Drugs, And Health Care Reform :
Lessons From The NIH-UniversityIndustry Relationship
Wendy H . Schacht
Specialist in Science and Technology
Science Policy Research Division
April 14, 1994
I i 111 I III III IIll
IIIi! Illll III IIII
BIOTECHNOLOGY, BREAKTHROUGH DRUGS, AND
HEALTH CARE REFORM : LESSONS FROM THE
President Clinton's health care proposal (H.R. 3600, S . 1757) includes the
establishment of an Advisory Council to monitor the prices of new,
"breakthrough" drugs and a mechanism to allow the Secretary of the
Department of Health and Human Services to negotiate the cost to the
Government of such therapeutics if they are found "excessive" under threat of
exclusion from expanded Medicare prescription reimbursements . Such proposals
reflect the Administration's concerns over cost containment as well as
arguments that the pharmaceutical industry is receiving undue profits which are
contributing to the high cost of health care . Indirect price control techniques
have been considered, particularly by several Members of Congress, based on the
rationale that the Federal Government's financial, research, and/or clinical
support contributes to the development of new drugs and thus entitles it to
commensurate cost considerations .
The argument that the Government should control drug prices based upon
its contribution to product development is also the basis for inclusion of a "fair
pricing clause" in cooperative research and development agreements (CRADAs)
between the National Institutes of Health (NIH) and the private sector . In
response to concerns over anticipated high costs, this requirement mandates
that any commercial therapeutic or diagnostic resulting from a CRADA be sold
at a price which reflects the relative contributions of both the Government and
the company . While all Federal R&D agencies utilize CRADAs, NIH is the only
laboratory which stipulates that this clause be included .
Some view such efforts as a move away from congressional activity over the
past 15 years designed to facilitate the commercialization of federally-funded
R&D. The intent of this legislation is to provide the business and/or academic
communities with incentives to bring the results of Government-supported
research to the marketplace where they can generate profits, improve
productivity, or meet other important national needs . Earlier Congresses
determined that, despite arguments of unfair advantage or additional
Government costs, the payback to society brought about by increased innovation
The development and growth of the
was of paramount importance .
biotechnology industry and the emergence of new therapeutics to improve health
care are prominent examples of the benefits of innovation .
Since NIH has chosen to utilize the fair pricing clause, fewer firms are
interested in cooperative work with the laboratory . This experience may be
illustrative of the consequences if similar conditions are imposed on the
development of breakthrough drugs . Companies which do not control the
results of their investments appear to be less likely to engage in R&D . The
implications may be significant, not just for the companies involved, but for the
development of new biotechnology drugs to meet the health, public welfare, and
economic growth needs of this Nation.
TABLE OF CONTENTS
THE CLINTON HEALTH CARE PROPOSAL : POSSIBLE
PRICE CONTROLS ON BREAKTHROUGH DRUGS 3
ECONOMIC DIMENSIONS OF BIOTECHNOLOGY
GOVERNMENT SUPPORT FOR
RESEARCH AND DEVELOPMENT
The Federal Interest
The Legislative Foundation
Patents, the Bayh-Dole Act, and Related Law 14
COLLABORATION : THE RESULTS
Implementation of the Laws
The Fair Pricing Clause
THE HEALTH CARE PLAN : IMPLICATIONS 22
Rationale for Price Controls
Concerns of the Biotechnology Industry 25
BIOTECHNOLOGY, BREAKTHROUGH DRUGS, AND
HEALTH CARE REFORM : LESSONS FROM THE
President Clinton's health care proposal (H.R. 3600, S . 1757) includes the
establishment of an Advisory Council to monitor the prices of new,
"breakthrough" drugs and a mechanism to allow the Secretary of the
Department of Health and Human Services to negotiate the cost to the
Government of such therapeutics if they are found "excessive" under threat of
exclusion from expanded Medicare prescription reimbursements .' Such
proposals reflect the Administration's concerns over cost containment as well as
the arguments that the pharmaceutical industry receives undue profits which
contribute to the high cost of health care and the elderly pay too much for
prescription drugs . Indirect price control techniques have been considered,
particularly by some members of Congress, based on the rationale that the
Federal Government's financial, research, and/or clinical support contributes to
the development of new drugs and thus entitles it to commensurate cost
The argument that the Government should control drug prices because it
contributes to product development is also the basis for inclusion of a "fair
1 Note : Other legislative initiatives to reform health care have been
introduced which ". . . impose some kind of restraint on the ability of
manufacturers to set prices for prescription drugs," including H .R. 2624, S . 223,
S. 491, and H .R. 1200 ; see: U.S . Library of Congress . Congressional Research
Service . Prescription Drug Prices : Should the Federal Government Regulate
Them? CRS Issue Brief No . IB92097, by Gary Guenther. However, the Clinton
proposal has provisions that specifically target new, breakthrough drugs which
are the focus of this discussion .
