Recoupment Efforts Threaten Federal Research

Encouraged by Congress to patent inventions, academic researchers now face a drive by government to recover royalty income.

In recent years, members of Congress and health advocates have proposed legislative “recoupment measures” that would inappropriately and unfairly place the onus for the pricing and affordability of therapeutic drugs and biologics on academic and other nonprofit research institutions by imposing levies on their royalty income streams. There are at least three compelling reasons why such efforts are problematic and should be opposed. First, these proposals rest on the unfounded assumption of a causal relationship between industry pricing policies and academic institutions’ receipt of royalty streams from successful licensing and commercialization of intellectual property derived from federally funded research. Second, such proposals imply that current federal science policy neither seeks nor achieves a satisfactory “return on investment” in the form of widespread public health benefits, thereby contradicting the most compelling arguments for public funding of scientific research. Third, there is no reason to believe that once implemented, such approaches, now directed at certain “blockbuster” drugs whose origins may be traced, often circuitously, to National Institutes of Health (NIH)-funded research, would not be applied more broadly to other commercial products, both within and outside biomedicine, that yield patent income to research institutions.

Proposals to use federal research funding and patent law to leverage drug pricing go back more than a decade. More recently, in December 2000, Congress attached report language to appropriations legislation funding NIH, noting that: “The conferees have been made aware of the public interest in securing an appropriate return on the NIH investment in basic research. The conferees are also aware of the mounting concern over the cost to patients of therapeutic drugs.” Congress instructed NIH to list all Food and Drug Administration (FDA)-approved drugs with annual sales exceeding $500 million that were developed with NIH support. It further directed NIH to prepare a plan to ensure that “taxpayer’s interests” are protected.

According to NIH’s report, released the following year, 47 FDA-approved therapeutic drugs under patent generated U.S. sales of more than $500 million annually, but only four of them were determined to have been derived directly from patents generated by NIH-funded research. Although NIH-funded research in the past two decades has generated thousands of patents held by universities and other nonprofit institutions, and some of this research might have contributed to the science behind the development of many of these 47 drugs, NIH complied with the language of the directive as required and confined its report to a reaffirmation of the principles supporting technology transfer and a commitment to improve its systems for the (mandated) reporting of new inventions by research awardees. Of course, additional “eligible” drugs might appear at any time, especially in response to the scientific efflorescence stimulated by the doubling of the NIH budget over the past five years.

The conference language reflected a compromise to an amendment introduced by Sen. Ron Wyden (D-Oreg.) and proposals by the late Senator Paul Wellstone and Rep. Bernie Sanders (I-Vt.) relating to “reasonable pricing” of pharmaceuticals. Senator Wyden’s amendment, which was tabled, required, “as a condition of receiving a grant or contract from the National Institutes of Health,” assurance from an academic institution or other entity to transfer to the NIH director a percentage of funds made available from licenses or sales of a broad range of pharmaceuticals. The amendment would have applied to “any pharmaceutical, pharmaceutical compound, or drug delivery mechanism (including biologics and vaccines) approved by the Food and Drug Administration” that used results from a research award and met the $500 million threshold. It was rationalized as a “payback” of the original NIH investment.

These concerns appeared to resonate in Congress. Sen. Tom Harkin (D-Ia.), a stalwart supporter of NIH funding and then chairman of the Senate NIH appropriations subcommittee, noted that the recently approved anti-leukemia drug Gleevec, which was derived in part from federally funded research, will cost patients between $2,000 and $3,000 a month. He concluded that “we need to figure . . . how to get some of the money to come back to NIH.” The administration at least briefly echoed these concerns, when Department of Health and Human Services (DHHS) Secretary Tommy Thompson stated that NIH should recoup a portion of the proceeds from pharmaceuticals it helps develop, and that the money could be used for a prescription drug­purchasing program. Thompson never reiterated this proposal, although Rep. Rahm Emanuel (D-Ill.) and other Democrats unsuccessfully introduced similar recoupment mechanisms during debate on the Medicare prescription drug benefit bill enacted in 2003. Wyden, for his part, has continued to focus on this issue, most recently demanding another NIH report on steps the agency takes to ensure the availability and affordability of products developed with federal resources. NIH’s release of this report is pending.

A General Accounting Office (GAO) report, NIH-Private Sector Partnership in the Development of Taxol, released June 6, 2003, criticized NIH for not ensuring a reasonable commercial price from the manufacturer of the cancer drug Taxol and for failing to negotiate a larger royalty on its sales. According to the report, worldwide sales of Taxol from 1993 to 2002 exceeded $9 billion, of which NIH received royalties at a rate of one-half percent ($35 million). In response to a draft of the report, NIH argued that its negotiating position was greatly limited because it did not hold a patent on Taxol. Moreover, NIH believes it acted to get a promising compound into production and therapeutic application as expeditiously as possible. Senator Wyden, who initiated the GAO study, opined that NIH does not appropriately manage the technologies it helps to spawn: “[T]his report proves that NIH does not understand that as part of its mandate to get drugs to market quickly, it must effectively move to make sure that patients can afford those products. They should also work to get taxpayers a square deal for their investment.”

