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Pr
epared for Members and Committees of Congress
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ȱ
ž––Š›¢ȱ
Public interest in approaches that might provide prescription drugs at lower cost, particularly for
the elderly, has rekindled discussion over the role the federal government plays in facilitating the
creation of new pharmaceuticals for the marketplace. In the current debate, some argue that the
government’s financial, scientific, and/or clinical support of health-related research and
development (R&D) entitles the public to commensurate considerations in the prices charged for
any resulting drugs. Others view government intervention in price decisions based upon initial
federal funding as contrary to a long-term trend of government promotion of innovation,
technological advancement, and the commercialization of technology by the business community
leading to new products and processes for the marketplace.
The government traditionally funds R&D to meet the mission requirements of the federal
departments and agencies. It also supports work in areas where there is an identified need for
research, primarily basic research, not being performed in the private sector. Over the past 25 or
more years, congressional initiatives have expanded the government’s role to include the
promotion of technological innovation to meet other national needs, particularly the economic
growth that flows from the use of new and improved goods and services. Various laws facilitate
commercialization of federally-funded R&D through technology transfer, cooperative R&D, and
intellectual property rights. The legislated incentives are intended to encourage additional private
sector investments often necessary to further develop marketable products. The current approach
to technology development attempts to balance the public sector’s interest in new and improved
technologies with concerns over providing companies valuable benefits without adequate
accountability or compensation.
Some question whether or not the current balance is appropriate, particularly with respect to drug
discovery. The particular nature and expense of health-related R&D have focused attention on the
manner in which the National Institutes of Health (NIH) undertakes research activities. Critics
maintain that any need for technology development incentives in the pharmaceutical and/or
biotechnology sectors is mitigated by industry access to government-supported work at no cost,
monopoly power through patent protection, and additional regulatory and tax advantages such as
those conveyed through the Hatch-Waxman Act and the Orphan Drug Act. Supporters of the
existing approach argue that these incentives are precisely what are required and have given rise
to robust pharmaceutical and biotechnology industries. It remains to be seen whether or not
decisions related to federal involvement in issues related to pharmaceutical R&D will change the
nature of the current approach to government-industry-university cooperation. This report will be
updated as events warrant.
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ÂŽÂŽ›Š•ȱÇǰȱ›žÂȱ’œŒ˜ŸŽ›¢ǰȱŠ—Âȱ›’Œ’—Âȱ
ȱ
˜—ÂŽ—Âœȱ
Overview ......................................................................................................................................... 1
Government Support for R&D ........................................................................................................ 2
Industrial R&D ................................................................................................................................ 4
Patents ............................................................................................................................................. 5
Legislative Initiatives ...................................................................................................................... 8
The Stevenson-Wydler Technology Innovation Act.................................................................. 9
The Bayh-Dole Act ................................................................................................................. 10
NIH-University-Industry Collaboration: The Results ....................................................................11
Intramural Research ................................................................................................................ 12
Policies.............................................................................................................................. 12
Fair Pricing Clause............................................................................................................ 14
Extramural Research ............................................................................................................... 15
Issues and Options......................................................................................................................... 19
Pricing Decisions and Recoupment......................................................................................... 19
Research Tools ........................................................................................................................ 24
Government Rights: Royalty Free Licenses and Reporting Requirements............................. 26
Concluding Observations .............................................................................................................. 27
’ž›Žœȱ
Figure 1. NIH CRADAs ................................................................................................................ 16
˜—ŠŒÂœȱ
Author Contact Information .......................................................................................................... 28
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ÂŽÂŽ›Š•ȱÇǰȱ›žÂȱ’œŒ˜ŸŽ›¢ǰȱŠ—Âȱ›’Œ’—Âȱ
ȱ
ŸŽ›Ÿ’Ž ȱ
Public interest in approaches that might provide prescription drugs at lower cost, particularly for
the elderly, has rekindled discussion over the role the federal government plays in facilitating the
development and marketing of new pharmaceuticals. In the current debate, some argue that the
government’s financial, research, and/or clinical support of health-related R&D entitles the public
to commensurate considerations in the prices charged for any resulting drugs. Others view
government intervention in price decisions based upon initial federal funding of basic research as
contrary to a long-term trend of government promotion of innovation, technological
advancement, and the commercialization of technology by the business community leading to
new products and processes for the marketplace.
The federal involvement in R&D stems, in part, from the understanding that technological
advancement is a key element in economic growth. Many of the innovations that stimulate
technological progress are rooted in basic research. However, because the returns to basic
research accrue to society as a whole and often can not be captured by the firm performing the
work, there tends to be underinvestment in these activities. Thus, the government typically funds
fundamental research as a “public good.†Concurrently, the government has an interest in
ensuring that the results of this enterprise are applied to generate new goods and services to meet
the demands of citizens. The benefits of research emerge when innovations are available in the
marketplace. In recognition of this, the Congress has passed legislation to facilitate the
commercialization of new technology.
Government policies implemented over the past 25 or more years include incentives to increase
private sector investment in technology development through technology transfer, cooperative
R&D, and intellectual property rights. The intent is to encourage academia and industry to
commit the necessary, and often substantial, resources required to take the results of federally-
supported R&D and generate products or processes to meet market demand. Utilizing patent
ownership and facilitating collaborative government-university-industry efforts, the current
legislative approach attempts to balance the public’s need for new technologies and techniques
with concerns over providing companies valuable benefits without adequate accountability or
compensation. The reservation of certain rights for the government that permit federal
intervention in specific circumstances associated with health and safety concerns are intended to
act as safeguards for the public.
Some Members of Congress have questioned the adequacy of the current balance between public
and private needs. The particular nature of health-related research and development, and the
substantial federal investment in this area (over $29 billion was appropriated to NIH for medical
research in FY2008),1 has led critics of the current system to argue that the necessity of incentives
is mitigated by such factors as free access to the results of federally funded work, by the
monopoly power permitted by patent protection, and by other regulatory and tax advantages such
as those conveyed by the Hatch-Waxman Act or the Orphan Drug Act. Therefore, some maintain,
a more direct payback should be required including recoupment of public sector financial support
or government involvement in price decisions. Others counter that these inducements have played
an important role in making the U.S. pharmaceutical and biotechnology industries innovative,
1 See http://www.officeofbudget.od.nih.gov/UI/fy2008elws.html.
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŗȱ
ÂŽÂŽ›Š•ȱÇǰȱ›žÂȱ’œŒ˜ŸŽ›¢ǰȱŠ—Âȱ›’Œ’—Âȱ
ȱ
productive, and competitive. They point out that while the government contributed to
development of the Internet, as well as to the telecommunications, semiconductor, and aviation
industries, no one is advocating federal involvement in cost considerations in these areas as they
are in the health field.
This paper explores the reasons behind government funding of research and development and
subsequent efforts to facilitate private sector commercialization of the results of such work. It
does not address issues associated with drug costs or pricing. Instead, the report looks at the
manner in which the National Institutes of Health (NIH) supports research to encourage the
development of new pharmaceuticals and therapeutics, particularly through cooperative activities
among academia, industry, and government. The goal is to offer insights concerning the
discussion on whether or not use of the results of the federal R&D enterprise warrants
government input into price decisions made by the private sector. Concerns surrounding
innovation in health-related areas will be explored within the broader context of the government’s
role in facilitating technological progress.
˜ŸŽ›—–Ž—Âȱž™™˜›Âȱ˜›ȱÇȱ
The U.S. government spent almost $138.0 billion for research and development in FY2008
(according to the National Science Foundation).2 Traditionally, the government funds R&D to
meet the mission requirements of the federal departments and agencies (e.g., defense, public
health, environmental quality). It also supports work in areas where there is an identified need for
research, primarily basic research, not being performed in the private sector. Federal funding
reflects a consensus that while basic research is the foundation for many innovations, the rate of
return to society as a whole generated by investments in this activity is significantly larger than
the benefits that can be captured by any one firm performing it.3 “Government support of basic
scientific research represents an example of the government furnishing a good, scientific
knowledge, that improves social well-being ... a good that cannot be sold because those who do
not pay receive the benefits anyway.â€4 Estimates of a social rate of return on R&D spending over
twice that of the rate of return to the inventor of the product often leads to underinvestment by the
business community.5 In addition, incentives for private sector financial commitments are
dampened by the fact that spending for R&D runs a high risk of failure. The rewards of basic
research tend to be long-term, sometimes are not marketable, and are not always evident.
Congressional initiatives have expanded the government’s role in R&D to include the promotion
of technological innovation to meet other national needs, particularly the economic growth that
flows from the commercialization and use of new products and production processes by the
2 National Science Foundation, Federal R&D Funding by Budget Function: Fiscal Years 2006-2009, available at
http://www.nsf.gov/statistics/nsf08315/pdf/tab2.pdf.
3 Edwin Mansfield, “Social Returns From R&D: Findings, Methods, and Limitations,†Research/Technology
Management, November-December 1991, 24. See also: Charles I. Jones and John C. Williams, “Measuring the Social
Return to R&D,†Quarterly Journal of Economics, November 1998, 1119 and Richard R. Nelson and Paul M. Romer,
“Science, Economic Growth, and Public Policy,†in Bruce R. Smith and Claude E. Barfield, eds. Technology, R&D,
and the Economy, (Washington, The Brookings Institution and the American Enterprise Institute, Washington, 1996),
57.
4 Baruch Brody, “Public Goods and Fair Prices,†Hastings Center Report, March-April 1996, 8.
5 For a list of relevant research in this area see Council of Economic Advisors. Supporting Research and Development
to Promote Economic Growth: The Federal Government’s Role, (October 1995), 6-7.
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
Řȱ
ÂŽÂŽ›Š•ȱÇǰȱ›žÂȱ’œŒ˜ŸŽ›¢ǰȱŠ—Âȱ›’Œ’—Âȱ
ȱ
private sector.6 Technological advancement is an important factor in the Nation’s economic
growth. Experts widely accept that technical progress is responsible for up to one-half the growth
of the U.S. economy and is one principal driving force for increases in our standard of living.7
Historically, industrial expansion was based on the use of technology to exploit natural resources.
Today, such growth tends to be founded on scientific discoveries and engineering knowledge
(e.g., biomedical applications, electronics) and is even more dependent than before on the
development and use of technology. Technology can help drive the economy because it
contributes to the creation of new goods and services, new industries, new jobs, and new capital.
It can expand the range of services offered and extend the geographic distribution of those
services. The application of technologies also can contribute to the resolution of those national
problems that are amenable to technological solutions.
Technological progress is achieved through innovation, a process by which industry provides new
and improved products, manufacturing processes, and services. Research and development are
important to this technological advancement in many ways. R&D contributes to economic growth
by its impact on productivity. For more than two decades various experts studying the effects of
research and development have found that productivity growth in an industry or a firm is
generally directly and significantly related to the amount spent previously on R&D in that
industry or company.8 Analysts estimate that one-half of productivity increases (output per
person) are the result of investments in research and development.9 Others argue that innovations
arising from R&D are the most important ones.10 Profound changes in our society have been
brought about by advances in research, resulting in new products and processes in the areas of
medicine, semiconductors, computers, and materials, to name just a few.