2 For example see : U.S . Congress . Senate. Special Committee on Aging .
The Federal Government's Investment in New Drug Research and Development :
Are We Getting Our Money's Worth? Hearing, 103d Cong ., 1st Sess . Feb . 24,
1993; and U .S. Congress . House . Committee on Small Business . Subcommittee
on Regulation, Business Opportunities, and Technology . Conflict of Interest,
Protection of Public Ownership in Drug Development Deals Between TaxExempt, Federally Supported Labs and the Pharmaceutical Industry . Hearing,
103d Cong., 1st Sess . Mar. 11, 1993 .
pricing clause" in cooperative research and development agreements (CRADAs)
between the National Institutes of Health (NIH) and the private sector . In
response to concerns over anticipated high costs to the consumer, this
requirement mandates that any commercial therapeutic or diagnostic resulting
from a CRADA be sold at a price which reflects the relative contributions of
both the Government and the company . While all Federal R&D agencies utilize
CRADAs, NIH is the only laboratory which stipulates that this clause be
Some view Government intervention in price decisions based upon initial
Federal support as contrary to a long-term trend of Government promoting
innovation, technological advancement, and the commercialization of technology
by the business community . Over the last 15 years, Government policies,
congressional legislation and, more recently, Administration directives have
established a policy to promote the acceleration of private sector
commercialization of the results of federally-funded R&D, often through
cooperative ventures between Government, industry, and academia . Economic
incentives for investment in research and development by companies are a major
part of this approach . This policy has been adopted for various reasons
including the economic growth and increased productivity which comes from
many new products, processes, and services .
In many areas, major joint Government-industry efforts to facilitate the
development and commercialization of new technologies are pointed to by some
as the "wave of the future ." The Administration has made Governmentindustry-university cooperation a cornerstone of its technology policy as well as
part of its strategy for economic growth . President Clinton has stated that at
least 20 percent of Federal laboratory budgets should be used to provide support
for joint ventures with industry . Federal funding for cooperative efforts has
increased substantially. A dramatic example is the Advanced Technology
Program at the National Institute of Standards and Technology, which provides
seed funding to companies or consortia of universities, industries, and
Government laboratories to accelerate the development of generic technologies
with broad application across industries . This program has seen its budget grow
from $47 million in FY 1992, to $68 million in FY 1993, to $199 million in FY
1994 . The FY 1995 budget request for this effort is $451 million . The Advanced
Battery Consortium, the Clean Car Initiative, and the American Textile
Consortium (AMTEX) have all made headlines as models of cooperation
following both the letter and spirit of the relevant laws . There has been no
public discussion of imposing direct or indirect price controls on any resulting
products or processes, nor do the attendent CRADAs include a fair pricing
Despite the Government's efforts to promote technological advancement,
the biomedical community is sometimes subject to criticism, scrutiny, and doubt
over similar, long established cooperative efforts between Federal laboratories,
academia, and industry . A question is why and what could this mean to the cost
of health care? In light of the initiatives included in the Clinton health care
proposal, this paper will look at the possible effects of price control strategies
on the biotechnology community; on its pursuit of research, development, and
commercialization ; and ultimately on the availability of new, genetically
engineered therapeutics and diagnostics . This will be done in the context of
parallel concerns over drug costs to the consumer which led to the inclusion of
the fair pricing clause in NIH CRADAs . The approach taken here is to provide
the reader with (1) an understanding of the reasons behind Government
promotion of technological advancement, (2) an explanation of Federal
legislation establishing the policies and practices to facilitate this technological
progress, and (3) an exploration of the implementation of these laws by the
National Institutes of Health . Analysis of both the current interaction between
NIH and companies involved in R&D and the results of the application of the
fair pricing clause may prove illustrative of the issues surrounding the
imposition of similar conditions on new, breakthrough, biotechnology drugs .