A long campaign

These proposals and the report are but the latest in a series of congressional reactions to the prices of pharmaceuticals arguably derived in part from publicly funded research. An earlier effort, the reasonable-pricing clause adopted by NIH in 1989, targeted industry partnerships with NIH. The clause, which applied to exclusive licenses on intellectual property arising from these collaborations (and to certain other licensing arrangements for NIH-owned patents), recommended that there be a “reasonable relationship” between the pricing of the licensed product, the level of public investment in the product, and the health and safety needs of the public. The clause was reportedly implemented to address political concern over the cost of the HIV/AIDS drug AZT. Shortly after the appointment of Harold Varmus as NIH director in 1994, the agency reviewed the clause’s impact on its agreements, and Varmus, concluding that the clause “has driven industry away from potentially beneficial collaborations,” rescinded it in 1995. The number of NIH Cooperative Research and Development Agreements signed with industry nearly tripled in the following year (from 32 to 87) and climbed fourfold in subsequent years.

Other attempts to constrain the prices of therapeutics have sought to work within existing legislation, including the provisions of the 1980 Bayh-Dole Act under which funding agencies can “march in” and take title to property rights originally ceded to a contractor or grantee. Most recently, in January 2004, a citizens’ group petitioned DHHS and NIH to exercise march-in rights and compel licensing to third parties of the patented HIV drug Norvir (ritonavir) after Abbott Laboratories abruptly raised the price of the drug more than 400 percent. Many AIDS patients and advocates were understandably irate, given that the drug is most frequently used as a “metabolic booster” with other combination antiretroviral drug therapies, which just so happen to compete with Abbott’s own, newer antiretroviral cocktail. Thus, one effect of the price hike was to force an increase in the costs of the competitive regimens. The petitioners, Essential Inventions, Inc., argued that the price hike is contrary to the requirements under Bayh-Dole to make an invention available to the public on reasonable terms and is also to the detriment of overriding public health interest. A related antitrust complaint has also been filed with the Federal Trade Commission.

The various proposals for recoupment will do nothing to mitigate the long-term problems of drug cost, affordability, and availability.

Although no university research laboratory was involved in the development of Norvir, and although most legal experts do not support the assertions of the petition, the academic community has followed the case closely, concerned that invocation of the federal march-in provision could create a precedent for using Bayh-Dole to regulate drug pricing. It is noteworthy that since the passage of Bayh-Dole, no federal agency has exercised march-in rights, and indeed, NIH had earlier asserted in rejecting another such petition (in the CellPro case) that it was “wary” of exercising its march-in rights to influence the marketplace. The requirement to make federally funded inventions available to the public on reasonable terms is generally interpreted by technology transfer officials and attorneys, including the authors of the Bayh-Dole Act, as preventing a contractor or grantee from “sitting on” an invention or otherwise not being diligent in commercializing a technology. The provision was not intended, according to the bill’s authors, to affect the market price of a resulting technology.

Frustration over the cost of high-profile pharmaceuticals may be aggravated by knowledge that about 75 percent of the papers cited in pharmaceutical patent applications are from publicly funded research. However, this literature typically describes advancements in basic scientific knowledge and enabling technologies, not discoveries directly connected to or embodied in the pharmaceutical compound or method. Drug affordability and availability have become explosive political issues both here and in third-world nations ravaged by AIDS and other treatable infectious diseases. Yet, royalties and other licensing expenses are but a small part of drug development costs and an inconsequential fraction of total sales revenues, and to our knowledge no convincing relationship between a licensing fee or royalty payment and the market price of a pharmaceutical has ever been demonstrated. Moreover, federal intervention to take title to inventions or to issue compulsory licenses, although at first glance perhaps appealing in particular high-profile circumstances, would create uncertainty and anxiety in the business environment for drug development and most likely exert a chilling effect on technology transfer agreements between industry and universities conducting federally funded biomedical research.

Social returns

The majority of the NIH’s sponsored research is performed by academic institutions and is published and broadly disseminated without monetary returns to the institutions or to NIH. From the perspective of the academic community, legislative or administrative proposals such as those described above threaten to confound a fundamental premise of federal science and technology policy: the requirement that awardee institutions not only disseminate useful knowledge but also transfer technology created from federally funded research to the private sector through licensing arrangements or other agreements. It is through these processes of knowledge dissemination and technology transfer that the public receives its rich return on the federal investment in basic science.