To leverage the substantial federal investment in R&D, government policies and practices provide
incentives for private sector utilization of the results of this endeavor to make products and
processes for the marketplace. Legislative initiatives (discussed below) facilitate the
commercialization of government-funded research and development through mechanisms that
encourage government-industry-university collaboration. Joint federal efforts with the private
sector offer a means to get government-generated research and technical know-how to the
business community where it can be developed, commercialized and made available for use to
meet the needs of government agencies or to stimulate economic growth vital to the nation’s
welfare and security. In addition, cooperative ventures among government institutions,
companies, and academia allow for R&D to cross traditional boundaries of knowledge and
6 For information on relevant legislation see CRS Report RL33528, Industrial Competitiveness and Technological
Advancement: Debate Over Government Policy, by Wendy H. Schacht.
7 Gregory Tassey, The Economics of R&D Policy (Connecticut: Quorum Books, 1997), 54. See also Edwin Mansfield,
“Intellectual Property Rights, Technological Change, and Economic Growth,†in: Intellectual Property Rights and
Capital Formation in the Next Decade, eds. Charls E. Walker and Mark A. Bloomfield (New York: University Press of
America, 1988), 5.
8 Alden S. Bean, “Why Some R&D Organizations Are More Productive Than Others,†Research/Technology
Management, January-February 1995, 26. See also: Edwin Mansfield, “How Economists See R&D,†Harvard Business
Review, November-December 1981, 98.
9 Zvi Griliches, “The Search for R&D Spillovers,†Scandinavian Journal of Economics, 1992, 29-47. Cited in: Council
of Economic Advisors, Supporting Research and Development to Promote Economic Growth: The Federal
Government’s Role, October, 1995, 1.
10 Ralph Landau, “Technology, Economics, and Public Policy,†in: Technology and Economic Policy, eds. Ralph
Landau and Dale W. Jorgenson (Cambridge: Ballinger Publishing Co. 1986), 5.
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
řȱ
ÂŽÂŽ›Š•ȱÇǰȱ›žÂȱ’œŒ˜ŸŽ›¢ǰȱŠ—Âȱ›’Œ’—Âȱ
ȱ
experience. Ideas, expertise, and know-how are combined, facilitating a mix that may lead to
more creativity and invention.
—žœÂ›’Š•ȱÇȱ
Industry also has an interest in cooperative efforts with government and/or academia. As new
technologies are generated and their impact more widespread, industry has had to commit an
increasing amount of resources to the performance of R&D. Concurrently, shortened product
cycles have led to expanded demands for new technology and higher costs for technology
development as reflected in the 53.3% increase in company support for such work between 1996
and 2006 (using constant 2000 dollars).11 The rising expense of research and development has
been juxtaposed with increasing international competition and shareholder demands for short-
term returns. Thus, partnerships are a result of “today’s complex technologies, intense
competition, and information overload [that] have required new approaches†beyond the funding
of scientists to pursue their own interests.12 Cooperative R&D permits work to be done which is
too expensive for one company to fund or of marginal value for any given firm.
Companies have developed alternative means of acquiring new technologies while controlling the
requisite costs. External alliances allow access to innovations without the expense and risks of
generating them independently. Thus, collaboration permits firms to acquire the basic research
they need from outside organizations. Experts argue that, for certain industries, the more
extensive a firm’s emphasis on external sources of technical knowledge, the greater its total factor
productivity growth.13 A survey undertaken by PriceWaterhouseCoopers found “businesses that
outsource [their R&D] are growing faster, larger, and more profitable than those that do not.â€14
The perceived benefits to this approach are reflected in increasing company support for external
R&D. In 2005, companies funded $11.7 billion in outside research and development, 5.7% of the
total firm financed R&D, up from 3.7% in 1993.15 In the early 1980s, just after the passage of the
Bayh-Dole Act, less than 2% of industry funding was directed at extramural research.16
It should be noted that joint ventures are not always successful due, in part, to failed concepts,
cultural differences between companies or organizations, managerial and financial issues, or
conflicting goals and objectives. However, studies by PriceWaterhouseCoopers identify numerous
benefits that have resulted from partnering including increased sales of existing products;
improved competitive position; increased productivity; development of more new products or
business lines; and better operations or technology. Of the fastest growing U.S. firms, 56% have
partnered in the past three years “resulting in more innovative products, more profit
opportunities—and significantly higher growth rates.â€17 An earlier survey undertaken by the
11 National Science Foundation, Science and Engineering Indicators, 2008, Appendix table 4-16, available at
http://www.nsf.gov/statistics/seind08/append/c4/at04-16.pdf.
12 John Carey, “What Price Science?†Business Week, 26 May, 1997, 168.
13 Alden S. Bean, “Why Some R&D Organizations Are More Productive Than Others,†Research/Technology
Management, January-February 1995, 26.
14 PriceWaterhouseCoopers, Trendsetter Newsletter, March 13, 2000, available at http://www.barometersurveys.com.
15 Science and Engineering Indicators, 2008, Appendix table 4-50, available at http://www.nsf.gov/statistics/seind08/
append/c4/at04-50.pdf.
16 John E. Jankowski, “R&D: Foundation for Innovation,†Research/Technology Management, March-April 1998, 17.
17 PriceWaterhouseCoopers, “Partnerships Have Big Payoffs for Fast-Growth Companies,†Trendsetter Barometer,
(continued...)
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
Śȱ
ÂŽÂŽ›Š•ȱÇǰȱ›žÂȱ’œŒ˜ŸŽ›¢ǰȱŠ—Âȱ›’Œ’—Âȱ
ȱ
company concluded that “collaborative growth firms are spending more on new product
development while focusing more on bigger winners and on innovation ... [and] ... are not
reluctant to go outside their organization to work with others in the development of their
innovative new products.â€18
This trend is reflected in the pharmaceutical industry. There are an increasing number of
alliances, particularly between large businesses and small biotech companies.19 According to one
study, “nearly a third of new pharmaceutical products are now developed through alliances.â€20
Other research shows that “drugs developed in alliances are more likely to succeed in clinical
trials.â€21 It appears that “merging technological knowledge and skills from different companies
improves the innovation process.â€22
In addition to joint projects among companies, industry-university cooperation in R&D provides
another important means to facilitate technological innovation. Traditionally, much of the basic
research integral to certain technological advancement is funded by the government but
performed in academia. Companies are increasingly looking toward this community to provide
the underlying knowledge necessary for the development of commercial products without
financing the large overhead costs associated with in-house research. A study by the late
Professor Edwin Mansfield demonstrated that “over 10% of the new products and processes
introduced in [the 8 industries explored] could not have been developed (without substantial
delay) in the absence of recent academic research.â€23 According to David Blumenthal at the
Harvard School of Medicine, by the mid to late 1990s, over 90% of life science companies in the
United States had a cooperative relationship with universities.24
ŠÂŽ—Âœȱ
Much of this cooperative work, whether government-industry, government-university, industry-
university, or industry-industry, is facilitated by the patent system. Patents protect the inventor’s
investments in generating the knowledge that is the basis for innovation. The U.S. Constitution
states that patents are intended to promote “the progress of science and the useful arts.†As
(...continued)
August 26, 2002, available at http://www.barometersurveys.com.
18 Coopers and Lybrand, L.L.P., “Partnerships Pay off for Growth Companies,†Trend Setter Barometer, 6 January,
1997, available at http://www/barometersurveys.com.
19 Patricia M. Danzon, Sean Nicholson, Nuno Sousa Pereira, Productivity in Pharmaceutical-Biotechnology R&D: The
Role of Experience and Alliances, National Bureau of Economic Research, Working Paper 9615, April 2003, 5
available at http://www.nber.org/papers. See also, Nadine Roijakkers and John Hagedoorn, Inter-firm R&D Partnering
in Pharmaceutical Biotechnology since 1975: Trends, Patterns, and Networks, Research Policy, April 2006, 444.
20 Jon Hess and Elio Evangelista, Pharma-Biotech Alliances, Contract Pharma, September 2003, available at
http://www.contractpharma.com/articles/2003/09/pharmabiotech-alliances.
21 Patricia M. Danzon, Sean Nicholson, Nuno Sousa Pereira, Productivity in Pharmaceutical-Biotechnology R&D: The
Role of Experience and Alliances, Journal of Health Economics 24, 2005, 319.
22 Francis Bidault and Thomas Cummings, “Innovating Through Alliances: Expectations and Limitations,†R&D
Management, January 1994, 33.
23 Edwin Mansfield, “Academic Research and Industrial Innovation: An Update of Empirical Findings,†Research
Policy 26, 1998, 775.
24 David Blumenthal, “Academic-Industrial Relationships in the Life Sciences,†The New England Journal of
Medicine, December 18, 2003, 2453.
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
śȱ
ÂŽÂŽ›Š•ȱÇǰȱ›žÂȱ’œŒ˜ŸŽ›¢ǰȱŠ—Âȱ›’Œ’—Âȱ
ȱ
research and development become more expensive, ownership of title to inventions has been used
by the federal government as a means to foster increased private sector activities to generate new
and improved products and processes for the marketplace. In an academic setting, the possession
of title is expected to provide motivation for the university to license the technology to industry
for further refinement and application in expectation of royalty payments.
The patent system is grounded in Article I, Section 8, Clause 8 of the Constitution and is intended
to stimulate new discoveries and their reduction to practice, commonly known as innovation. The
grant of a patent provides the inventor with a means to capture returns to his invention through
exclusive rights on its practice for 20 years from date of filing. This is designed to encourage
those investments necessary to further develop an idea and generate a marketable technology. At
the same time, the process of obtaining a patent places the concept on which it is based in the
public domain. In return for a time limited monopoly right to specific applications of the
knowledge generated, the inventor must publish the ideas covered in the patent. Proponents argue
that, as a disclosure system, the patent can, and often does, stimulate other firms or individuals to
invent “around†existing patents to provide for parallel technical developments or meet similar
and expanded demands in the marketplace.25
Innovation produces new knowledge. One characteristic of this knowledge is that it is a “public
good,†a good that is not consumed when it is used. This “public good†concept underlies the
U.S. patent system. As Professor John Shoven points out, “The use of an idea or discovery by one
person does not, in most cases, reduce the availability of that information to others.â€26 Therefore
the marginal social cost of the widespread application of that information is near zero because the
stock of knowledge is not depleted. This is why the federal government funds basic research.
“Ordinarily, society maximizes its welfare through not charging for the use of a free good.â€27
However, innovation typically is costly and resource intensive. Patents permit novel concepts or
discoveries to become “property†when reduced to practice and therefore allow for control over
their use. They “create incentives that maximize the difference between the value of the
intellectual property that is created and used and the social cost of its creation.â€28
The patent process is designed to resolve the problem of appropriability. If discoveries were
universally available without a means for the inventor to realize a return on investments, most
commentators are convinced that there would result a “much lower and indeed suboptimal level
of innovation.â€29 Although research is often important to innovation, it appears that, on average, it
constitutes approximately 25% of the cost of commercializing a new technology or technique,
thus requiring the expenditure of a substantial amount of additional resources to bring most
products or processes to the marketplace. The grant of a patent provides the inventor with a
mechanism to capture the returns to his invention through exclusive rights on its practice for 20
25 For more information see CRS Report 97-599, Patents and Innovation: Issues in Patent Reform, and CRS Report 98-
862, R&D Partnerships and Intellectual Property: Implications for U.S. Policy, both by Wendy Schacht.
26 John B. Shoven, “Intellectual Property Rights and Economic Growth,†in eds. Charls Walker and Mark A.
Bloomfield, Intellectual Property Rights and Capital Formation in the Next Decade (New York, University Press of
America, 1988), 46.
27 Robert P. Benko, “Intellectual Property Rights and New Technologies,†in Intellectual Property Rights and Capital
Formation in the Next Decade, 27 [see ].