Throughout this report, an effort has been made to distinguish to the
extent possible between the biotechnology industry and the pharmaceutical
industry. Although they do overlap, the former is characterized by a
preponderance of small firms which are research intensive, have few products
on the market, and generally are dependent for funding on venture capital or
public stock offerings . Most have been established within the last 10 years ;
several have grown significantly in size over that time . The pharmaceutical
sector tends to be made up of larger companies which do work in biotechnology,
but which predominantly produce chemically derived therapeutics . The majority
of these firms are well established and have a record of high profitability . Some
of the available data used in this paper was generated by studies of only the
pharmaceutical industry. However, this information is included because of its
relevance to the biotechnology sector and the debate over price limitations .
1HE CLINTON HEALTH CARE PROPOSAL : POSSIBLE
PRICE CONTROLS ON BREAKTHROUGH DRUGS
The Clinton health care proposal contains several initiatives dealing with
drug prices, including new, breakthrough therapeutics .
Administration testimony in February 1994, "The President's commitment to the
country is to make prescription drugs available to all Americans at reasonable
prices ."3 Among the measures included to "contain drug costs" is the creation
of an Advisory Council on Breakthrough Drugs (Title I, Subtitle F, sec . 1572)
which would review the price of such new advances and report to the Secretary
of Health and Human Services on its "reasonableness ."
The Council would base its determinations on prices of other drugs in
the same therapeutic class, cost information supplied by the
'Lee, Philip and Helen M . Smits . U.S. Dept . of Health and Human Services .
Written statement submitted to the House Committee on Energy and Commerce,
Subcommittee on Health and the Environment, Feb . 8, 1994.
manufacturer, the prices charged for the drug in other industrial
countries, the projected prescription volume, economies of scale,
product stability, special manufacturing requirements and research
costs . Also included are evaluations of cost-effectiveness relative to the
cost of alternative course of treatment options, and improvements in
quality of life offered by the new product'
The Secretary of the Department of Health and Human Services (DHHS)
has the option to publish the Advisory Council's findings in the Federal Register
with the understanding that "this information should help health alliances and
consumers make appropriate and cost-effective decisions ."5 In addition, because
the Clinton plan would require that Medicare pay for outpatient prescriptions,
the Secretary would be permitted to negotiate with the manufacturer of a new
drug and exclude its use under Medicare if an acceptable rebate amount could
not be agreed upon (Title II, Subtitle A, sec . 2003) . In doing this, the Secretary
must take into consideration prices of other drugs in the same therapeutic class,
cost data supplied by the producer, prescription volume estimates,
economies of scale, product stability, special manufacturing requirements . . . . "
and foreign prices for the drug, among other things . This reflects the
Administration's concerns with
. . . the possibility that the lack of market competition combined with
guaranteed private health insurance for every American could lead to
pharmaceutical prices that are much higher than they would be in the
current health care system . . . The American people need to know
that the prices they pay bear a reasonable resemblance to the costs of
research, development, and production .'
ECONOMIC DIMENSIONS OF BIOTECHNOLOGY
At issue is whether or not such provisions would have a serious adverse
effect on the biotechnology industry in light of the general assumption that a
significant number of future breakthrough drugs will be the result of
biotechnology--genetically engineered drugs, biologics, and diagnostics .
Biotechnology therapeutics are important not just to the health of the individual
but ultimately may have far reaching effects on the economy in terms of labor
productivity and national health care costs, among other things . Biotechnology
' Ibid ., p . 3.
Ibid., p . 3 .
