Proposal from Senator King Won’t Reduce Drug Prices, Just Innovation

By Joseph Allen
July 17, 2017

Many were stunned to learn that Senator Angus King (I-ME) included language undermining the Bayh-Dole Act in the report of the Senate Armed Services Committee as it approved the National Defense Authorization Act. The languagedirects” the Department of Defense (DOD) to issue compulsory licenses under Bayh-Dole “whenever the price of a drug, vaccine, or other medical technology is higher in the U.S. than the median price charged in the seven largest economies that have a per capita income at least half the per capita income of the U.S.” The provision gives the Department no discretion— it must comply.

Apparently no one bothered to check with DOD or anyone familiar with the law to discover that this language incorporates a long discredited theory of how Bayh-Dole operates, or of the significant damage it would do to the development of badly needed medicines and the U.S. economy. The bill is headed to the full Senate for consideration. So before that happens, let’s consider why this is such a bad idea.

Bayh-Dole Doesn’t Authorize Agencies to Regulate Pricing

As discussed repeatedly the purpose of the Bayh-Dole Act is to encourage the prompt commercialization of federally-funded patents. It decentralized technology management from the Washington bureaucracy to inventing organizations, allowing universities and federal laboratories to license discoveries made with government funding. The agencies are charged with overseeing a few rules making sure the system works as Congress intended, and getting out of the way. One of their functions is insuring that licensees are really trying to bring a technology to market.

As soon as the government began funding a significant amount of the nation’s research after World War II, concerns arose that dominant companies might license a federally-supported invention to suppress it. That led to the creation of “march-in rights.” Congress included them in Bayh-Dole, allowing agencies to compel additional licensing if evidence is presented that good faith efforts toward development are not being made. Agencies can also march in if a licensee cannot produce enough products to meet a national emergency or violates its pledge to make the product in the U.S.

Twenty years later, two professors “discovered” a new meaning in the law– that agencies could march in if a price of a product wasn’t “reasonable.” Senators Bayh and Dole immediately responded that isn’t how their law works, adding if Congress ever wants to micromanage pricing decisions, it must amend the statute while defining a “reasonable price.” Because that has never been done, the King provision instructs the Department of Defense to exercise a power that it doesn’t have.

While it may seem simple from the outside to say that DOD should just ignore such instructions, that’s not quite so easy when the direction comes from the committee which oversees the department and controls its purse strings. At the very least Sen. King’s language would create chaos. It also undermines a fundamental goal of Bayh-Dole: establishing a uniform patent policy for all agencies. DOD is being told to implement the law inconsistently with the rest of the government. But even worse, who would commercialize DOD inventions with this hanging over their heads?

It’s estimated that licensees spend $100 dollars in development for every $1 the government spent on research leading to a life science patent. Commercializing a new drug can easily take more than a decade of hard work, costing billions of dollars. Even then, the chances of success are small. Under our system, this risk is borne by the private sector. What company would assume this burden knowing due to foreign drug pricing policies they can’t control, a successful product could trigger Senator King’s pricing provision, requiring DOD to license their competitors? What venture capitalist would fund a biotech startup company based on a DOD supported discovery?

Ironically, Senator King’s proposal came just as a new study shows that academic patent licensing contributed $1.33 trillion to the U.S. economy, while supporting 4.2 million good paying jobs between 1996- 2017. University inventions lead to two new companies and two new products being created every day of the year.

Most of this impact is in the life sciences. The U.S. is unique as half of our drugs originate in small companies, which receive about 70% of academic licenses. Senator King’s proposal would wreak havoc with the system that made the U.S. the world leader in biopharma.

The King proposal gives foreign governments a powerful tool to bludgeon our life science industry. If they arbitrarily lower the price they will pay for a new drug (the vast majority of which are made in the U.S.) it can trigger the King provision. Other countries would not only get our drugs cheaper, their companies could get a compulsory license courtesy of the U.S. government to sell a drug developed with American sweat and treasure back to us. That’s one sweet deal for them– and a bitter pill for us.

The Proposal Aims to Overturn Previous DOD Decisions

The backers of the King approach make no secret that a key goal is securing compulsory licensing for Xtandi, an effective treatment for advanced prostate cancer. They filed march in petitions with the National Institutes of Health and the Department of Defense, which co-funded the research leading to the discovery. The petitions argued that because Xtadi is more expensive in the U.S. than abroad, the agencies should issue compulsory licenses under their Bayh-Dole march in authorities.

