Bernie Sander’s Really Bad Idea

By Joseph Allen
August 28, 2017

Senator King’s compulsory licensing proposal was bad enough. Sen. Sanders would make it even worse. Let’s hope the Senate understands that putting our life science industry at risk doesn’t benefit consumers– or patients.

It seems to be the catch phrase of our times that just when you think it can’t get any worse, it does. Last month we discussed a proposal by Sen. Angus King (I-ME) that was added to the pending Department of Defense (DOD) authorization bill seeking to control drug prices by undermining the Bayh-Dole Act, the foundation for public/private sector R&D alliances. These partnerships are a big reason why the U.S. is the world’s dominant force in innovation.

King would force the agency to “march in” under the Act to issue compulsory licenses on inventions arising from DOD supported R&D “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.” That the law provides agencies no such authority went unnoticed. Perhaps that’s because the Committee didn’t ask DOD or anyone versed in Bayh-Dole for advice before it acted.

The bill will soon be considered by the full Senate and indications are that Sen. Bernie Sanders (I-VT) will offer an amendment making a bad idea much worse. Let’s hope the Senate carefully considers what’s being proposed. They should also examine the examples the proponents put forward to bolster the claim that American taxpayers are being ripped off by the current system. As we’ll see, these are false narratives but typical of the arguments used to attack the world’s most efficient technology transfer system. And no one has benefitted more from Bayh-Dole than those suffering the ravages of disease both here and around the world.

The Bayh-Dole Act uses the incentives of patent ownership and licensing to spur the development of federally funded R&D. By any objective standard it has been a success. Bayh-Dole only allows agencies to march in, requiring that additional licenses be issued, when the original licensee is not making good faith efforts to commercialize a technology, or if the licensee is unable to produce enough products to meet a national emergency. By requiring DOD to march in against successfully developed drugs, King’s language would force the agency to exercise an authority it does not have under the law, but at least the resulting chaos is limited to one department.

Sen. Bernie Sanders (I-VT) introduced legislation requiring every agency and non-profit entity to include a “reasonable pricing” provision based on King’s formula for any life science invention made with government support. Apparently the colossal failure of a similar requirement forced on the National Institutes of Health (NIH) in the 1990’s which led to the collapse of industry partnerships without any reduction in drug prices is either unknown, or made no impression on Sen. Sanders. Or perhaps like his trust in socialism, he thinks that what failed in the past will somehow work by some weird magic if trotted out again.

Senators King and Sanders cite two examples provided to them by the foes of Bayh-Dole to show the supposed failures of the current system. Let’s examine them. As explained in his press release, Sanders introduced his proposal “… after drug maker Sanofi Pasteur refused to agree to fair pricing on a Zika virus vaccine developed with over $1 billion in taxpayer dollars.”

Of course, the vaccine is not developed with taxpayer dollars– it’s not developed at all which is why the Army is desperately seeking a licensee. Sanders and the critics ignore another important fact: Sanofi is the only company expressing any interest in commercializing the vaccine based on an invention made at the Walter Reed Army Institute of Research. That should say volumes about the risks involved in its development. The vaccine will only be available to protect public health and our armed forces deployed in Zika prone areas if a company steps up to the plate.

The pending exclusive license between the Army and Sanofi brought howls of protest along with demands that the vaccine be licensed non-exclusively or that a reasonable pricing provision be forced into the agreement. Why the critics assume that companies would line up to take a non-exclusive license when only one company is even interested in an exclusive one is baffling.

Further, Sanofi has said it will have to back away if a “reasonable pricing” provision is part of the deal. So if the negotiation falls through because of Congressional pressure and the vaccine remains on the shelf, will the critics take the blame? Don’t hold your breath.

The next example is even worse. Sanders press release continues: “The Sanofi deal is not unique. The high-priced cancer drug Xtandi was developed at UCLA with taxpayer-funded research grants and support from the Army and the National Institutes of Health. UCLA licensed the drug to a small biotech company in San Francisco.”

This is simply wrong. Xtandi was not “developed” at UCLA with taxpayer funds. In a pending paper analyzing the story of Xtandi, Ashley Stevens who’s done seminal work on the role of public sector research in the discovery of drugs, estimates that Medivation, the “small San Francisco biotech” spent $423 million over 11 years developing Xtandi. Together with its partner Astellas about $900 million was spent on development in the U.S. That number doubles if the dollars they spent outside the U.S. are included.