Ibid ., p. 3 .
also has the potential to enhance the world's food supply and environmental
Currently U.S. biotechnology companies generate annual sales of $7
billion ;' the National Academy of Sciences has projected that this will increase
to $50 billion by the year 2000 .9 An industry which did not exist 15 years ago,
biotechnology has provided new products and processes for the international
marketplace with vast potential for many more advances . Along with medical
devices and traditional pharmaceuticals, this sector has consistently generated
a positive trade balance for the United States . 10 It is estimated that the
industry employs 97,000 people directly" and an additional 100,000
In addition, Americans hold 70-80 percent of all U .S.
biotechnology patents .18
As noted above, most biotechnology companies are small firms involved in
a highly competitive, research intensive industry . In addition, an estimated 33
percent of R&D projects in the major pharmaceutical companies now involve
work on genetically engineered therapeutics ." The biotechnology sector's
R&D expenditures are 81 percent of sales ." This compares to 10 percent in
the pharmaceutical industry and typically 3 percent in manufacturing .
Currently, with only 27 products approved for marketing, much of the present
7 U.S. Congress . House. Committee on Small Business . Subcommittee on
Regulation, Business Opportunities, and Energy . The National Institutes of
Health and Its Role in Creating U .S. High-Technology Industry Growth and
Jobs . Hearings, 100th Cong., 1st Sess ., Dec . 9, 1991 . p. 5 .
s Burrill, G . Steven and Kenneth B . Lee, Jr. Biotech 94, Long-Term Value
Short-Term Hurdles . San Francisco, Ernst and Young, 1993. [Unnumbered
National Academy of Sciences . Putting Biotechnology to Work : Bioprocess
Engineering. Washington, 1992 .
1 ° The National Institutes of Health and Its Role in Creating U .S . HighTechnology Industry Growth and Jobs, op . cit ., p. 5 .
u Biotech 94, op . cit . [Unnumbered page]
lz Widder, Kenneth J . Why the Biotech Indust
Union-Tribune, June 20, 1993 . p. G3.
in Peril. The San Diego
The National Institutes of Health and Its Role in Creating U .S . HighTechnology Industry Growth and Jobs, op . cit., p. 14.
Number of Biotech Projects in Pharmaceutical R&D on the Rise .
Washington Fax, Oct. 14, 1993 . p. 2.
Biotech 94, op . cit ., p. vii .
value of biotechnology firms is in R&D . According to some surveys, the top
public U .S . biotechnology companies have over 270 new drug therapies
undergoing clinical trials and approximately 2,000 new compounds in the early
stages of development ." Safeguarding this investment in research and
development will inherently depend on intellectual property protection . As will
be discussed later, Wharton School economist Edwin Mansfield and others have
found the drug industry to be more dependent on patents than other industrial
FY 1994 Federal funding for health related biotechnology (41 percent of the
total Federal biotechnology research budget) is an estimated $1 .7 billion . 17
Analysts at Ernst and Young estimate that the biotechnology industry spent
$5.7 billion on research and development in calendar year 1993 . 18 Dependent
on private sector, high risk funding for much of the difference, biotechnology
companies are faced with enormous costs associated with a new therapeutic .
Various studies have calculated that a pharmaceutical company may have to
spend between $125 million to $359 million to bring a new drug to the
marketplace." The larger costs reflect research spending on drugs which never
make it out of the laboratory . These figures are so high because of the
uncertain nature of biomedical research, clinical trials, and the FDA approval
process, among other things . Yet even after reaching the marketplace, only
about one in three drugs are able to recoup R&D costs through sales . 21
Nonetheless, U .S . pharmaceutical firms have maintained high net profits for
According to the Food and Drug Administration, 80 percent of the drug
approvals between 1985 and 1990 were for small improvements to existing
products ." However, in the future it may be the breakthrough drugs which
will have the most impact. In 1992, FDA estimated that 40 percent of the new
is Ibid ., p. 31.
U.S . Office of Science and Technology . Federal Coordinating Council for
Science, Engineering, and Technology . Committee on Life Sciences and Health .
Biotechnology for the 21st Century : Realizing the Promise . U.S . Govt. Print .
Off., Washington, June 30, 1993 . p . 13-14 .
Biotech 94, op . cit . [Unnumbered page]
19 Ibid, p . 12 . Also: U.S. Office of Technology Assessment . Pharmaceutical
R&D: Costs, Risks, and Rewards . Washington, U.S. Govt. Print . Off. p. 16 .
20 Steere, William C ., Jr . The Pharmaceutical Industry's Role in Health-Care
Reform . The NPC Report, Fall 1993 . p. 2.
