Changes to Bayh-Dole allowing government to control pricing can only be made through the legislative process. If that happens, it will be a disaster for those suffering the ravages of disease and a death knell for American leadership in the life sciences.
Just as the drug pricing debate on Capitol Hill is heating up, an important new study, “The Bayh-Dole Act’s Vital Importance to the U.S. Life-Sciences Innovation System,” published by the Information Technology & Innovation Foundation (ITIF), underscores the law’s contribution to the United States’ lead in the life sciences. The report warns that attempts to misuse the march-in rights provision of the law to control drug prices would have serious consequences to our competitiveness and our health.
Predictably, the critics condemned the report as “A lot of myth and propaganda.” Despite being repeatedly rebuffed, they continue to argue the law authorizes the government to license competitors if a resulting product isn’t “reasonably priced.” That debate spilled over to the Capitol Hill unveiling of the study, in which I participated (watch video here). What happened there sheds a lot of light on the nature of the argument.
Decades of Change
The report is a treasure trove of information:
- Throughout the 1980s, fewer than 10% of new drugs were introduced first in the U.S.;
- As recently as 1990, the pharmaceutical industry invested 50% more in Europe than in the United States; and
- Europe was the unquestioned center of biopharmaceutical research, challenged only by Japan, for most of the post-war period.
But that all changed due to critical policy changes like R&D tax credits, increased funding of the National Institutes of Health (NIH) and passage of the Bayh-Dole Act, which allows academic organizations and industry contractors to own inventions they make with federal funding. The Supreme Court’s ruling in Diamond v. Chakrabarty that man-made microorganisms are patentable and the creation of the Court of Appeals for the Federal Circuit restored confidence in the American patent system. The impact on the life sciences industry was dramatic:
- The U.S. seized the lead in biotechnology with university spin outs playing a vital role;
- Now, more than 60% of new drugs are introduced here first;
- The U.S. is the largest funder of biomedical R&D in the last two decades, with as much as 80% of the world’s investment;
- More than 350 new medicines, many first of their kind, have been approved by the Food and Drug Administration; and
- An estimated 74% of the drugs in the clinical pipeline are potential first-in class (i.e. new treatments) for diseases such as Alzheimer’s, cancer, psychiatric disorders, cardiovascular or diabetes-related illnesses.
A major reason for this dramatic turn-around is the proliferation of public-private sector R&D partnerships under Bayh-Dole. Prior to the Act, the Comptroller General reported that not one NIH-supported drug had been commercialized when the government took the invention away from the inventing organization, making it available under non-exclusive licenses.
As the report shows, the enactment of Bayh-Dole in 1980 helped fuel an Innovation Renaissance:
- Only 55 U.S. universities had been granted a patent in 1976—the number jumped to 240 in 2006;
- 390 patents were awarded to universities in 1980. In 2015, academic institutions received 6,680;
- More than 12,000 startup companies were launched around academic inventions under the law;
- Between ’96- ’15, academic patent licensing contributed approximately $1.3 trillion to the U.S. economy while supporting more than 4 million jobs; and
- Other countries are adopting the Bayh-Dole model to integrate their universities into the economy.
A Denounced “Discovery”
But there is a potential fly in the ointment. As we’ve discussed repeatedly (see here, here, here, here, here, and here), 20 years after Bayh-Dole passed, two enterprising professors—Peter Arno and Michael Davis—”discovered” it had a secret meaning. The march-in rights provision of the Act, designed to ensure that good-faith efforts are being made to develop a federally funded invention or that sufficient quantities of a product are available to meet a national emergency, was claimed to allow the government to license competitors if a product wasn’t “reasonably priced.”
Senators Bayh and Dole immediately denounced that theory, but nonetheless, the critics seized upon it, launching a series of petitions asking the government to march in against several drugs. That each attempt has been appropriately rejected by NIH hasn’t fazed them in the least. They are now touting their theory on Capitol Hill, claiming the silver bullet of march in rights will lower drug costs.
The ITIF report reaches a different conclusion: “Allowing march-in rights to address pricing would lead to significantly reduced innovation.” A good illustration is the collapse of cooperative R&D agreements at NIH when Congress forced it to include a “reasonable pricing” clause in them. The provision was later revoked by then NIH Director Harold Varmus, who found the policy only drove away important industry collaborators without achieving any public benefit.
It’s not hard to predict what would happen if the alternative theory of Bayh-Dole were ever applied. Who would invest their life savings in a start-up company or be able to attract venture funding if after spending $1 billion over a decade, the government could march-in to license the competitors if someone complained their product wasn’t “reasonably priced”—a term that’s undefined in the law?
The ITIF report shows that such an interpretation is contrary to the statute while warning that attempts to misuse Bayh-Dole for controlling drug prices could jeopardize our lead in the life sciences:
The point here is that global life-sciences competition only continues to intensify, and U.S. leadership going forward is no sure thing, especially if it fails to continue supporting the types of policies that have contributed immensely to that leadership. The Bayh-Dole Act represents one of these core policies, and its effectiveness today is as important as it ever has been in underpinning U.S. life-sciences leadership.
That warning should be taken seriously as China targets the life sciences.