Last year both NIH and the Dept. of Defense appropriately rejected the petitions as unauthorized by the statute. Dr. Francis Collins, Director of NIH, quoted from the petitioner’s own data showing that patient use of Xtandi was up substantially, thus meeting the Bayh-Dole test of being commercially available. This was the fifth time that march in petitions arguing for compulsory licenses to control prices of successfully developed drugs have been rejected by federal agencies as not sanctioned under Bayh-Dole. Senator King seeks to overturn these decisions by forcing DOD to misapply the law.

Another target is an announcement by the Department of the Army that it’s considering granting an exclusive license to Sanofi to develop a desperately needed vaccine for the Zika virus based on an invention from the Walter Reed Army Institute of Research.  Because of the considerable risk involved coupled with a pressing public need, the Army offered to underwrite development of the vaccine through a Cooperative R&D Agreement (CRADA) with Sanofi. Word of the pending deal triggered a firestorm. Senator Bernie Sanders demanded that the deal must include language guaranteeing that the vaccine would be sold for a reasonable price. Ensuing stories like that in PBS’s Newshour gave ample coverage to the critics who argue for non-exclusive licensing of the invention. However one salient point is glossed over. Sanofi is the only company expressing any interest in licensing the invention, even with exclusivity. If the deal falls through because of outside pressures, a badly needed vaccine could remain on the shelf.

We already have a clear record of what happens when reasonable pricing formulas are forced on agencies. Congressional critics browbeat NIH into including such provisions for products resulting from its CRADAS and exclusive licenses in the 1990’s. Rather than leading to a golden age of lower cost drugs, companies simply walked away. Five years later, then NIH Director Harold Varmus revoked the provision saying: “the pricing clause has driven industry away from potentially beneficial scientific collaborations with (NIH) scientists without providing an offsetting benefit to the public” (emphasis added). After the rescission, CRADAS with NIH spiked 500%.

Retrying this failed experiment on the Department of Defense will yield the same dismal result, except this time there’s no excuse for anyone being surprised.

While it’s certainly legitimate to do everything we can to make medical care affordable, Senator King’s proposal will only harm drug development, not lower costs. But perhaps one benefit will come out of this mess. Members of Congress may be more cautious the next time these critics come bearing a magic elixir claimed to cure a complex problem. Before swallowing their snake oil, it’s a good idea to have a real expert check the ingredients. That could prevent some very serious side effects.

The Author

Joseph Allen

Joseph Allen is a Featured Contributor on IPWatchdog.com, and 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. He is our resident Bayh-Dole expert, and will write frequently about Bayh-Dole and issues surrounding the commercialization of university research.

In 2008, Joe founded Allen & Associates, through which he offers consulting services assisting clients in technology transfer issues, including developing effective communication strategies with national policy makers.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 3 Comments comments. Join the discussion.

  1. Chris Gallagher July 17, 2017 5:01 pm

    Good reporting Joe …passage of such legislation would be a disaster for research universities and US war fighters who would lose the medical benefits of private sector research’s amplification of basic life science grants.

  2. Tesia Thomas July 17, 2017 6:44 pm

    It’s unlike DoD to grant exclusive licenses and when they do, they allow for objections to it.
    If no one wants a license other than Sanofi/no one objects who wants a license then they should grant the license.

    And the reason is that the Zika virus is low profile. Companies are probably thinking they won’t make their money back on developing the drug unless they sell it at high cost.
    Though, Sanofi is getting grant money (public funding) to help pay for trials so they’re not really paying so much out of pocket.

    Really this is ‘cart before the horse.’
    The drug hasn’t even passed trials and people are worrying about pricing it.
    WTH?!

  3. Tesia Thomas July 17, 2017 6:50 pm

    First people need to figure out if it works and if the patents even have value. And then worry about licensing the patents and how much the drug costs.

    But the value should be whatever saves the most lives.

    Though, I think that drug companies take on the risk of losing everything when they initiate making a new drug. They play as VCs do.
    “One big drug/startup must make back the money spent on all drugs/startups.”

    Again, if they’re getting taxpayer money (those grants from HHS) to pay for trials then don’t include that money in ‘money-to-recoup’ when selling the drug because taxpayers paid for it, and not the company.

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