Biotech 94, op . cit ., p. 10 .
drugs approved were major advances over existing products ." But despite the
potential, this remains a complex sector . As described by industry analysts :
. . . the biotechnology industry's progress has been governed by a
unique confluence of factors : massive breakthroughs in science and
technology, enormous capital needs with a long horizon to payback,
financial markets that turn alternately hot and cold, the heavy hand
of regulation, uncertainty about intellectual property rights, and a cost
crisis in its primary market (health care) . No other major industry has
had to grow up with so many hurdles to surmount in order to bring
value-added products to its customers and earn commensurate
GOVERNMENT SUPPORT FOR
RESEARCH AND DEVELOPMENT"
Because of the arguments put forth that the Government's imposition of
price controls derives, in part, from the Federal investment in R&D, it is
important to determine the rationale behind such support . An understanding
of the foundation for these research efforts is important to the assessment of
this justification. The U.S. Government funds research and development to
meet the mission requirements of the Federal departments and agencies (e.g.,
defense, public health, environmental quality) . It also finances work in areas
where there is an identified need for research, primarily basic research, not
being performed in the private sector .
Federal support for basic research is founded, in large part, on the
understanding that 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 any one firm performing it 25 This Government support reflects
a consensus that basic research is the foundation for many innovations, but that
incentives for private sector financial commitments are dampened by the fact
that spending for R&D runs a high risk of failure . Even results of fruitful R&D
Stone, Peter H . An Industry in Pain, National Journal, Oct . 23, 1993 . p.
Burrill, Steven G . and Kenneth B . Lee, Jr . Nurturing Biotechnology
Companies . Chemtech, Apr . 1993. p. 49.
1 For additional discussion see : U.S. Library of Congress . Congressional
Research . Industrial Competitiveness and Technological Advancement : Debate
Over Government Policy . CRS Issue Brief No . IB91132, by Wendy H . Schacht ;
and The Debate Over a National Industrial Policy Toward Technology and
Economic Growth . CRS Rept . No . 92-426 SPR, by Wendy H . Schacht .
Mansfield, Edwin . Social Returns From R&D : Findings, Methods, and
Limitations . Research/Technology Management, Nov .-Dec . 1991. p . 24.
often are exploited by other domestic and foreign companies, thus resulting in
underinvestment in research by the private sector . The returns from basic
research are generally long-term, sometimes not marketable, and not always
The Government's interest has been expanding beyond the traditional role
of funding R&D . The concern for technological advancement has extended to
meeting other national needs including the economic growth that flows from
commercialization of new products and processes in the private sector . While
a basic tenet is that commercialization of technology is the responsibility of the
private sector, over the past several years there have been additional efforts by
the Government to stimulate innovation and technological advancement in
The actual and expected innovations flowing from biotechnology go beyond
economic considerations of the importance of technological progress to the
Nation . The potential life saving quality of many of the products associated
with biotechnology provides an additional dimension .
industry not only generates profits on sales of products, provides jobs, and
stimulates investments, but advances in this arena could also facilitate economic
growth through improvements in productivity resulting from a healthier
population and a possible decrease in public costs associated with health care .
Technological advancement is an important factor in economic growth and
long-term increases in the Nation's standard of living . Industrial expansion
historically was based on the use of technology to develop natural resources .
Today, industrial growth tends increasingly to be based on the development of
scientific discoveries and engineering knowledge (e .g ., electronics, biomedical
applications) and is even more dependent than before on the development and
use of technology . Technology contributes to the creation of new goods and
services, new industries, and new jobs . New technology expands the range of
services which can be offered and extends the geographic distribution of these
services . The development and application of technology also play a role in
determining patterns of international trade by affecting the comparative
advantages of industrial sectors . It is now widely accepted that " . . . from onethird to one-half of all [U .S .] growth has come from technical progress, and that
it is the principal driving force for long-term economic growth and the increased
standards of living of modern industrial societies ."26 Technological progress
can clearly contribute to the resolution of those national problems which are
amenable to technological solutions .
Technological progress is achieved through innovation, the process by
which industry provides new and improved products, processes, and services .
An invention becomes an innovation when it has been integrated into the
Landau, Ralph . Technology, Economics, and Public Policy . In : Landau,
Ralph and Dale W. Jorgenson, eds . Technology and Economic Policy .