Tracking the Language
During the ITIF briefing in the Capitol on March 7, I was asked to explain the intent of march-in rights. The key phrases in the law date back to 1945, when President Roosevelt asked Vannevar Bush for recommendations on what to do with the enormous R&D machine that helped win World War II. The resulting paper, “Science: the Endless Frontier,” advised that the government continue to fund basic research as an important national priority.
Roosevelt accepted the recommendation and asked his Attorney General to consider how resulting inventions would be managed. The Attorney General concluded that the government should normally own these inventions but in special situations they could be retained by the contractor. But if the discovery wasn’t being developed, contractors would be forced to license others “at a reasonable royalty” (emphasis added).
As time went on, it became apparent that contractor ownership should be expanded to encourage commercialization, so shortly before his death in 1963, President Kennedy issued a Presidential Memorandum which also required the contractor to license others if “effective steps” weren’t being made to develop government-funded inventions to “the point of practical application” (emphasis added).
President Nixon expanded on the Kennedy policy in 1971, adding that if the invention was not being commercialized, the government would compel that it be licensed “on terms that are reasonable under the circumstances.” (emphasis added).
Note that the underscored terms were associated with successful development and terms of the license, not with a product’s price.
Bayh-Dole adopted many of these terms with their original meaning. Section 203 says that the agency funding the research can require the contractor (typically an academic organization) to license others “upon terms that are reasonable under the circumstances” or can issue licenses itself if the contractor refuses in four specific situations.
Three of the four triggers apply to the “contractor, assignee (at the time most universities didn’t have tech transfer offices and relied on patent management entities like University Patents, Inc. or Research Corp to license their inventions) or the licensee. However, the first trigger– which is the subject of the debate—only applies to the contractor or assignee, not the licensee. This distinction is critical.
Here’s the wording for Sec. 203(a)(1):
action is necessary because the contractor or assignee has not taken, or is not expected to take within a reasonable time, effective steps to achieve practical application of the subject invention in such field of use.
At the time, few universities were experienced in patent licensing and many feared that dominant companies would license inventions with the intent of suppressing them. So, this language means that the university is trying to find a licensee to develop the invention, otherwise the government can march in to do so. It also means that the terms of the license are conducive to commercialization, including monitoring the licensee to ensure they are trying to develop the invention in good faith.
One reason why march in rights have not been used is that universities are effectively enforcing their licenses and terminating them if it appears the licensee is missing due diligence milestones without good reason.
The critics first claimed that “reasonable terms” in the preamble referred to a product’s price. However, they clearly apply to the terms of a license, so they moved on. They then seized on the definition of “practical application” in the law, which says that the invention is being utilized and its benefits are “available to the public on reasonable terms.”
While the phrase can seem ambiguous taken out of context, it was used in march-in rights provisions referring to commercial availability or terms of a license, not price. In the first trigger, since a university is not developing the product and has no authority to set its price, the language clearly refers to the license.
Thus, every attempt to invoke this trigger to march in because someone didn’t like how a product is priced has been rejected. Despite considerable political pressure, most of the dismissals were made under the Obama Administration.
The recently-issued “Unleashing American Innovation” draft green paper developed under the leadership of Commerce Under Secretary Walter Copan, charged with overseeing Bayh-Dole, reviewed the issue. It again confirmed that this march-in trigger is keyed to the terms of the license and not to the cost of a product. A clarifying regulation is proposed to:
Define the circumstances under which the government may exercise march-in rights consistent with the uses of march-in specified in statute and not as a regulatory mechanism for the Federal Government to control the market price of goods and services.
This has thrown the critics into a tizzy. So, they’ve come up with a new twist. At the ITIF briefing, they asserted that in Bayh-Dole’s policy and objectives it lists the need to “protect the public against nonuse or unreasonable use of inventions.” Thus, the government can march in if a drug is too expensive.
I commented that you can’t take a word here or there out of a statute and throw the whole thing on its head. When we were writing Bayh-Dole, it wasn’t the DaVinci Code. We weren’t leaving hidden messages behind us. A law must be considered in the context of its times. Our goal was that, whenever possible, federally funded inventions are being brought to the marketplace.
The Threat is Real
That everyone involved in passing Bayh-Dole, along with both Republican and Democratic administrations, has unanimously rejected the idea that the law allows the government to set product prices would seem to be enough to end the debate. But still, the critics press on.
There has only been one public meeting to consider a march-in petition. I contacted Senator Bayh when it was scheduled at NIH in 2004 and asked if he would appear because of the serious threat it posed to the law. He did, and spelled out how the law works, and that commercialization, not price control, is its intent. He added that if we meant for the government to march in to set prices, we would have provided statutory guidance for doing so.
He cautioned that changes in law must be made through the legislative process. It can’t be done through torturing the words into an entirely different meaning than Congress intended. So, before Bayh-Dole can be used for controlling the price of a successfully developed product, it must be amended, including defining in statute what constitutes a “reasonable price.”
Hopefully, that will never happen. If it does, the result won’t be a golden age of cheap drugs, but a return to the days when our public and private sectors didn’t cooperate. That will be a disaster for those suffering the ravages of disease—and a death knell for the brief period of American leadership in the life sciences. But it will provoke some big smiles in China.