The Bayh-Dole Act was a response to concerns of the 1970s that many potential research products were “lying fallow” because of uncertainty about or difficulty in negotiating intellectual property rights with the several sponsoring federal agencies and the lack of sufficient incentive in academic institutions for commercializing their sponsored-research inventions. Since its enactment, patents issued to universities and other nonprofit institutions have risen from fewer than 250 in 1980 to more than 3,600 issued in 2002. The significance of the Bayh-Dole Act was that it obligated federal research awardees to pursue the movement of their research inventions into products and practice, and it removed the federal government as a party to negotiations. The act thereby encouraged commercial entities and venture capitalists to negotiate licensing arrangements with academic institutions without fear of federal intercession.

It is worth recalling that the Bayh-Dole Act’s key objective, as stated in its preamble, is to encourage the dissemination and utilization of technology, not to promote commercial returns on federal research investments either to agencies or academic institutions. Moreover, although the act encourages financial reward to inventors, it requires institutions to reinvest in their research programs whatever licensing income they receive. Although the number of patents issued to universities and other nonprofit institutions has increased dramatically, the great majority do not generate revenues sufficient to recover patenting expenses. Proposals that would recoup the public’s research investments by taxing awardee institutions’ royalty streams would run contrary to the express intentions of Bayh-Dole and represent a major departure from prevailing federal policy. Perhaps most troubling, the entire effort appears to be premised on faulty economics.

NIH and other federally funded scientific research generate a substantial societal return on investment. Indeed, the fundamental rationale of federal science policy since the end of World War II has been to invest tax dollars in basic scientific research to promote societal returns of improved health, strengthened national security, and enhanced economic performance. This has been the central argument advanced in Congress for funding NIH and other science agencies and has been echoed by the advocacy community.

Economic research first demonstrated in the 1950s that more than half of annual growth in U.S. gross national product was attributable to new technology and new knowledge, and later studies have confirmed the relationship of academic research with industrial innovation and prosperity. Estimates of a social rate of return on federally funded research have been reported between 25 percent and 50 percent annually. Improvements to health from medical and other research have been documented in studies of the role of academic research in the development of specific products or therapies. Declining rates of disability and generally improved quality of life indicators among older Americans directly correlate with innovations from biomedical research and have welcome implications for the financial burden of care placed on families and federal programs such as Medicare.

The generative effects of academic research on the electronic and computer science industries, as seen in Silicon Valley, Boston’s Route 128 corridor, and North Carolina’s Research Triangle, are recognized worldwide. Similarly, federal investments in biomedical research spawned the biotechnology industry and are reflected today in the concentration of biotechnology firms near leading biomedical research centers, which is attributable to interactions with leading academic scientists, ideas, and pools of university-trained personnel. Although comparatively little, if any, of the commercial value of these enterprises remunerates universities directly, these industries do provide the foundation for job creation, economic growth, and improved quality of life that are avidly sought and highly prized by local communities, states, and members of Congress. Witness the recent enactment of NIH’s revised Institutional Development Award (IDeA) program, expressly designed to jump-start the ability of “have-not” states to compete more successfully for NIH awards. Legislators advocating this program appear to have little doubt about the rich socioeconomic returns that can accrue from the federal investment in biomedical research.

Other sectors of the economy also owe their existence to academic research inventions, and proposed recoupment schemes could logically be extended beyond biomedicine to all research fields. Indeed, if “return on investment” of federal research funds, or recovery of outlays, is the purported logic behind these recoupment initiatives, there is no reason why these other sources should not become seductive targets for tapping over time. Finally, the various recoupment proposals would tax one of the rare streams of unrestricted university revenues that can be used as seed money for bold research initiatives, to help pay for the increasingly costly infrastructure that is necessary to be competitive in research, and to offset some of the significant cost-sharing that federal research funding presently requires.

The nation relies almost entirely on the private sector to accomplish development, testing, and production of new therapeutics, as well as vaccines, medical devices, and related products. It relies on academic institutions, teaching hospitals, and governmental institutions to perform most publicly funded research. The predisposition of intellectual property rights provided by the Bayh-Dole Act has become an important and demonstrably successful component of the U.S. system of transferring knowledge and technology from academic laboratories to industry. As such, it is part of a system of innovation and development that has served the nation well and is admired and increasingly emulated, by the rest of the world. The various proposals for recoupment will do nothing to mitigate the long-term problems of drug cost, affordability, and availability, but will threaten a robust system of technology transfer that has brought immense benefit to the U.S. public and generated a splendid sustained return on the federal investment in basic science.

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Cite this Article

Korn, David, and Stephen Heinig. “Recoupment Efforts Threaten Federal Research.” Issues in Science and Technology 20, no. 4 (Summer 2004).

Vol. XX, No. 4, Summer 2004