Cambridge, Ballinger Publishing Co ., 1986 . p . 2 .
economy such that the knowledge created results in a new or improved product
or service that can be sold in the marketplace or is applied to production to
increase productivity and quality . It is only through commercialization that a
significant stimulus to economic growth occurs . Yet, while the United States
has a strong basic research enterprise, foreign firms have at times appeared
more adept at taking the results of these scientific efforts and making
commercially viable products . Often U .S . companies are competing in the global
marketplace against goods and services developed by foreign industries from
research performed in the United States . Thus, there has been increased
congressional interest in mechanisms to accelerate the development and
commercialization processes in the private sector .
The majority of innovations are the result of incremental improvements to
existing products or processes . Some of these are based on R&D, but many
others are the result of changes in engineering and the production process, or
reflect new ideas generated by intuition, experience, or skill . However, research
and development are critical to technological progress in many ways . It has
been demonstrated that the innovations arising from R&D are the more
important ones in terms of their effects on society. 27 Profound changes have
been brought about by advances in research resulting in new products and
processes in the areas of medicine, semiconductors, computers, and materials,
just to name a few . Biotechnology may be the next frontier .
The Federal response to stimulating innovation has taken various forms,
among them :
(1) facilitation of "technology transfer" from Government
laboratories to the private sector ; (2) promotion of cooperative research and
development among Government, industry, and academia ; (3) support for small,
high technology companies ; and (4) incentives for increased private sector
investment in R&D . Of particular interest to this study are several laws which
affect the way the National Institutes of Health interacts with the academic
community and industry in the R&D arena . Underlying these efforts is a series
of legislative provisions designed to promote and protect private sector
investments in related research and development to encourage the participation
of the business community as discussed below . It is in this area where the
sometimes competing goals of health care cost containment and encouragement
of technology-based breakthroughs may conflict .
Mansfield, Edwin and Anthony Romeo, Mark Schwartx, David Teece,
Samuel Wagner, Peter Brach . Technology Transfer, Productivity, and Economic
Policy. New York, W .W . Norton and Co ., 1982 . p . 5 .
The Federal Interest
The Federal Government spends approximately $70 billion per year on
research and development to meet the mission requirements of all the Federal
departments and agencies . Of this figure, in FY 1993 approximately $23 billion
was spent for research and development carried out by Federal laboratories ; $1 .7
billion was expended by the National Institutes of Health for intramural
research 29 While the major portion of the total Federal R&D spending is in
the defense arena, Government support has led to or contributed new products
and processes for the commercial marketplace including, but not limited to,
antibiotics, plastics, jet aircraft, computers, electronics, and genetically
engineered drugs (e .g., insulin, human growth hormone) and diagnostics .
Given the increasing competitive pressures on U .S. firms in the
international marketplace, as well as demands for new products to meet the
Nation's needs, proponents of technology transfer argue that there are many
other technologies and techniques generated in the Federal laboratory system
which could have commercial value if further developed by the industrial
community . The movement of technology from the Federal laboratories to
industry is achieved through technology transfer, a process by which technology
developed in one organization, in one area, or for one purpose is applied in
another organization, in another area, or for another purpose . Technology
transfer can have different meanings in different situations . In some instances,
it refers to the transfer of legal rights, such as the assignment of patent title to
a contractor or the licensing of a Government-owned patent to a private firm .
In other cases, the transfer endeavor involves the informal movement of "knowhow" (information, knowledge, and skills) through person-to-person interaction .
Until recently, despite the potential offered by the resources of the Federal
laboratory system, the commercialization level of the results of federally-funded
research and development remained low . There are various reasons for this, one
of which is the fact that many technologies and patents have no commercial
application or have little value in the marketplace . Additional barriers to
transfer involve costs . It has been estimated that research accounts for
For more information on this and the following chapter see : U.S. Library
of Congress . Congressional Research Service . Technology Transfer : Use of
Federally Funded Research and Development . CRS Issue Brief No . IB85031, by
Wendy H. Schacht .
U.S . National Science Foundation . Federal Funds for Research and
Development: Fiscal Years 1991, 1992, and 1993 . Washington, U.S . Govt. Print .