Based on the grant information in UCLA’s patent filings, data in NIH’s Reporter database, and the Army’s Congressionally Directed Medical Research Programs (CDRMO) database, Stevens estimates that UCLA received approximately $1.3 million from NIH and the Army over the years on the research leading to Xtandi. However, two additional drugs now in advanced testing by major drug companies also resulted from the UCLA researchers’ work. Therefore, only $433,000 in federal funding should be attributed to Xtandi. With Medivation/Astellas’ investment of $1.8 billion, the companies funded 99.7% of the overall R&D for Xtandi and UCLA, through its federal funding provided 0.30%.

That hardly seems like a taxpayer rip off. Rather, a breakthrough prostate cancer drug is now available world-wide because the private sector was willing to make a substantial investment over more than a decade of hard work with no guarantee of success.

Like the Zika vaccine, UCLA had only one company, Medivation, interested in licensing Xtandi. What the critics always miss is that it’s a lot easier spotting a blockbuster drug after the sweat and treasure required for commercialization is done than when an early stage invention is sitting in the lab.

The genius of the Bayh-Dole system is that by relying on the incentives of the patent system, companies like Medivation are willing to undertake the risk and expense of development. And like Xtandi, another characteristic of our system is that these risk takers are more often than not small companies. While they think they are whacking big pharma, the real victims of Sen. King and Sanders proposal will be small companies. The other victims will be patients desperately in need of effective treatments to relieve their suffering that will instead gather dust in the lab– as happened before Bayh-Dole.

Approximately 70% of university licenses go to small companies and spinouts. These companies, like Medivation. are the source of about half of the drugs developed in the U.S. More than two new companies are formed around academic inventions every day of the year– most of them in the life sciences. As a result, the United States of America is far and away the biggest developer of medical breakthroughs. Let’s walk through a scenario of the impact if the King/Sanders provisions were in place.

Suppose you’re an entrepreneur who’s identified a promising invention at State U. and believe in its potential so much that you put your life’s savings and take out a second mortgage on your house to set up a new company. You enlist some prominent researchers to come in with you. Together you put together a development plan and approach the university for a license. You are the only company that’s interested, you seem to know what you’re talking about, have a good plan and you qualify for preferential treatment under Bayh-Dole as a small company. You get an exclusive license.

Your company does some initial research with its limited funds, the results are promising, so you approach a VC. The negotiation goes well and first round funding is almost within your grasp when they ask if there are any other factors they should know. You say: “Well, there is one. Since the invention was made with federal funds, the government will issue a compulsory license to our international competitors if our product is more expensive in the U.S. than the average cost in OECD countries.”

The VC looks startled, and says: “So how do we know what that average price will be?”

You reply: “We have to raise hundreds of millions, perhaps billions of dollars and spend the next decade in development and clearing the FDA regulatory procedures. Like any new drug there’s more than a 90% chance that we’ll fail. But if we’re successful and our drug is approved we’ll have to see how much foreign governments will agree pay for it in their controlled markets. That determines how much we can charge here. Otherwise the government will take it away from us, licensing other companies who haven’t risked anything so they can copy our product.”

So does a rational VC say: “Hey, that works for me, here’s a big check.” Or do they say: “Don’t let the door hit you on the way out– and never come back!”

While King and Sanders will kill life science start ups and guarantee that promising federally funded inventions waste away on the shelf, there is one big winner under their system: China.

China is targeting the life sciences and building up their university research system to compete with ours (including introducing Bayh-Dole incentives). Unlike our patent system which entrepreneurs are rightly reluctant to trust, China is strengthening theirs. They are aggressively recruiting U.S. drug and biotech companies to conduct their R&D there, promising more bang for the buck than they could get in the U.S. If forced to choose between accepting an undefined “reasonable pricing” clause that is only apparent after all of the risks of commercialization are taken, and shifting R&D alliances overseas where they are being lured by increased incentives, which way do you think they will go? Of course, later the Chinese will try and suck all of the knowhow and IP out of these companies to compete with us, but in the short run it looks like a good deal. Do you think that Senators King, Sanders and their allies will find Chinese drug developers sensitive to their ideas of fairness?

Much hangs in the balance when Congress returns next month and the DOD authorization bill with Sen. King’s language and a possible Sander’s amendment is considered. Let’s hope the other 98 Senators think long and hard about the consequences before they vote “Yea’ or “Nay.” There’s a lot riding on the outcome.

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 14 Comments comments. Join the discussion.