28 Stanley M. Besen and Leo J. Raskind, “An Introduction to the Law and Economics of Intellectual Property,†Journal
of Economic Perspectives, Winter 1991, 5.
29 Kenneth W. Dam, “The Economic Underpinnings of Patent Law,†Journal of Legal Studies, January 1994, 247.
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
Ŝȱ
ÂŽÂŽ›Š•ȱÇǰȱ›žÂȱ’œŒ˜ŸŽ›¢ǰȱŠ—Âȱ›’Œ’—Âȱ
ȱ
years from date of filing. That is intended to encourage those investments necessary to further
develop an idea and generate a marketable technology.
The utility of patents to companies varies among industrial sectors. Patents are perceived as
critical in the drug and chemical industries. That may reflect the nature of R&D performed in
these sectors, where the results often are relatively easy to reproduce.30 Others have pointed out
that drug patents are more detailed in their claims and therefore easier to defend.31 In contrast,
studies have found that in many other industries the protection offered by patents is diminished
by the ability to invent around the patent and limited by the disclosure of vital information in the
patent itself.32 In the aircraft and semiconductor industries patents have not been the most
successful mechanism for capturing the benefits of investments. Instead, lead time and the
strength of the learning curve were determined to be more important.33 According to one study, in
the semiconductor and related equipment industry, secrecy and lead time were deemed
significantly more important than patents. Similar findings characterize the aerospace and
machine tool industries, among others.34 The degree to which industry perceives patents as
effective has been characterized as “positively correlated with the increase in duplication costs
and time associated with patents.â€35
The patent system has dual policy goals—providing incentives for inventors to invent and
encouraging inventors to disclose technical information.36 Disclosure requirements are factors in
achieving a balance between current and future innovation through the patent process, as are
limitations on scope, novelty mandates, and nonobviousness considerations.37 Patents can give
rise to an environment of competitiveness with multiple sources of innovation, which is viewed
by some experts as the basis for technological progress. This is important because, as Professors
Robert Merges and Richard Nelson found in their studies, in a situation where only “a few
organizations controlled the development of a technology, technical advance appeared
sluggish.â€38
30 Henry Grabowski, “Patents, Innovation and Access to New Pharmaceuticals,†Journal of International Economic
Law, December 2002, 849.
31 Levin, Richard C. and Alvin K Klevorick, Richard R. Nelson, and Sidney G. Winter. Appropriating the Returns for
Industrial Research and Development, Brookings Papers on Economic Activity, 1987, printed in The Economics of
Technical Change, ed. Edwin Mansfield and Elizabeth Mansfield. (Vermont, Edward Elgar Publishing Co., 1993), 255
and 257.
32 Wesley M. Cohen, Richard R. Nelson, and John P. Walsh, Protecting Their Intellectual Assets: Appropriability
Conditions and Why U.S. Manufacturing Firms Patent (or Not), NBER, February 2000, available at
http://www.nber.org/papers/w7552.
33 Appropriating the Returns for Industrial Research and Development, 253.
34 Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not),
Table 1.
35 Appropriating the Returns for Industrial Research and Development, 269.
36 Robert P. Merges, “Commercial Success and Patent Standards: Economic Perspectives on Innovation,†California
Law Review, July 1988, 876.
37 The Economic Underpinnings of Patent Law, 266-267. Scope is determined by the number of claims made in a
patent. Claims are the technical descriptions associated with the invention. In order for an idea to receive a patent, the
law requires that it be “ ... new, useful [novel], and nonobvious to a person of ordinary skill in the art to which the
invention pertains.â€
38 Robert P. Merges and Richard R. Nelson, “On the Complex Economics of Patent Scope,†Columbia Law Review,
May 1990, 908.
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
Åȱ
ÂŽÂŽ›Š•ȱÇǰȱ›žÂȱ’œŒ˜ŸŽ›¢ǰȱŠ—Âȱ›’Œ’—Âȱ
ȱ
The patent system has long been subject to criticism, however. Some observers have asserted that
the patent system is unnecessary due to market forces that already suffice to create an optimal
level of innovation. The desire to obtain a lead time advantage over competitors, as well as the
recognition that technologically backward firms lose out to their rivals, may well provide
sufficient inducement to invent without the need for further incentives.39 Other commentators
believe that the patent system encourages industry concentration and presents a barrier to entry in
some markets.40 Still other observers believe that the patent system too frequently attracts
speculators who prefer to acquire and enforce patents rather than engage in socially productive
activity.41
When analyzing the validity of these competing views, it is important to note the lack of rigorous
analytical methods available for studying the effect of the patent law upon the U.S. economy as a
whole. The relationship between innovation and patent rights remains poorly understood. As a
result, current economic and policy tools do not allow us to calibrate the patent system precisely
in order to produce an optimal level of investment in innovation. Thus, each of the arguments for
and against the patent system remains open to challenge by those who are unpersuaded by their
internal logic.
ÂŽÂ’œ•ŠÂ’ŸŽȱ —’Â’ŠÂ’ŸŽœȱ
Reflecting the importance of cooperative R&D to the government, a series of legislative
provisions use intellectual property rights to foster collaboration between all the parties in the
research and development enterprise leading to the generation of new and improved products and
processes for the marketplace. Both P.L. 96-480, the Stevenson-Wydler Technology Innovation
Act (known as the “Stevenson-Wydler Actâ€),42 as amended, and P.L. 96-517, Amendments to the
Patent and Trademark Act (commonly referred to as the “Bayh-Dole Act†after its two main
sponsors, former Senators Birch Bayh and Robert Dole),43 are the basis for efforts at using patents
and licensing to facilitate cooperative R&D, technology transfer, and the commercialization of
technology supported by the federal government. These laws affect the way the National
Institutes of Health, and other government agencies, interact with the academic community and
industry in the R&D arena. It is in this area where the sometimes competing goals of prescription
drug cost containment and encouragement of technology-based innovations may conflict.
While the result of different legislative histories and concerns, the Stevenson-Wydler Act and the
Bayh-Dole Act were passed to encourage the use of technologies funded by and/or developed by
the federal government in pursuit of the departments’ and agencies’ mission requirements.
However, they address intellectual property issues that arise from different R&D relationships.
The Stevenson-Wydler Act contains provisions concerning assignment of title to inventions
arising from collaborative work between federal laboratories and outside cooperating parties
where no direct federal funding is involved. The Bayh-Dole Act primarily addresses the
39 See Frederic M. Sherer, Industrial Market Structure and Economic Performance (1970), 384-387.
40 See John R. Thomas, “Collusion and Collective Action in the Patent System: A Proposal for Patent Bounties,â€
University of Illinois Law Review (2001), 305.
41 Ibid.
42 15 U.S.C. sec. 3701 and following.
43 35 U.S.C. sec. 200 and following.
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
Şȱ
ÂŽÂŽ›Š•ȱÇǰȱ›žÂȱ’œŒ˜ŸŽ›¢ǰȱŠ—Âȱ›’Œ’—Âȱ
ȱ
distribution of patents resulting from federally-funded research and development performed by
outside organizations and prescribes the licensing of government-owned inventions.44
‘ŽȱÂŽŸŽ—œ˜—Ȭ¢Â•Ž›ȱŽŒ‘—˜•˜Â¢ȱ ——˜ŸŠÂ’˜—ȱŒÂȱ
P.L. 96-480, the Stevenson-Wydler Act, as amended, was enacted to encourage use of
technologies developed in the federal laboratory system. This is to be accomplished by
technology transfer, the process by which technology generated in one organization, in one area,
or for one purpose is applied in another organization, in another area, or for another purpose. In
the defense and space arenas it is often called “spin-off.†The original Act, provided federal
departments and agencies with a mandate to transfer technology as well as established
mechanisms by which to accomplish this goal. P.L. 99-502, the Federal Technology Transfer Act
of 1986 and P.L. 101-189, the FY1990 Department of Defense Authorizations, amended the law
and created cooperative research and development agreements (CRADAs) as a means to
undertake the transfer activity.
A CRADA is a specific legal document (not a procurement contract) that defines the collaborative
venture. It is intended to be developed at the laboratory level, with limited agency review. The
work performed must be consistent with the laboratory’s mission. In pursuing these joint efforts,
the laboratory may accept funds, personnel, services, and property from the collaborating party
and may provide personnel, services, and property to the participating organization. The
government can cover overhead costs incurred in support of the CRADA, but is expressly
prohibited from providing direct funding to the industrial partner.
The act does not specify the dispensation of patents derived from the collaborative work,
allowing agencies to develop their own policies. At the least, the law permits the non-federal
collaborating party the “option to choose an exclusive license for a pre-negotiated field of use for
any such invention under the agreement.†The laboratory director also may negotiate licensing
agreements for related government-owned inventions previously made at that laboratory to
facilitate cooperative ventures.
In all cases, the government retains certain rights, including a “nonexclusive, nontransferable,
irrevocable, paid-up license to practice the invention or have the invention practiced throughout
the world by or on behalf of the Government for research or other Government purposes.†Under
“exceptional circumstances,†the government may exercise its right to require a party, to which it
assigned title or granted exclusive license to an invention, to license the technology to another
organization if it is necessary to address health and safety needs not being addressed; to meet
requirements for public use specified by federal regulation not being met; or if the cooperating
party has not performed its obligations as specified in the agreement.
Preference in determining CRADAs is given to small businesses, companies that will
manufacture in the United States, or foreign firms from countries that permit American
companies to enter into similar arrangements. According to Senate report 99-283 that
44 For a detailed discussion of the legislative provisions of the Stevenson-Wydler Act and the Bayh-Dole Act see CRS
Report RL33527, Technology Transfer: Use of Federally Funded Research and Development; CRS Report RL32076,
The Bayh-Dole Act: Selected Issues in Patent Policy and the Commercialization of Technology; and CRS Report
RL30320, Patent Ownership and Federal Research and Development (R&D): A Discussion on the Bayh-Dole Act and
the Stevenson-Wydler Act, all by Wendy H. Schacht.
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
şȱ
ÂŽÂŽ›Š•ȱÇǰȱ›žÂȱ’œŒ˜ŸŽ›¢ǰȱŠ—Âȱ›’Œ’—Âȱ
ȱ
accompanied the legislation, “the authorities conveyed by [the section dealing with CRADAs] are
permissive†to promote the widest use of this arrangement.45
It should be noted that CRADAs are only one form of cooperative activity, but because they can
be easily identified and quantified they tend to be the most visible. Other mechanisms include
personnel exchanges and visits; licensing of patents; work for others; educational initiatives;
information dissemination; the use of special laboratory facilities and centers set up in particular
technological areas; cooperative assistance to state and local programs; and the spinoff of new
firms. Currently, federal laboratories legislatively are prohibited from competing with the private
sector and can only offer the use of expertise and equipment which is not readily available
elsewhere. Technology transfer and cooperative efforts are expressly forbidden to interfere with
the laboratories’ R&D mission-related activities.
‘ŽȱŠ¢‘Ȭ˜•ŽȱŒÂȱ
P.L. 96-517, the Bayh-Dole Act, evolved out of congressional interest in developing a uniform
federal patent policy to promote the utilization of inventions made with the support of the federal
research establishment.46 Such action was deemed necessary because, at the time the legislation
was under consideration, only 5% of federally-owned patents were being used. While there were
several possible reasons for such a low level of utilization (including no market applications), this
was thought by many to be one consequence of the practice by most agencies of taking title to all
inventions made with government funding while only permitting the nonexclusive licensing of
contractor inventions.47 Without title to inventions, or at least exclusive licenses, companies may
be less likely to engage in and fund the additional R&D necessary to bring an idea to the
marketplace. The Bayh-Dole Act, by providing universities, nonprofit institutions, and small
businesses with ownership of patents arising from federally-funded R&D, offers an incentive for
cooperative work and commercial application. Royalties derived from intellectual property rights
provides the academic community an alternative way to support further research and the business
sector a means to obtain a return on their financial contribution to the endeavor.