Off., 1993 . p. 58. Note : the total Federal agency intramural figure includes the
"Federally Funded Research and Development Center" funding columns under
which NSF reports support for several of the Department of Energy laboratories
categorized as FFRDCs .
CRS- 1 1
approximately 25 percent of expenditures associated with bringing a new
product or process to market ." Thus, while it might be advantageous for
companies to rely on Government-funded research, there are still significant
added investments necessary to achieve commercialization after the transfer of
technology has occurred. This is particularly relevant in the biomedical field
where clinical trials and FDA regulations place additional requirements .
However, industry unfamiliarity with these technologies, the "not invented here"
syndrome, and ambiguities associated with obtaining title to or exclusive license
for federally-owned patents also contribute to the limited level of
The Legislative Foundation
Congress has enacted several laws to facilitate technology transfer from the
Federal Government to the private sector, beginning in 1980 with P .L. 96-480,
the Stevenson-Wydler Technology Innovation Act . Recognizing the benefits to
be derived from the transfer of technology, the law explicitly states that :
It is the continuing responsibility of the Federal Government to ensure
the full use of the results of the Nation's Federal investment in
research and development .
P.L. 96-480 "legitimized" the transfer effort and mandated that technology
transfer be accomplished as an expressed part of each agency's mission .
Section 11 created the institutional mechanisms by which Federal agencies
and their laboratories can transfer technology ." Additional incentives for the
transfer and commercialization of technology are contained in several
amendments to Stevenson-Wydler . Of particular interest to this discussion, is
the creation of a specific legal instrument, the "Cooperative Research and
Development Agreement" (CRADA), to initiate joint research and development
activities between a Federal laboratory and the business and/or academic
communities . P.L. 99-502, the Federal Technology Transfer Act, permits
Government-owned, Government-operated laboratories to enter into CRADAs ;
this authority was extended to Government-owned, contractor-operated
laboratories (generally the laboratories of the Department of Energy) in the FY
1990 Defense Authorization Act (P.L. 101-189) . Decisions to participate in
CRADAs may be made by the director of a laboratory who may also negotiate
licensing agreements for related Government-owned inventions previously made
at that laboratory. There is expected to be limited agency headquarter review
of CRADAs ; they are intended to be developed at the laboratory level . In
S0 See: The Debate Over a National Industrial Policy Toward Technology
and Economic Growth, op . cit.
g' For more information see : U.S. Library of Congress . Congressional
Research Service. Technology Transfer : Use of Federally Funded Research and
Development . CRS Issue Brief No . 1B85031, by Wendy H. Schacht .
pursuing these joint efforts, the laboratory may accept funds, personnel,
services, and property from the collaborating party and may provide personnel,
services, and property (but not funds) to the other organization. The work
performed must be consistent with the laboratory's mission .
Under a CRADA, title to, or licenses for, inventions made by a laboratory
employee may be granted in advance to the participating company, university,
or consortium by the director of the laboratory . In addition, the director can
waive, in advance, any right of ownership the Government might have on
inventions resulting from the collaborative effort regardless of size of the
company . This diverges from other patent law which requires that title to
inventions made under Federal R&D funding be given only to small businesses,
not-for-profits, and universities (see below) . In all cases, the Government
retains a nonexclusive, nontransferable, irrevocable, paid-up license "to practice,
or have practiced," the invention for its own needs .
Laboratory personnel and former employees are permitted to participate in
commercialization activities if these are consistent with the agencies' regulations
and rules of conduct . Federal employees are subject to conflict of interest
restraints . Preference for CRADAs is given to small businesses, companies
which 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, which accompanied the legislation, "the authorities
conveyed by [the section dealing with CRADAs] are permissive" to promote the
widest use of this arrangement . To date, over 2,000 CRADAs have been signed
across all Federal departments and agencies ; NIH was involved in 206 through
the end of FY 1993 . In the Administration's FY 1995 budget request, the
President has recommended that the number of CRADAs involving all Federal
institutions increase to 3,200 by 1995 .