  1. PHOSITA August 29, 2017 5:55 am

    So you are saying that if it wasn’t for the US market, there would be no incentive for drug companies the world over to invest in research for new innovative drugs. Really? You argument suggest that the global drug industry is only profitable thanks to the US market, and that drug markets outside of the US cause drug manufacturers losses, which are only offset by the profits from the American market. No! No drug company on earth would sell a single drug anywhere at a loss. Prices of drugs are not set arbitrarily by governments of OECD countries. They are set through negotiation in which profitability for the manufacturer is secured. If a drug company is unhappy with the price a government is willing to pay for a drug that will be included in the basket of drugs covered by the national healthcare program, the drug will simply not be included in the basket. Governments in countries that provide national healthcare have leverage in negotiations with drug manufacturers, and this is what drives costs of drugs to be be lower in a country like Canada than in the US. However, rest assured that drug companies are still profiting in Canada and in other OECD countries. The difference in the US is that the individual consumer has no leverage to negotiate prices, because there is no national healthcare program that can conduct a fair negotiation before the drug companies on behalf of the individual consumer. As a result drug companies can set exorbitant prices on patented drugs.

  2. Confused Pharmacist August 29, 2017 6:46 am

    While patents on publicly funded research MAY provide incentives, let’s not kid ourselves to the outcome of such endeavors: it promotes only those drugs that are economically profitable. Thus you see twenty different types of Viagra but very little for lesser known but still as deadly or life crippling diseases and conditions. If such drugs are developed, the prices are skyrocketed because the costs cannot be distributed over a large number of people like a Viagra could. The truth is people can’t afford these drugs that but for public funded research, wouldn’t exist in the first place.

  3. Moocow August 29, 2017 7:36 am

    Maybe. But the truth also is: you need to have a drug first, before you can worry about how to price it.

  4. xtian August 29, 2017 11:35 am

    @PHOSITA “So you are saying that if it wasn’t for the US market, there would be no incentive for drug companies the world over to invest in research for new innovative drugs.”

    Yes. Now that we have that established, let’s have a reasonable conversation about how the US supplements Ex-US drug costs. Please prove me wrong by identifying a drug whose ex-US (limited to EU or CA) market is larger in size than the US.

  5. CP in DC August 29, 2017 11:41 am

    Drugs initially developed at universities or the NIH eventually get licensed for a song. Basic research is carried out by these institutions. Cheap but underdeveloped, companies must spend money on further development and going through FDA required clinical trials (that is the largest expense). Once FDA approved, other countries (without such resources) take FDA approval as their own. So US pays the large prices to make up the initial costs and other countries pay less because they piggy back on US development and clinical trials.

    ANDA litigation was to be the cure for high priced pharmaceuticals and it worked somewhat. After pay-for-delay was rejected by the Supreme Court, the challenges dropped off dramatically. So prices remained high with fewer new entrants into the marketplace.

    The high prices remain until generics enter the market. After the first generic, the price drops around 85% of the original price, after the second around 50%, and eventually bottoms out at 15%. Yes, generics don’t pay for development or FDA clinicals other than data needed for the the ANDA.

    Pharmaceutical companies will make a profit on their drugs, even the generics make a profit with their lower prices. The question is how much of a profit. The US has the highest profit margin of all developed countries and when licensed, the US is often separately negotiated. The US pays more for its drugs than any other country. Undergo ANDA damages discovery and you find out so much about pricing. A couple of months ago, Glaxo won 235 million from Teva who was found to willfully infringe the Coreg patents (wait, I thought it cost billions…). Another tidbit: pharma spends more on advertising than R&D.

    With this background, I know pharmaceutical companies need to make a profit to recover their costs and that is fair, but does the US have to bare the brunt of the recovery?

  6. Moocow August 29, 2017 2:50 pm

    @ PHOSITA: The US market surely subsidizes innovative drugs worldwide; I think that’s OK in relation to countries that are much poorer than the US. For those, it’s not so wrong that we should pay a higher proportionate share of the cost of innovation. But in relation to other rich countries one wonders. Have you looked at the per capita income in Norway or Luxemburg? They will pay $7 for a Big Mac but they can’t pay for drug innovation?
    As far as price controls in OECD countries go, it’s not as simple as drug companies negotiating with government buyers until they’re satisfied with their expected profits. Price caps, price freezes, formulary restrictions, substitution laws and other heavy-handed government interventions are actually predominant. It’s also been shown that price controls result in lower R&D investment and fewer innovative products.
    All that being said, I think Mr. Allen’s point was a different one: If we want private investment in expensive and uncertain technology in the U.S., we shouldn’t spook investors with the promise of importing foreign price controls. Investors can just walk away.

  7. dh August 29, 2017 3:11 pm

    The premise here is that patented drugs serve a utilitarian market (the drug provides a well-understood and utilitarian need of the patient), rather than being based on advertising, marketing and cultural biases (see anti-depressants). Furthermore, even assuming strict utility, the government has an inherent license on its other funded research in energy and defense. Why should Big Pharma (of all industries) not be considered to be in a similar investment contract?