Each nonprofit organization (including universities) or small business is permitted to elect (within
a reasonable time frame) to retain title to any “subject invention†made as a result of R&D funded
by the federal government; except under “exceptional circumstances when it is determined by the
agency that restriction or elimination of the right to retain title to any subject invention will better
promote the policy and objectives of this chapter.â€48 The owner of the intellectual property must
commit to commercialization of the patent within a predetermined time frame agreed to by the
supporting agency and the performing organization. As stated in the House report to accompany
the bill, “the legislation establishes a presumption [emphasis added] that ownership of all patent
rights in government funded research will vest in any contractor who is a nonprofit research
institution or a small business.â€49
45 Senate Committee on Commerce, Science, and Transportation, Federal Technology Transfer Act of 1986, Report to
Accompany H.R. 3773, 99th Cong. 2nd sess., 1986, S.Rept. 99-283, 10.
46 House Committee on Science and Technology, Government Patent Policy, 95th Cong., 2nd sess., May 1978, H.Rept.
Prt. 4.
47 Government Patent Policy, 5.
48 Ibid.
49 Federal Technology Transfer Act, Report to Accompany H.R. 6933, 3.
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŗŖȱ
ÂŽÂŽ›Š•ȱÇǰȱ›žÂȱ’œŒ˜ŸŽ›¢ǰȱŠ—Âȱ›’Œ’—Âȱ
ȱ
Certain rights are reserved for the government to protect the public interest. The government
retains “a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced
for or on behalf of the United States any subject invention throughout the world ... .†The
government also retains “march-in rights†that enable the federal agency to require the contractor
(whether he owns title or has an exclusive license) to “grant a nonexclusive, partially exclusive,
or exclusive license in any field of use to a responsible applicant or applicants ... †with due
compensation, or to grant a license itself under certain circumstances. The special situation
necessary to trigger march-in rights involves a determination that the contractor has not made
efforts to commercialize within an agreed upon time frame or that the “action is necessary to
alleviate health or safety needs ... †that are not being met by the contractor (15 U.S.C. sec. 203).
The Bayh-Dole Act also addresses the licensing of inventions to which the government retained
title typically because of past agency practices or because of a public interest. Title 35 U.S.C.
§209 proscribes the licensing of this type of invention. The law permits federal departments to
offer nonexclusive, exclusive, or partially exclusive licenses under certain conditions and with
specific rights retained by the government. These include the right to terminate the license if
commercialization is not pursued as provided in the business plan or if the government needs the
license for public use. The agencies are required to inform the public about the availability of a
patent for licensing. Notices are to be published in the Federal Register for a period of three
months and if a company displays intent to license, the laboratory must place an additional notice
and offer 60 days for objections. In providing licenses, small businesses are given preferences and
licensees must agree that “any products embodying the invention or produced through the use of
the invention will be manufactured substantially in the United States.â€
Ȭ—’ŸŽ›œ’¢Ȭ —žœÂ›¢ȱ˜••Š‹˜›ŠÂ’˜—DZȱ‘ŽȱŽœž•Âœȱ
The primary mission of the National Institutes of Health “is science in pursuit of fundamental
knowledge about the nature and behavior of living systems and the application of that knowledge
to extend healthy life and reduce the burdens of illness and disability.â€50 To achieve this, NIH
funds over $29 billion of both in-house and extramural R&D; 10% of this total is for work within
NIH laboratories and 80% goes to contractors, primarily universities and non-profit research
institutions.51 Simultaneously, the Stevenson-Wydler Technology Innovation Act and the Bayh-
Dole Act provide the agency with the “statutory mandate to ensure that new technologies
developed in those laboratories are transferred to the private sector and commercialized in an
expeditious and efficient manner.â€52 Thus, NIH is faced with two interrelated goals: “promoting
the health of the American people and all mankind through research in the biosciences, and
fostering a vigorous domestic biotechnology industry.â€53 While the legislation discussed in this
paper provides a general framework within which to achieve some of these objectives, there are
specific issues associated with health research that have generated concerns not raised in other
industrial sectors. Given the particular interest in health-related R&D, the increased commercial
50 National Institutes of Health, About NIH, available at http://www.nih.gov/about/.
51 See http://www.officeofbudget.od.nih.gov/UI/2008/Congressional%20Approps.pdf and http://www.nih.gov/about/
budget.htm.
52 Office of Technology Transfer, National Institutes of Health, Public Health Service (PHS) Patent Policy, available at
http://ott.od.nih.gov/policy/phspat_policy.html.
53 President’s Council of Advisors on Science and Technology. Achieving the Promise of the Bioscience Revolution:
The Role of the Federal Government. Washington, December 1992. Introductory letter, no page number.
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŗŗȱ
ÂŽÂŽ›Š•ȱÇǰȱ›žÂȱ’œŒ˜ŸŽ›¢ǰȱŠ—Âȱ›’Œ’—Âȱ
ȱ
potential, and cost considerations, questions are being raised within Congress as to the adequacy
of current arrangements. Most experts agree that closer cooperation can augment funding sources
(both in the public and private sectors), increase technology transfer, stimulate additional
innovation, lead to new products and processes, and expand markets. Yet, others point out that
collaboration may provide an increased opportunity for unfair advantages, excessive private
sector profits at the expense of the public, conflicts of interest, redirection of research, and less
openness in sharing of scientific discovery.
—›Š–ž›Š•ȱŽœŽŠ›Œ‘ȱ
Intramural research performed at the National Institutes of Health accounts for approximately
10% of the NIH budget. Typically, NIH keeps title to inventions made in its laboratories. In
FY2008, NIH (and FDA) scientists filed 402 invention disclosures and 176 new patent
applications, while 88 patents were issued. During that year, 259 licenses were executed and
$97.2 million in royalties collected on existing licenses. This is in contrast to 10 years earlier in
FY1998 when 287 inventions were disclosed, 132 patent applications filed, and 171 patents
issued. At that time, 215 licenses were executed and royalty payments totaled $39.6 million. Over
the FY1998-FY2008 time period, $709.1 million in royalties were generated from licenses on
NIH-owned patents.54
To date, NIH has identified 25 FDA approved products that have been developed with technology
from the NIH intramural research program.55 It should be noted that NIH did not develop the
final product; technologies derived from NIH supported research are involved in producing or
administering the product.56 According to the General Accounting Office (now the Government
Accountability Office), NIH was responsible for 95% of the royalties collected by six agencies
(Department of the Army, Department of the Navy, Department of the Air Force, Department of
Energy, and the National Aeronautics and Space Administration) studied between 1996 and 1998.
In addition, NIH had the largest number of licensing agreements.57 A 2004 report by the
Department of Commerce found that income from technologies licensed by the Department of
Health and Human Services (HHS) accounted for 56% of the total amount of license fees
collected by all federal laboratories during FY2003. The number of licenses issued by HHS
comprised 21% of the total number of licenses, second only to the Department of Energy.58
˜•’Œ’Žœȱ
The articulated policy of the Public Health Service (PHS), the parent agency of NIH, as well as
the Food and Drug Administration, and the Centers for Disease Control, is to “ensure that new
54 Information on NIH patent and licensing procedures in this section, unless otherwise noted, is available at
http://ott.od.nih.gov/about_nih/statistics.html.
55 National Institutes of Health, FDA Approved Therapeutic Drugs and Vaccines Developed with Technologies From
the Intramural Research Program at the National Institutes of Health, available at http://ott.od.nih.gov/about_nih/
fda_approved_products.html.
56 Mark L. Rohrbaugh, NIH: Moving Research from the Bench to the Bedside, Testimony before the House Committee
on Energy and Commerce, Subcommittee on Health, July 10, 2003 available at http://ott.od.nih.gov.
57 General Accounting Office, Technology Transfer: Number and Characteristics of Inventions Licensed by Six Federal
Agencies, GAO/RCED-99-173, June 1999, 6, 7.
58 Office of the Secretary, U.S. Department of Commerce, Summary Report on Federal Laboratory Technology
Transfer, December 2004, 10 and 11, available at http://www.technology.gov/reports/TechTrans/2004_Sum.pdf.
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŗŘȱ
ÂŽÂŽ›Š•ȱÇǰȱ›žÂȱ’œŒ˜ŸŽ›¢ǰȱŠ—Âȱ›’Œ’—Âȱ
ȱ
technologies developed in those laboratories are transferred to the private sector and
commercialized in an expeditious and efficient manner†while protecting the public interest.59
The policies associated with the patenting and licensing of inventions made within NIH are
designed to “balance new product development with appropriate market competition.â€60
Cooperative Research and Development Agreements (CRADAs) must reflect the mission
requirements of NIH and not divert resources from the agency’s mandate.61 It also is expected
that scientific input from the collaborating party will advance the capabilities of government
scientists in their work. In this environment, ideas and results are to be discussed openly.
Publication of the knowledge generated by NIH-supported research is required, after providing
time to apply for patent protection. To support the transfer of technology and the widespread use
of the intellectual property, as well as to further
a longstanding tradition of scientific freedom, PHS research results are published freely.
Publication of research is not to be significantly delayed for the purpose of either filing
patent applications on patentable subject matter, or conducting further research to develop
patentable subject matter.62
NIH practice is to patent inventions arising from intramural R&D within the provisions of the law
and to transfer the technology through the use of licensing whenever possible instead of
assignment of patent title to the outside entity. The organization “will seek patent protection on
biomedical technologies only when a patent facilitates availability of the technology to the public
for preventive, diagnostic, therapeutic, or research use, or other commercial use.â€63 Under a
CRADA,
the producing Party will retain ownership of and title to all CRADA Subject Inventions, all
copies of CRADA Data, and all CRADA Materials produced solely by its employee(s). The
Parties will own jointly all CRADA Subject Inventions invented jointly and all copies of
CRADA Data and all CRADA Materials developed jointly.64
Typically, the collaborating party has the option to elect an exclusive (or nonexclusive) license to
any subject invention not made solely by an employee of this collaborating entity. Accordingly,
the terms of the license
will fairly reflect the nature of the CRADA Subject Invention, the relative contributions of
the Parties to the CRADA Subject Invention and the CRADA, a plan for the development
and marketing of the CRADA Subject Invention, the risks incurred by the Collaborator and
the costs of subsequent research and development needed to bring the invention to the
marketplace.65
59 Public Health Service (PHS) Patent Policy.
60 National Institutes of Health, A Plan to Ensure Taxpayers’ Interests are Protected, “Technology Transfer Mission
Statement,†Appendix A-3.3, July 2001, available at http://ott.nih.gov/policy/policy/policy_protect_text.html.
61 Office of Technology Transfer, National Institutes of Health, Cooperative Research and Development Agreements
(CRADAs) and Material Transfer Agreements (MTAs), available at http://ott.od.nih.gov/cradas/model_agree.html.
62 Public Health Service (PHS) Patent Policy.
63 Ibid.
64 Office of Technology Transfer, National Institutes of Health, PHS Model CRADA, 2005, available at
http://ott.nih.gov/doc/CRADAModel2005.doc.
