequent petition employing the Arno-Davis theory on the same grounds: Bayh-Dole does not sanction price controls.

Next we encounter a core dogma of the cult: inventions should be licensed non-exclusively to lower drug costs and promote fairness. The JAMA article asserts: “If universities issued more nonexclusive licenses of their products, there would be less need to rely on march-in rights. Even though non-exclusive licenses may bring lower royalty rates, they can be successful in helping bring to market essential therapeutic technologies.” They cite non-exclusive licensing of two method patents (Axel and Cohen-Boyer) as examples.

A stake to the heart: Before Bayh-Dole federal policies emphasized non-exclusive licensing.  In all that time not a single new drug was commercialized when the government took university inventions and tried this approach. In contrast, licensing under Bayh-Dole commercialized at least 153 new drugs and vaccines. Of the 22 drugs commercialized from NIH owned inventions, only 1 was licensed non-exclusivelyand that was a method patent (“NIH Inventions translate into drugs and biologics with high public health impact”).

Companies cannot justify the risk of new drug development through non-exclusive licensing.

Next, a ghoul moaning march-ins are a fraud because agencies haven’t used them.

A stake to the heart: In more than 30 years only one march-in petition met the statutory criteria.  Of the others, one was from a company that infringed a university patent and asked the government to march-in to rescue it. The others were filed under the Arno/Davis price control theory and were appropriately rejected as being unsupported by law.

One petition was legitimate. Genzyme encountered production problems and was unable to produce the drug Fabrazyme. NIH concluded that it would not march-in because it would take competitors longer to gain FDA approval than it would take Genzyme to get back on line.

The reason march-ins have not been needed is that universities effectively enforce their licensing agreements by monitoring development milestones and performance measures.  When licensees falter, universities terminate the agreement, shopping the technology to others.  Rather than a sign of failure, the lack of march-ins proves that Bayh-Dole works.

Frustrated by the failure to deliver a fatal bite to Bayh-Dole, our final ghost screams if march-in rights don’t create price controls, the law should be amended so they do.  JAMA concludes: “… policy makers will need to revisit Bayh-Dole to fashion a better safety net to ensure equitable access to taxpayer-funded discoveries.”

A stake to the heart: We’ve been down this road before and it goes over a cliff. Under pressure from Congress, NIH imposed a requirement that products developed from its cooperative R&D agreements (CRADAS) with industry be “reasonably priced.”  The result: companies walked away.  NIH revoked the provision and industry returned.  Companies are not going to partner with universities or federal labs with pricing swords hanging over their heads. This threat is particularly dire for start-up companies and small businesses which Nature Biotechnology says licensed 60% of the federally-funded inventions turned into new drugs.

If we are foolish enough to undermine Bayh-Dole countries like China are delighted to lure our companies abroad to collaborate with their universities. Forfeiting our lead turning fundamental research into new products means losing our dominance in the life sciences. Thus, we must respond whenever gloomy apparitions urge us toward disaster.

Traditionally, the best remedy for vampires is hauling them out into the sunshine where they crumble into dust. Exposing these arguments to open scrutiny is equally effective.  Requiescat in pace


About the Author

Joe Allen is a 30-year veteran of national efforts to foster public/private sector commercialization partnerships, and author of numerous articles on technology management for national publications. Joe served as a Professional Staff Member on the U.S. Senate Judiciary Committee with former Senator Birch Bayh (D-IN), and was instrumental in working behind the scenes to ensure passage of the historic Bayh-Dole Act. Joe has served as the Executive Director of Intellectual Property Owners, Inc., a trade association representing major R&D companies, he was involved in the creation of the Court of Appeals for the Federal Circuit, and he also served at the U.S. Department of Commerce as the Director of the Office of Technology Commercialization. From 1992 until 2004, Allen was with the National Technology Transfer Center (NTTC), becoming President in 1997. Clients included NASA, the Department of Defense, EPA, the Department of Veterans Affairs, and the Department of Commerce. Between 2004 until 2007, Allen was the Vice President and General Manager of the West Virginia High Technology Consortium Foundation. In 2008, Joe founded Allen & Associates to continue to facilitate public/private partnerships between universities, federal laboratories and industry.

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  1. Joe,

    Well done again! As you show once more, the naysayers of Bayh-Dole have “no shame” (or facts) to support their position. I’m frankly sick of all the “spinmongering” that goes on when it comes to Bayh-Dole and drug price controls.