  8. Anon August 29, 2017 4:28 pm

    Moocow @ 6:

    I think that’s OK in relation to countries that are much poorer than the US.

    Respectfully, please allow me to make my own personal decisions of charity.

  9. dh August 30, 2017 5:19 am

    @CP in DC

    “Another tidbit: pharma spends more on advertising than R&D.”

    That speaks volumes. Selling pills is a racket.

    Meanwhile, in the hard sciences, AMD and Motorola don’t have to advertise their circuits, and you don’t have to ask an engineer to figure out whether you need them.

  10. PHOSITA August 30, 2017 5:49 am

    `Moocow,
    The FDA is one major agency, but hardly the only one of its kind. Just like every country has its own patent system, every developed country has its own version of the FDA. Meanwhile, if the drug companies had it there way, they would get rid of the FDA.

  11. ORTA August 30, 2017 2:11 pm

    Totally agree with Mr Allen’s point that such legislation would significantly harm medical technology transfer efforts of universities and federal labs. Furthermore, it wouldn’t get at the systemic problem of over-priced drugs. Medicare Part D explicitly banned Medicare from negotiating prices, which is, frankly, un-American and codified corporate welfare for the Pharma industry.
    Congress needs to get off its tail and make the obvious tweak to the law.
    But…guess which lobby disproportionately bankrolls the campaigns of the elected leaders who supposedly represent us?

  12. SamClem September 1, 2017 9:33 am

    @PHOSITA

    “You argument suggest that the global drug industry is only profitable thanks to the US market, and that drug markets outside of the US cause drug manufacturers losses, which are only offset by the profits from the American market.”

    This is *exactly* how it works. After time, the US profits allow lower and lower margins as the market expands and manufacturing ramps up.

    “No! No drug company on earth would sell a single drug anywhere at a loss. ”

    Well, it depends on your definition of loss. If you mean less than the costs of goods landed in the country, usually not, if you mean loss in accounting, all the time. And then there are bundle deals–we get good PR for selling 100,000 doses of a drug with big public awareness at a loss so that a single payer health care country bus 10 million doses of something else on a X year guaranteed contract so we can run the factories.

    No different than any other business.

  13. SamClem September 1, 2017 9:44 am

    @CP in DC:

    “Once FDA approved, other countries (without such resources) take FDA approval as their own. ”

    Can you name one? Countries way way way below OECD status have all kinds of health ministries and regulations, often corrupt, inept or both, but what country says “oh, FDA approved, sure!, just ship it to the local pharmacy.”

  14. CP in DC September 2, 2017 10:59 am

    @13 SamClem

    I’ll name three other countries that accept FDA approval. Mexico, Singapore, and Saudi Arabia are examples. It’s easy to find additional examples. It’s not that these countries don’t have health ministries, they don’t have FDA like facilities and expertise to carry out testing. Even the FDA has been fooled, look up Ranbaxy’s problems and subsequent fine in 2013.

    Here is segment of an article addressing the advantage of FDA approval.

    One of the greatest challenges of diversifying international sales is navigating the variant and sometimes complex regulatory systems, particularly in regions where a manufacturer may not have sufficient regulatory intelligence or resources in order to complete the registration process in a timely and cost-effective manner.

    The good news is that manufacturers who have already obtained approval for their device from the USA FDA will find that the registration process abroad is significantly, and sometimes dramatically, eased and that even greater opportunities are presented. Below are six major advantages of registration with FDA-approval.
    1) EXPEDITED PROCESS:

    The most obvious and dramatic advantage of a USA FDA certification for your medical device is that many countries around the world expedite the regulatory processes for devices that are FDA-approved. In Mexico, where registration can take up to two years, devices with FDA-approval can obtain a license in less than 60 days as a part of the North American Free Trade Agreement (NAFTA). Singapore allows an abridged evaluation process for FDA-approved devices that reduces approval times by 30-50%. Many more countries provide similar advantages to devices with FDA-approval, including Saudi Arabia.
    2) CFG ASSURANCE:

    The American Certificate to Foreign Government (CFG) is the equivalent to a Certificate of Free Sale (CFS) in most other countries. With FDA-approval, you are automatically qualified for a CFG from the USA, which is universally accepted for regulatory applications in other markets. Currently, almost any authority around the world requires a CFG or CFS to provide proof of the history of sale of the device.
    3) MEETING TESTING REQUIREMENTS:

    USA FDA requirements exceed almost any other system in the world. Consequently, the testing conducted for the FDA is sufficient for most other registration processes. In many cases, additional testing will not be required if FDA documentation (or documentation accepted by the FDA) can be presented. This is most significant when providing testing reports of technical or clinical studies in which the device or its usage have been invalidated.

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