65 Ibid.
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŗřȱ
ÂŽÂŽ›Š•ȱÇǰȱ›žÂȱ’œŒ˜ŸŽ›¢ǰȱŠ—Âȱ›’Œ’—Âȱ
ȱ
Decisions on licensing are to be made to “ensure development of each technology for the
broadest possible applications, optimizing the number of products developed from PHS
technology.†Thus, non-exclusive or co-exclusive licenses are used if possible; exclusive licenses
are to be for specific indications or fields of use. When a mandatory exclusive license is used as
under a CRADA, NIH requires that the licensee grant sublicenses to “broaden the development
possibilities when necessary for the public health.†The resulting technology is to be made
available for research purposes. Technologies licensed to industry are required to be expeditiously
commercialized, “offered and maintained for sale, and made reasonably accessible to the public.â€
The public interest is maintained through efforts to encourage development of competing
products and through royalty-bearing licenses that reflect “a fair financial return on the public’s
research investment.â€66
Š’›ȱ›’Œ’—Âȱ•ŠžœŽȱ
Prior to 1995, NIH had included what was known as a “fair pricing clause†in its cooperative
research and development agreements and many licensing arrangements. In 1989, the Public
Health Service (PHS) instituted a policy addressing the pricing of products resulting from a
government-owned patent licensed by NIH on an exclusive basis to industry or an invention
jointly developed with industry under a CRADA and then licensed exclusively to the collaborator.
The language used in the contract stated:
Because of [NIH’s] responsibilities and the public investment in research that contributes to
a product licensed under a CRADA, DHHS [Department of Health and Human Services] has
a concern that there be a reasonable relationship between the pricing of a licensed product,
the public investment in that product, and the health and safety needs of the public.
Accordingly, exclusive commercialization licenses granted for the NIH intellectual property
rights may require that this relationship be supported by reasonable evidence.67
While there was no statutory requirement mandating this type of clause, it was instituted in
response to public and political pressures resulting from concern over the cost of AZT, a drug
used in the treatment of HIV infection. However, according to the NIH, “AZT was not developed
under a CRADA or exclusive license nor, to date, has it been determined that the government has
a patentable interest in this medication.â€68 No other federal department or agency, with the
exception of the Bureau of Mines, had established such a requirement.
The clause was removed in 1995 at the request of Dr. Harold Varmus, then Director of NIH, after
a review of the situation and several public hearings. He concluded that the evidence indicated
“the pricing clause has driven industry away from potentially beneficial scientific collaborations
with PHS scientists without providing an offsetting benefit to the public.â€69 While sharing
concerns over the “potential inaccessibility†of drugs due to costs, “NIH [agreed] with the
consensus of the advisory panels that enforcement of a pricing clause would divert NIH from its
primary research mission and conflict with its statutory mission to transfer promising
66 Office of Technology Transfer, National Institutes of Health, Public Health Service (PHS) Licensing Policy,
available at http://ott.od.nih.gov/policy/phslic_policy.html.
67 National Institutes of Health, “Press Release and Backgrounder,†NIH News, April 11, 1995, 7.
68 Ibid., 4.
69 Ibid., 1.
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŗŚȱ
ÂŽÂŽ›Š•ȱÇǰȱ›žÂȱ’œŒ˜ŸŽ›¢ǰȱŠ—Âȱ›’Œ’—Âȱ
ȱ
technologies to the private sector for commercialization.â€70 A study by the Department of Health
and Human Services Inspector General found that companies viewed the clause as a major
problem in the NIH CRADA approach.71 Opponents of the clause argued that the uncertainty of
the pricing clause exacerbated a process already fraught with risk. According to industry sources,
not knowing what the determination of “fair†pricing would be at the end of a long and expensive
research, development, and commercialization process was a strong deterrent to entering into
cooperative arrangements. Many of the pharmaceutical and biotechnology companies declined to
undertake CRADAs. Some firms even declined opportunities for joint clinical trials with NIH in
anticipation of future price control demands. At the public hearings most of the patient advocacy
groups called for repeal of the fair pricing clause.
NIH reportedly was reluctant to make definitive decisions on pricing. At that time, reasonable
pricing was defined as a price within the range of existing therapies.72 However, a differentiation
was made between the reasonable pricing clause and “price setting:†the latter was seen as
regulation and had been considered inappropriate for NIH. According to 1991 testimony of Dr.
Bernadine Healy, then Director of NIH, the laboratory was “probably ... unqualified†to undertake
drug pricing because it has not been involved in such activities. Instead, NIH “should approach
fair pricing as a co-inventor of a fundamental discovery and use ... leverage as an agency that
knows what we brought to the table.†Dr. Healy maintained that the laboratory should not be “too
intrusive†or get “too involved in the financial and proprietary activities of companies.â€73
The effect of abandoning the clause was immediate. Subsequent to rescission of the clause in
April 1995, the number of CRADAs executed by NIH increased substantially (see Figure 1).
¡Â›Š–ž›Š•ȱŽœŽŠ›Œ‘ȱ
Extramural research, primarily at universities or medical centers, comprises the major portion of
NIH research funding (approximately 84% of the total). Under law mandated by the Bayh-Dole
Act, federal departments and agencies do not retain title to inventions made with government
funding when the research is performed by an outside contractor. Since the federal organization
does own the patent, it does not receive royalty payments for any licensing agreements. Nor does
the agency have direct say, other than as provided in the Bayh-Dole Act, in the way these
technologies are commercialized.74
70 Ibid., 3.
71 Reginald Rhein, “Will NIH’s Fair Price Clause Make CRADAs Crumble?,†The Journal of NIH Research, March
1994, 41.
72 NCI Seeking Prices for CRADA Products in Line with Existing Therapies; Indigent Care Important, The Blue Sheet,
January 27, 1993, 10.
73 House Committee on Small Business, The National Institutes of Health and Its Role in Creating U.S. High-
Technology Industry Growth and Jobs, Hearing, 100th Cong., 1st sess., December 9, 1991, 22-23.
74 A Plan to Ensure Taxpayers’ Interests are Protected.
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŗśȱ
ÂŽÂŽ›Š•ȱÇǰȱ›žÂȱ’œŒ˜ŸŽ›¢ǰȱŠ—Âȱ›’Œ’—Âȱ
ȱ
Figure 1. NIH CRADAs
160
153 149
140
126
120
120
109
101
100
87
87 87 80
80
72
60
51
42
41
44
32
30
40
31 32
26
20
20
10
4
0
7
8
9
2
3
6
7
8
1
2
5
6
7
8
86
8
8
8
90
91
9
9
94
95
9
9
9
99
00
0
0
03
04
0
0
0
0
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
Source: National Institutes of Health, Office of Technology Transfer http://www.ott.od.nih.gov/about_nih/
statistics.html.
Across all technology areas, the Bayh-Dole Act appears to be successful in facilitating the
commercialization of technology.75 The latest published licensing survey by the Association of
University Technology Managers (AUTM) found that in FY2006, 697 new commercial products
were brought to market, 553 new companies were created, and 4,963 new licenses/options were
granted as a result of technology transfer from the academic community.76 In 1980, 390 patents
were awarded to universities;77 by 2005, this number increased to 2,725.78 While these figures
include all types of R&D, funding for university research in the life sciences comprises by far the
largest portion of academic research support. In 2006, 54.5% of total R&D expenditures at
academic institutions went to finance the medical, biological, and life sciences. The federal
government remains the primary source of this funding.79
75 For a detailed discussion of the impact of this legislation across the federal government see The Bayh-Dole Act:
Selected Issues in Patent Policy and the Commercialization of Technology.
76 Association of University Technology Managers, U.S. AUTM Licensing Survey: FY2006, available at
http://www.autm.net/events/file/AUTM_06_US%20LSS_FNL.pdf.
77 National Science Board, Science and Engineering Indicators—1993, National Science Foundation, Washington, 430.
78 U.S. Patent and Trademark Office, Utility Patents Assigned to U.S. Colleges and Universities, available at
http://www.uspto.gov/web/offices/ac/ido/oeip/taf/univ/asgn/table_1_2005.htm.
79 Science and Engineering Indicators, 2008, Appendix table 5-3, available at http://www.nsf.gov/statistics/seind08/
append/c5/at05-03.pdf.
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŗŜȱ
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ȱ
The use of this academic research, funded in large part by the federal government, appears to be
particularly important to the business community. Studies have found that “growth companies
with university ties have productivity rates almost two-thirds higher than peers.... â€80 In the
pharmaceutical industry, over one-quarter of new drugs depended on academic research for
timely commercialization.81 Further, there is evidence demonstrating that public science,
“research performed in and supported by governmental, academic and charitable research
institutions,†plays a crucial role in private sector technology development.82 Work prepared for
the National Science Foundation indicated that “public science plays an essential role in
supporting U.S. industry, across all the science-linked areas of industry, amongst companies large
and small, and is a fundamental pillar of the advance of U.S. technology.â€83 This study
demonstrated that of the papers cited in patents granted to U.S. companies during the years 1987-
1988 and 1993-1994, 73% were authored at academic, governmental, and other public facilities
(domestic or foreign) as compared with 27% from industrial sources. Similarly, research by
Professors Cohen, Nelson, and Walsh found “ ... that public research importantly affects industrial
R&D in a broad range of industries ... †and “ ... the share of R&D projects affected by public
research is likely even greater than that which makes use of either the research findings or the
techniques and instruments generated by public research.â€84 The biomedical community relies on
this basic work more heavily than other industries with 79% of drug and medicine patents citing
the results of public science.85
A May 2000 internal study on NIH Contributions to Pharmaceutical Development and a U.S.
Congress, Joint Economic Committee report on The Benefits of Medical Research and the Role of
the NIH issued the same time, document the part government funded research plays in drug
development.86 Scientists supported by the government “contributed by discovering basic
phenomena and concepts, developing new techniques and assays, and participated in clinical
applications of the drugs.â€87 While it is often many years before the research is utilized to
generate marketable results, top selling pharmaceuticals “are the result of a great deal of basic
research on the disease mechanism which allowed more specific targeting of the underlying
problem.â€88 Federal funding is also important in the search for new and additional uses for
80 Coopers and Lybrand L.L.P., “Growth Companies with University Ties Have Productivity Rates Almost Two-Thirds
Higher Than Peers,†Trend Setter Barometer, January 26, 1995, 1.
81 Nathan Rosenberg and Richard R. Nelson, “American Universities and Technical Advance in Industry,†Research
Policy, May 1994, 344.
82 G. Steven McMillian, Francis Narin, and David L. Deeds, “An Analysis of the Critical Role of Public Science in
Innovation: The Case of Biotechnology,†Research Policy, 2000, 1.
83 Francis Narin, Kimberly S. Hamilton, and Dominic Olivastro, “The Increasing Linkage Between U.S. Technology
and Public Science,†paper presented to the House Committee on Science, March 17, 1997, 15.
84 Wesley M. Cohen, Richard R. Nelson, and John P. Walsh, “Links and Impacts: The Influence of Public Research in
Industrial R&D,†Management Science, January 2002, 21.
85 Francis Narin, Kimberly S. Hamilton, and Dominic Olivastro, “The Increasing Linkage Between U.S. Technology
and Public Science,†Research Policy, 1997, 328. See also: G. Steven McMillan, Francis Narin, and David Deeds, “An
Analysis of the Critical Role of Public Science in Innovation: The Case of Biotechnology,†Research Policy, 2000, 1.
86 National Institutes of Health, NIH Contributions to Pharmaceutical Development, Case Study Analysis of the Top-
Selling Drugs, May 2000, administrative document and U.S. Congress, Joint Economic Committee, The Benefits of
Medical Research and the Role of the NIH, May 2000, available at http://jec.senate.gov.
87 NIH Contributions to Pharmaceutical Development, Case Study Analysis of the Top-Selling Drugs.
88 Ibid.
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
Å—Åȱ
ÂŽÂŽ›Š•ȱÇǰȱ›žÂȱ’œŒ˜ŸŽ›¢ǰȱŠ—Âȱ›’Œ’—Âȱ
ȱ
existing drugs since private sector firms will not use a technology covered by a patent because of
infringement issues.89
Results of a study by Professor Andrew Toole demonstrated that “federally funded basic research
is a positive and significant contributing factor in pharmaceutical product innovation.â€90
However, it is often particularly difficult to exactly identify the government’s contribution to a
new drug, particularly since a product typically embodies more than one patent. Generally, there
are multiple sources of input from multiple parties in drug development. This is demonstrated by
NIH’s detailed analysis of the top 5 drugs with sales of over $1 billion in 1994 and 1995 cited in
the paragraph above. In its 2000 case study, NIH found that
[r]esearch may be targeted to the cure of a particular disease, or aimed at understanding basic
mechanisms and gaining knowledge for which no immediate application is apparent.
Disease-targeted research can be effective in fueling progress in a given area. However, just
as often results from other fields of research led to breakthroughs in disease concepts or in
drug discovery. These five drugs all arose from both disease-specific and unrelated fields of
research.91
In response to congressional direction, the National Institutes of Health looked at 47 FDA-
approved drugs that had sales of $500 million or more a year to determine the role of NIH-
sponsored technologies in their development. As described in the resulting July 2001 report, A
Plan to Ensure Taxpayers’ Interests are Protected, “NIH sought to determine whether the agency,
directly, or through a grantee or contractor, held any patent rights to the drugs.â€92 NIH funded
technologies were found to have been used in the development of four of these pharmaceuticals:
Epogen® and Procrit® are based on different uses of a patented process technology
developed at Columbia University with support from NIH grants. Columbia licensed their
technology to Amgen for Epogen® and to Johnson & Johnson for Procrit®.
Neupogen® is manufactured by Amgen using patented technologies for a process and a
composition licensed from Memorial Sloan-Kettering Cancer Center (MSKCC). These
technologies were developed with NIH grant support.
Taxol® is manufactured by Bristol Myers Squibb (BMS) using a patented process
technology developed by Florida State University (FSU) with NIH grant funds. In addition,
the NIH has rights to an underlying technology arising from a NIH CRADA collaboration
with BMS. The NIH has received from BMS tens of millions of dollars in royalties from
FY1997 to FY2000 under the license to the NIH technology.93
A 2003 study by GAO found that government financial support of extramural research and
development had resulted in inventions that “were used to make only 6 brand name drugs
associated with the top 100 pharmaceuticals that VA [the Veteran’s Administration] procured for
use by veterans and 4 brand name drugs associated with the top 100 pharmaceuticals that DOD
89 The Benefits of Medical Research and the Role of the NIH.
90 Andrew A. Toole, The Impact of Public Basic Research on Industrial Innovation: Evidence From the
Pharmaceutical Industry, Discussion Paper, Stanford Institute for Economic Policy Research, November 2000,
available at http://siepr.stanford.edu/home.html.
91 NIH Contributions to Pharmaceutical Development.
92 A Plan to Ensure that Taxpayers’ Interests are Protected.
93 Ibid.
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŗŞȱ
ÂŽÂŽ›Š•ȱÇǰȱ›žÂȱ’œŒ˜ŸŽ›¢ǰȱŠ—Âȱ›’Œ’—Âȱ
ȱ
dispensed in 2001.â€94 What these, and other reports document is that “while NIH’s federally
funded research has contributed in a substantial, dramatic, yet general, way to advances in
medicine and biology, the direct contributions to a final therapeutic product as a consequence of
the Bayh-Dole process is limited and difficult to determine.â€95 In addition to multiple sources of
innovation, tracking the federal contribution is made more difficult by the fact that the
government does not retain ownership of inventions made by contractors.
œœžŽœȱŠ—Âȱ™Â’˜—œȱ
The actual and expected benefits flowing from the biomedical community go beyond economic
consideration of the importance of technological progress to the Nation. The potential life saving
quality of many of the products associated with this type of R&D provides an additional
dimension. In addition to the opportunities to generate profits on sales of products, provide jobs,
and stimulate investments, advances in biotechnology and pharmaceuticals also can facilitate
economic growth through improvements in productivity resulting from a healthier population.
Professor Frank Lichtenberg suggests that the benefits of new drugs include “longer life, better
quality of life, and reductions in total medical expenditure.â€96
›’Œ’—ÂȱŽŒ’œ’˜—œȱŠ—ÂȱŽŒ˜ž™–Ž—Âȱ
Federal support for health-related R&D amounts to approximately 22% of the total federal R&D
budget, second only to the R&D funding spent for defense.97 The sizable public sector investment
has raised the issue of a more direct return to the federal government and taxpayers for their
support of R&D. The significant portion of public resources spent by the government in this
arena, and provided to the private sector at no cost, has prompted some observers to call for
government involvement in the establishment of some pharmaceutical prices. Others argue that
the government should “recoup†its investment from firms using federally supported R&D after
profits are generated.
Such suggestions are based on several factors. In addition to funding research performed by
individual companies, under certain circumstances, the government furnishes the private sector
ownership of the intellectual property resulting from this public investment. Patent protection
gives firms monopoly rights on these innovations for a specified amount of time. Concurrently,
the government has conveyed added and substantial financial, regulatory, and tax advantages
through legislation such as the Hatch-Waxman Act and the Orphan Drug Act. According to one
commentator, “the drug industry was able to grow rapidly not only because its structure evolved
in an atmosphere relatively free from close examination, but also because it developed in a fairly
unrestrictive regulatory setting.â€98 Another critic of existing policy, Daniel Zingale, formerly the
94 General Accounting Office, Technology Transfer, Agencies’ Rights to Federally Sponsored Biomedical Inventions,
July 2003, GAO-03-536, 2.
95 A Plan to Ensure that Taxpayers’ Interests are Protected.
96 Frank Lichtenberg, “Cipro and the Risks of Violating Pharmaceutical Patents,†National Center for Policy Analysis,
Brief Analysis No. 380, November 15, 2001 available at http://www.ncpa.org/pub/ba/ba38.PDF.
97 National Science Foundation, Federal R&D Funding by Budget Function Fiscal Years 2006-2008, Table 2, available
at http://www.nsf.gov/statistics/nsf07332/pdf/tab2.pdf.
98 Mary T. Griffin, “AIDs Drugs and the Pharmaceutical Industry: A Need for Reform,†American Journal of Law and
Medicine, 1991, 6.
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŗşȱ
ÂŽÂŽ›Š•ȱÇǰȱ›žÂȱ’œŒ˜ŸŽ›¢ǰȱŠ—Âȱ›’Œ’—Âȱ
ȱ
executive director of AIDS Action, offered the following analogy: “imagine if General Motors
could get the American taxpayer to heavily subsidize its research and development, fund
government programs that purchase half of its cars and then get many of those same taxpayers to
buy a new car each and every year.â€99
Several years ago, an investigation of health-related R&D by the Boston Globe’s Spotlight Team
led them to conclude that pharmaceutical companies are “piggybacking on government researchâ€
and then charging “onerous prices.â€100 In the article it was argued that “by funding the early
stages of research and testing, NIH assumes great risk while reaping few financial rewards.†The
Globe’s research indicated that 45 of 50 top-selling drugs resulted from government funding of
approximately $175 million. “The average net profit margin of the companies making those drugs
was 14 percent in 1997, more than double the 6 percent average for industrial companies in the
Standard & Poor’s 500.â€
The government typically funds basic research because the resulting knowledge is considered a
public good. It is often assumed that incentives, including patent protection, encourage firms to
take steps to bring the results of this fundamental research to market. However, it also has been
argued that health care has both public and private benefits and is therefore not a classical public
good.101 By providing patent protection to the results of federally-funded research, a company
receives an individual benefit based upon public investments. According to one observer, the
suggestion that incentives for drug development, particularly patent protection, are necessary for
innovation in this field may be “exaggerated, given governmental subsidization of research and
development costs.â€102 The public investment in R&D “replaces some portion of the patent-
conferred incentives that are necessary to encourage companies to undertake privately financed
research.â€103 For example, it has been argued that the high prices associated with AIDS-related
drugs can not be attributed to the high cost of R&D and a lengthy regulatory process because of
the substantial federal investment in such research and fast track approval of these drugs.104
Proponents of recoupment and/or federal cost controls assert that the monopoly power of patents
should be modified by “public subsidizationâ€105 They contend that the public has a right to a
return on its investment. However, certain observers claim that “this right is not preserved under
the patent system, which ascribes solely to the patent holder all proprietary rights and interests in
the patented product or process.†The “extraordinary gains†generated by prices on the resulting
drugs “cannot be explained by the usual ‘incentives’ rationale for conferring patent monopolies.â€
Instead, those who favor government input into price decisions maintain that the prices of the
resulting pharmaceuticals and therapeutics should reflect the public contribution to these products
and processes. “In other words, public support of quasi-public goods must be balanced by some
degree of public sharing in the fruits of the investment, as well as input into the nature of that
sharing.â€
99 Adriel Bettelheim, “Drugmakers Under Siege,†CQ Outlook, September 25, 1999, 10.
100 Alice Dembner and the Globe Spotlight Team, “Public Handouts Enrich Drug Makers, Scientists,†The Boston
Globe, April 5, 1998.
101 Steven R. Salbu, “Aids and Drug Pricing: In Search of a Policy,†Washington University Law Quarterly, Fall 1993,
13-14.
102 Ibid., 6.
103 Ibid., 7.
104 AIDS Drugs and the Pharmaceutical Industry: A Need for Reform, 11.
105 Information and quotes in this paragraph from: Aids and Drug Pricing: In Search of a Policy, 5-20.
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŘŖȱ
ÂŽÂŽ›Š•ȱÇǰȱ›žÂȱ’œŒ˜ŸŽ›¢ǰȱŠ—Âȱ›’Œ’—Âȱ
ȱ
Critics of policies to recoup federal research support or government involvement in pricing
decisions argue that advocates of such actions misunderstand the actual nature of the NIH role in
research and pharmaceutical development. They maintain that federal support for basic research
reflects a consensus that such work is critical because it is the foundation for many new
innovations and that any returns created by this activity are generally long term, sometimes not
marketable, and not always evident. Yet the rate of return to society as a whole generated by
investments in research is significantly larger than the benefits that can be captured by the firm
performing the work. According to a study by Professors Iain Cockburn and Rebecca Henderson,
the rate of return to government funded biomedical research may be 30% a year, a figure that may
actually be higher because calculations do not account for the broader effects of pharmaceutical
innovation on health and well-being.106
The National Institutes of Health funds “basic research aimed at understanding biological
mechanisms and gaining knowledge for which no immediate application is apparent has been a
vital supply of new ideas, and can only be sustained through public support.â€107 This fundamental
knowledge contributes to the general pool of knowledge which industry may use to generate
specific products. In the health-related arena, NIH supports research, primarily at universities,
directed at the underlying mechanisms of disease; research and knowledge that are applied by the
private sector to develop specific treatments for disease.108 Studies demonstrate the “important
role that the public sector plays in providing fundamental insights in basic knowledge as a basis
for drug discovery.109 The basic research “feeds an independent step in the discovery process
called the ‘drug concept’ or ‘rock turning’ period ... [which] is the very first point in the
pharmaceutical innovative process and necessarily precedes chemical synthesis.â€110 This research
generally is composed of work supported by the government and publicly available as well as
knowledge resulting from internal firm R&D.111 The information and concepts generated by this
research have a “substantial impact†on pharmaceutical R&D.112 According to NIH:
The research supported and conducted by the NIH is sometimes mischaracterized as
necessarily resulting in the commercialization of drug products. In truth, much of NIH
funding supports the exploration of fundamental biological mechanisms that would
otherwise not be pursued due to the lack of market incentives. Such research can lead to
early-stage findings and provide clues that may eventually lead to medical advancements for
diseases for which existing methods of therapy are nonexistent, inefficient, or suitable only
for a select population.113
106 Ian M. Cockburn and Rebecca M. Henderson, Publicly Funded Science and the Productivity of the Pharmaceutical
Industry, NBER Conference on Science and Public Policy, April 2000, available at http://www.nber.org.
107 National Institutes of Health, NIH Contributions to Pharmaceutical Development, Case Study Analysis of the Top-
Selling Drugs, Administrative document, May 2000.
108
Ibid.
109 Publicly Funded Science and the Productivity of the Pharmaceutical Industry.
110 The Impact of Public Basic Research on Industrial Innovation: Evidence From the Pharmaceutical Industry.
111 Ibid.
112 Wesley M. Cohen, Richard R. Nelson, and John P. Walsh, “Links and Impacts: The influence of Public Research on
Industrial R&D,†Management Science, January 2002.
113 National Institutes of Health, Report to Congress on the Affordability of Inventions and Products, July 2004, 3,
available at http://ott.od.nih.gov/policy/policies_and_guidelines.html.
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
Řŗȱ
ÂŽÂŽ›Š•ȱÇǰȱ›žÂȱ’œŒ˜ŸŽ›¢ǰȱŠ—Âȱ›’Œ’—Âȱ
ȱ
This is not to imply that the private sector does little in relation to the government in the
pharmaceutical arena. Pharmaceutical companies spend more than NIH on R&D; primarily for
applied research and development directed at generating new drugs for the marketplace. Some
analysts argue that the federal role is overstated because existing studies use citations as a
measure of each sector’s contribution to drug development. This, critics maintain, skews the
results because the government encourages, and even requires, publication of research results
while industry often discourages such practices.114
What appears to be the case is that benefits move in both directions between the government and
the private sector.115 A comprehensive study by NIH of 5 top selling drugs demonstrated “that
public and private sector biomedical research are interwoven, complementary parts of the highly
successful U.S. biomedical science endeavor.â€116 Taking the results of this study further, Janice
Reichert and Christopher-Paul Milne of the Tufts Center for the Study of Drug Development at
Tufts University noted that for the set of drugs looked at by NIH, the government’s involvement
was greatest in the preclinical and clinical development of drugs that were treatments for
serious or life-threatening diseases ... [where] there was clearly a public health benefit
derived from facilitating the development of these drugs. The NIH was also involved in the
discovery and/or development of compounds that were in the “public domain†(i.e.,
knowledge of the existence and method of preparation of the compounds was publicly
available before therapeutic potential was identified) ... These types of compounds initially
might not have been of interest to the pharmaceutical industry, because possible patent
claims were limited.117
Those who oppose changes in the current approach to intellectual property ownership of the
results of federally funded R&D argue that the promise of a large return on investment “is
precisely the tool sanctioned by the Constitution to promote the progress of science.â€118 It is
because pharmaceuticals and biotechnology are so research intensive that they rely heavily on
patents. Intellectual property is important because the “costs of drug innovation are very high
while the costs of imitation are relatively low.â€119 The domestic pharmaceutical industry typically
reinvests 8 to 20% of its revenues in R&D, and oftentimes substantially more, in contrast to other
industries where the rates are about 3 to 4%, according to testimony presented by Dr. Arthur
Levinson, CEO of Genentech.120 Ownership of intellectual property is particularly important to
biotechnology companies that typically are small and do not have profits to finance additional
R&D. According to the Biotechnology Industry Organization, most of these firms finance
research and development from equity capital not profits. Only 5% of biotech companies have
114 Janice M. Reichert and Christopher-Paul Milne, “Public and Private Sector Contributions to the Discovery and
Development of ‘Impact’ Drugs,†American Journal of Therapeutics, 2002, 543-555. See also: Charles G. Smith and
John R. Vane, “The Discovery of Captopril,†The FASEB Journal, 2003, 788-789.
115 Publicly Funded Science and the Productivity of the Pharmaceutical Industry.
116 NIH Contributions to Pharmaceutical Development, Case Study Analysis of the Top-Selling Drugs.
117 Public and Private Sector Contributions to the Discovery and Development of “Impact†Drugs.
118 Evan Ackiron, “Patents for Critical Pharmaceuticals: The AZT Case,†American Journal of Law and Medicine,
1991, 18.
119 Patents, Innovation and Access to New Pharmaceuticals.
120 U.S. Congress, Joint Economic Committee, Putting a Human Face on Biotechnology:
A Report on the Joint Economic Committee’s Biotechnology Summit, February 23, 2000,
5 available at http://www.senate.gov/~jec/bio_report.htm.
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŘŘȱ
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ȱ
sales and therefore depend on venture capital and IPOs.121 Industry advocates maintain the
patents are a necessity for raising this equity capital and that price controls would deter
investors.122 Thus, some experts maintain that “the ability of companies to control their
discoveries through the establishment of intellectual property rights is fundamental to the
competitiveness of [such] industry.â€123
Elimination of the incentives associated with technology transfer and increased R&D through
patent ownership and control over intellectual property would reduce innovation according to
many experts. Columbia University’s Frank Lichtenberg states that “weakening patent protection
(e.g. by government violation of patents) may have a chilling effect on private R&D investment,
and therefore reduce the health and wealth of future generations.â€124 A similar opinion was
expressed by John E. Calfee of the American Enterprise Institute. Noting that, “one of the least-
appreciated effects of faster research and development is to quicken the competitive process
itself,†Calfee argues that “although the scientific effort required for new drugs costs a great deal
of money, the drugs are worth far more than they cost. Eliminate the financial reward, however,
and you cut off the supply.â€125
Dr. M. Kathy Behrens, a director of the National Venture Capital Association, testified at hearings
before the Joint Economic Committee on September 29, 1999 that “health care proposals which
impose drug price controls, or Medicare drug benefits which provide marginal reimbursement,
can create a perception or reality that the industry’s potential return is limited or at greater
risk.â€126 Other experts concur with this assessment. Research undertaken by Professor John
Vernon found “that pharmaceutical price regulation has a negative effect on firm R&D
investment ... [and] could impose a very high cost in terms of foregone medical innovation.â€127
One study has suggested that the threat of price controls during the first Clinton Administration
had a detrimental effect on private sector support of pharmaceutical research and development.128
Actual experience and cited studies suggest that companies which do not control the results of
their investments—either through ownership of patent title, exclusive license, or pricing
decisions—tend to be less likely to engage in related R&D. This likelihood is reflected in the
provisions of the Bayh-Dole Act (as well as other laws). Providing universities, nonprofit
institutions, and small businesses with title to patents arising from federally funded R&D offers
an incentive for cooperative work and commercial application. Royalties derived from intellectual
property rights provide the academic community an alternative way to support further research
and the business sector a means to obtain a return on its financial contribution to the endeavor.
While the idea of recoupment was considered by the Congress in hearings on the legislation prior
121 Information derived from: Richard Pops, BIO 2004 CEO and Investors Conference Keynote Speech, February 25,
2004 and Biotechnology Industry Organization, Biotechnology Industry Statistics, both available at http://www.bio.org.
122 Drugmakers Under Siege.
123 U.S. Department of Commerce, Office of Technology Policy, Meeting the Challenge: U.S. Industry Faces the 21st
Century, The U.S. Biotechnology Industry (Washington, July 1997), 16.
124 Cipro and the Risks of Violating Pharmaceutical Patents.
125
John E. Calfee, “Why Pharmaceutical Price Controls are Bad for Patients,†AEI On the Issues, March 1999 available at
http://www.aei.org/oti.
126 Putting a Human Face on Biotechnology: A Report on the Joint Economic Committee’s Biotechnology Summit, 8.
127 John A. Vernon, “Drug Research and Price Controls,†Regulation, Winter 2002-2003, 25.
128 Cipro and the Risks of Violating Pharmaceutical Patents.
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
Řřȱ
ÂŽÂŽ›Š•ȱÇǰȱ›žÂȱ’œŒ˜ŸŽ›¢ǰȱŠ—Âȱ›’Œ’—Âȱ
ȱ
to the act’s passage in 1980, it was rejected as an unnecessary obstacle, one which would be
perceived as an additional burden to working with the government. Policy makers thought such a
program to be particularly difficult to administer.129 Instead, Congress accepted as satisfactory the
anticipated payback to the country through increased revenues from taxes on profits, new jobs
created, improved productivity, and economic growth. For example, according to the MIT
Technology Licensing Office, in 1998, 15% of the sales of licensed products derived from
federally funded university research was returned to the government in the form of income taxes,
payroll taxes, capital gains taxes, and corporate income taxes. This was estimated to be 6 times
the royalties paid by companies to the universities.130 The emergence of the biotechnology
industry and the development of new therapeutics to improve health care are often cited
indications of such benefits.
ŽœŽŠ›Œ‘ȱ˜˜•œȱ
The focus on intellectual property ownership of the results of federally funded R&D has led some
critics to charge that the patenting of fundamental research prevents further biomedical
innovation. Law professors Rebecca Eisenberg and Arti Rai argue that due to implementation of
the Bayh-Dole Act “[p]roprietary claims have increasingly moved upstream from the end
products themselves to the ground-breaking discoveries that made them possible in the first
place.â€131 While patents are designed to spur innovation, Rai and Eisenberg maintain that certain
patents hinder the process. From their perspective, permitting universities to patent discoveries
made under federal funding, the Bayh-Dole Act “draws no distinction between inventions that
lead directly to commercial products and fundamental advances that enable further scientific
studies.â€132 These basic innovations are generally known as “research tools.â€
Eisenberg and Professor Richard Nelson argue that ownership of research tools may “impose
significant transaction costs†that result in delayed innovation and possible future litigation.133 It
also can stand in the way of research by others:
Broad claims on early discoveries that are fundamental to emerging fields of knowledge are
particularly worrisome in light of the great value, demonstrated time and again in history of
science and technology, of having many independent minds at work trying to advance a
field. Public science has flourished by permitting scientists to challenge and build upon the
work of rivals.134
129 For example see U.S. House of Representatives, Committee on Science and Technology, Government Patent Policy,
Hearings, September 23, 27, 28, 29, and October 1, 1976, 94th Cong. 2nd sess., 1976; United States Senate, Select
Committee on Small Business, Government Patent Policies, Hearings, December 19, 20, and 21, 1977, 95th Cong. 1st
sess., 1978; and U.S. Senate, Committee on Commerce, Science, and Transportation, Patent Policy, Hearings, July 23
and 27, and October 25, 1979, 96th Cong. 1st sess., 1979.
130 Kenneth D. Campbell, “TLO Says Government Research Pays Off Through $3 billion in Taxes, MIT Tech Talk,
April 15, 1998, available at http://web.mit.edu.
131
Arti K. Rai and Rebecca S. Eisenberg, “Bayh-Dole Reform and the Progress of Biomedicine,†American Scientist,
January-February 2003, 52.
132 Ibid.
133 Rebecca S. Eisenberg and Richard R. Nelson, “Public vs. Proprietary Science: A Fruitful Tension?,†Daedalus,
Spring 2002.
134 Ibid.
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Similar concerns were expressed by Harold Varmus, President of Memorial Sloan-Kettering and
former Director of the National Institutes of Health. In July 2000 prepared testimony, he spoke to
being “troubled by widespread tendencies to seek protection of intellectual property increasingly
early in the process that ultimately leads to products of obvious commercial value, because such
practices can have detrimental effects on science and its delivery of health benefits.â€135 While the
Bayh-Dole Act and scientific advances have helped generate a dynamic biotechnology industry,
there have been changes that “are not always consistent with the best interests of science.â€136
However, as Varmus and others acknowledge, the remedies to this situation are not necessarily
associated with the Bayh-Dole Act or its implementation by NIH. Yale President Richard Levin
notes that while some research should be kept in the public domain, including research tools, the
fact that it is privatized is not the result of the Bayh-Dole Act, but rather the result of patent law
made by the courts and the Congress. Therefore, he believes that changes to the act are not the
appropriate means to address the issues.137
Current law, as reaffirmed by court decisions, permits the patenting of research tools. However,
there have been efforts to encourage the widespread availability of these tools. Marie Freire,
formerly Director of the Office of Technology Transfer at NIH, testified that the value to society
is greatest if the research tools are easily available for use in research. She asserted that there is a
need to balance commercial interests with public interests.138 To achieve this balance, the
National Institutes of Health has developed guidelines for universities and companies receiving
federal funding that make clear research tools are to be made available to other scientists under
reasonable terms.139 In 1999, NIH issued a policy paper, Sharing of Biomedical Research
Resources, Principles and Guidelines for Recipients of NIH Research Grants and Contracts,
which “calls for the sharing of [research] tools among non-profit organizations with minimal
terms and impediments.â€140 This approach, now included as a requirement in NIH grants, is
reflective of subsequent changes to the Bayh-Dole Act that stated the results of the federal R&D
enterprise should be achieved “without unduly encumbering future research and discovery.... â€141
In addition, the U.S. Patent and Trademark Office made changes in the guidelines used to
determine the patentability of biotechnology discoveries.
A study by Professors John Walsh, Ashish Arora, and Wesley Cohen found that although there are
now more patents associated with biomedical research, and on more fundamental work, there is
little evidence that work has been curtailed due to intellectual property issues associated with
research tools.142 According to this view, scientists are able to continue their research by
135
U.S. Congress, House Committee on the Judiciary, Subcommittee on Courts and Intellectual Property, Hearings on
Gene Patents and Other Genomic Inventions, July 13, 2000, available at http://www.house.gov/judiciary/
seve0713.htm.
136 Ibid.
137 National Academy of Sciences, Board on Science, Technology, and Economic Policy, Workshop on Academic IP:
Effects of University Patenting and Licensing on Commercialization and Research, April 17, 2001 [transcript], 262
available at http://www.nas.edu.
138 U.S. Congress, Senate Committee on Appropriations, Subcommittee on Labor, Health and Human Services,
Education and Related Agencies, Hearings, August 1, 2001.
139 Available on the NIH website at http://www.nih.gov.
140 NIH: Moving Research From the Bench to the Bedside.
141 Ibid., see also P.L. 106-404, Section 6.
142 John P. Walsh, Ashish Arora, Wesley M. Cohen, “Working Through the Patent Problem,†Science, February 14,
(continued...)
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“licensing, inventing around patents, going offshore, the development and use of public databases
and research tools, court challenges, and simply using the technology without a license (i.e.,
infringement).†According to the authors of the report, private sector owners of patents permitted
such infringement in academia (with the exception of those associated with diagnostic tests in
clinical trials) “partly because it can increase the value of the patented technology.â€
˜ŸŽ›—–Ž—Âȱ’‘œDZȱ˜¢Š•Â¢ȱ›ŽŽȱ’ŒŽ—œŽœȱŠ—ÂȱŽ™˜›Â’—Âȱ
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The government retains certain rights under the Bayh-Dole Act to protect the public interest. The
act states that the government is provided a “nonexclusive, nontransferable, irrevocable, paid-up
license to practice or have practiced for or on behalf of the United States any subject invention
throughout the world.... †This license, commonly known as a “royalty free license,†has been the
subject of some discussion including whether or not this permits government purchasers to obtain
discounts on products developed from federally funded R&D, particularly pharmaceuticals. A
July 2003 GAO report addressed this issue and concluded that the license entitles the government
to practice or have practiced the invention on the government’s behalf, but “does not give the
federal government the far broader right to purchase, ‘off the shelf’ and royalty free (i.e. at a
discounted price), products that happen to incorporate a federally funded invention when they are
not produced under the government’s license.â€143 The study states that rights in one patent do not
“automatically†permit rights in subsequent, related patents.144 Because the government
apparently holds few licenses on the biomedical products it purchases (generally through the
Veteran’s Administration and the Department of Defense),145 federal officials indicated that
procurement costs were best reduced by use of the Federal Supply Schedule and national
contracts.146 Government licenses are used primarily in the performance of research in the
biomedical area.147
A related issue is that of tracking the government’s interest in patents resulting from federally
funded research and development. Under the Bayh-Dole Act, grantees are required to report
annually on the utilization of any invention arising from federally funded R&D. The Code of
Federal Regulations (37 CFR 404.14(h)) states that these “reports shall include information
regarding the status of development, date of first commercial sale or use, gross royalties received
by the contractor, and such other data and information the agency may reasonably specify.â€
[emphasis added] In an August 1999 study, GAO noted that federal contractors and grantees were
not meeting the reporting requirements associated with the Bayh-Dole Act, making it difficult to
identify and assess what licenses the government retained, among other things.148 Three years
later, in a follow-up report, GAO stated that four of the five agencies had taken steps to insure
(...continued)
2003, 1021, see also John P. Walsh, Charlene Cho, Wesley M. Cohen, “View for the Bench: Patents and Material
Transfers,†Science, September 23, 2005, 2002-2003.
143 Technology Transfer: Agencies’ Rights to Federally Sponsored Biomedical Inventions, 7.
144 Ibid., 8.
145 Ibid., 8.
146 Ibid., 12.
147 Ibid., 10.
148 General Accounting Office, Technology Transfer: Reporting Requirements for Federally Sponsored Inventions
Need Revision, August 1999, GAO/RCED-99-242, 2.
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improved compliance with the law including several new monitoring systems, although more
needed to be done.149 To keep track of inventions subject to the Bayh-Dole Act, in 1995 NIH
created Interagency Edison (iEdison), an Internet-based reporting system (that is also used by
other federal agencies). In response to the findings of GAO, suggestions by the NIH Interagency
Edison Working Group, and recommendations contained in the report A Plan to Ensure
Taxpayers’ Interests are Protected, new reporting requirements were implemented effective
January 1, 2002 that include “the commercial name of any FDA-approved products, utilizing any
subject invention, which have reached the market during the annual reporting period.â€150
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To date, the U.S. system of research, development, and commercialization has had a clear impact
on the pharmaceutical and biotechnology industries. Policies concerning funding for research,
intellectual property protection, and cooperative R&D have played an important part in the
economic success of these sectors.151 American pharmaceutical firms have “consistently
maintained a competitive edge in international markets†and lead in new drug discoveries.152
According to industry sources, U.S. investment in health-related R&D exceeds all other
countries153 and has demonstrated a pattern of R&D investment that has increased at
approximately twice the rate of R&D growth in Europe.â€154
Incentives for innovation in the industrial community clearly have contributed to substantial
research and development by the pharmaceutical and biotechnology sectors. In 2007, total
pharmaceutical industry spending on R&D was estimated to be $58.8 billion.155 Domestic R&D
spending for members of the Pharmaceutical Researchers and Manufacturers Association
(PhRMA) in 2007 was $35.4 billion with 18.7% of domestic sales reinvested in research and
development.156 The industry employs approximately 291,000 individuals in highly skilled
jobs.157 American biotechnology companies spent $30.0 billion on R&D, generated $55.6 billion
in product sales, and produced $68.4 billion in revenue during 2007.158 An industry that did not
exist 25 years ago, U.S. biotechnology has provided new products and processes for the
149 General Accounting Office, Intellectual Property: Federal Agency Efforts in Transferring and Reporting New
Technology, October 2002, GAO-03-47, 29.
150 National Institutes of Health, Changes in Grantee/Contractor Reporting of Intellectual Property Utilization, Notice
NOT-OD-02-019, December 13, 2001.
151 Iain Cockburn, Rebecca Henderson, Luigi Orsenigo, and Gary P. Pisano, “Pharmaceuticals and Biotechnology,â€
U.S. Industry in 2000 (National Academy Press, Washington, 1999), 365.
152 Department of Commerce, International Trade Administration, U.S. Industry &Trade Outlook 2000 (McGraw-Hill,
2000), 11-16.
153 PhRMA, Pharmaceutical Industry Profile 2006, 48, available at http://www.phrma.org.
154 PhRMA, Pharmaceutical Industry Profile 2003, 16, available at http://www.phrma.org.
155 PhRMA, Pharmaceutical Industry Profile 2008, inside front cover, available at http://www.phrma.org.
156 Ibid., inside front cover and 52.
157 Bureau of Labor Statistics, U.S. Department of Labor, Career Guide to Industries, 2006-07 Edition, Pharmaceutical
and Medicine Manufacturing, available at http://www.bls.gov/oco/cg/cgs009.htm.
158Ernst & Young, Beyond Borders, Global Biotechnology Report 2008, available at http://www.ey.com/Global/
assets.nsf/International/Industry_Biotechnology_Beyond_Borders_2008/$file/
Biotechnology_Beyond_Borders_2008.pdf.
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international marketplace, including more than 200 biotech drugs and vaccines, with potential for
many more advances.
Some observers question whether or not there are unintended consequences to current policies
and programs related to innovation that may need to be addressed. As discussed in this paper, the
current legislative approach promotes the private sector use of the results of federally funded
research and development, particularly through incentives to cooperative activities among
government, industry, and academia. This approach attempts to balance the public’s interest in
new or improved products and processes for the marketplace with concerns over providing
companies valuable benefits without adequate accountability or compensation. In general,
incentives for the commercialization of government-supported R&D have been created in
response to the argument that the economic benefits to the Nation’s research investment occur
when new goods and services are available to meet public demand, create new jobs, improve
productivity, and increase our standard of living. To date, these potential benefits have been
considered more important than the initial cost to the government.
However, the particular nature of health-related R&D and the substantial federal investment in
this area have caused uncertainty over whether or not the present balance is appropriate. Critics of
the current approach argue that the need for technology development incentives in the
pharmaceutical and/or biotechnology sectors is mitigated by industry access to government-
supported R&D at no cost, monopoly power through patent protection, and other regulatory and
tax advantages. They maintain that the benefits to industry are such that the public has the right to
expect a more direct financial return for the federal investment and, therefore, the government
should be permitted to provide input into certain drug pricing decisions. Those who disagree
point out that the collaborative public-private environment created by federal policies and
practices has generated extraordinary innovation in the pharmaceutical and biotechnology
industries. These sectors have provided significant benefits to the health and well-being of the
Nation. It remains to be seen if changes will be made and if the nature of government-industry-
university cooperation will be altered.
žÂ‘˜›ȱ˜—ŠŒÂȱ —˜›–ŠÂ’˜—ȱ
Wendy H. Schacht
Specialist in Science and Technology Policy
wschacht@crs.loc.gov, 7-7066
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