While much of the focus of technology transfer has been on the formal
CRADA mechanism, there are various other ways to promote cooperation
between Government laboratories, industry, and academia . Many of these also
have a legislative basis, reflecting congressional intent to establish an
environment where industry expands its utilization of the results of federallyfunded research and development . These include non-CRADA cooperative
agreements, personnel exchanges and visits ; direct funding for projects through
grants ; licensing of Government-owned patents ; educational initiatives;
information dissemination (publication) ; participation at meetings ; and the
spinoff of new firms . In addition, P .L. 102-564, the Small Business Innovation
Development Amendment Act, created a new pilot program designed to facilitate
the commercialization of Federal laboratory R&D by small companies, among
other things . The Small Business Technology Transfer Program will provide
funding for research proposals developed and executed cooperatively between a
CRS- 1 3
small firm and a research scientist in a laboratory (Federal, university, or nonprofit institution) which fall under the mission requirements of the Government
funding agency. This will be financed by a 0 .05 percent set-aside of the agency's
R&D budget in 1994, 0 .1 percent in 1995, and 0 .15 percent in 1996 .
Efforts to foster joint ventures between academia, industry, and
Government are an attempt to utilize and integrate what these sectors do best
and to direct these activities toward the goal of generating new products and
processes for the marketplace . Collaborative projects allow for shared costs,
shared risks, shared facilities, shared expertise, and possibly shared profits .
Opponents argue that joint ventures stifle competition ; proponents assert that
they are designed to accommodate the strengths and responsibilities of each
participant in the innovation process .
The lexicon of current cooperative activity covers various different
institutional and legal arrangements . Collaborative ventures can be structured
either "horizontally" or "vertically ." The former involves efforts in which
companies work together to perform research and then use the results of this
research within their individual organizations . The latter involves activities
where researchers, producers, and users work together . Both approaches are
seen as ways to address some of the perceived obstacles to the competitiveness
of American firms in the marketplace . Issues of patent ownership, disclosure of
information, licensing, and antitrust are resolved within the guidelines
established by law governing joint ventures as discussed below .
Of particular interest to NIH is industry-university cooperation .
Traditionally, universities perform much of the basic research integral to certain
technological advancements . They are generally able to undertake fundamental
research because it is part of the educational process and because they do not
have to produce for the marketplace . The risks attached to basic research in
this setting are fewer than those in industry where companies must earn profits .
Universities also educate and train the scientists, engineers, and managers
employed by companies .
Academic institutions do not have the commercialization capacity or
responsibility available in industry and necessary to translate the results of
research into products and processes that can be sold in the marketplace . Thus,
if the work performed in the academic environment is to be integrated into
goods and services, a mechanism to link the two sectors must be available . Prior
to World War II, industry was the primary source of funding for basic research
in universities . This financial support helped shape priorities and build
relationships . However, after the war, the Federal Government supplanted
industry as the major financial contributor and became the principal
determinant of the type and direction of the research performed in academic
institutions . This situation resulted in some disconnection between the
university and industrial communities . Because industry and not the
Government is responsible for commercialization, the difficulties in moving an
idea from the research stage to a marketable product or process appear to have
been compounded .
Efforts to encourage increased collaboration between the academic and
industrial sectors might be expected to augment the contribution of both parties
to technological advancement . It is of benefit to the Government, particularly
for NIH which extensively funds university R&D ($5 .2 billion in FY 1994), 32
to see that the results of this Federal investment are commercialized . In
response, the Congress enacted P .L. 96-517, Amendments to the Patent and
Trademark Laws, commonly known as "Bayh-Dole" after its two main sponsors .
The intent of the legislation is to utilize patent ownership of inventions arising
out of Government-sponsored R&D to facilitate the development of new
technologies through cooperation between the research community, small
business, and industry.
Patents, the Bayh-Dole Act, and Related Law
P.L. 96-517 was passed by the Congress in 1980 to address the low
utilization rate of patents resulting from Government sponsored research . The
House report to accompany H .R. 6933 notes that at the time the bill was
considered there were 26 different agency policies regarding the use of the
results of Government-funded R&D . The intent was to replace this with a
"single, uniform national policy designed to cut down on bureaucracy and
encourage private industry to utilize government funded inventions through the
commitment of the risk capital necessary to develop such inventions to the point
of commercial application ."83 This was to be accomplished by utilizing the
patent system to (1) provide for increased participation of small firms in the
Federal R&D enterprise under the assumption that these companies tend to be
more innovative and (2) augment collaboration between universities (as well as
other non-profit institutions) and the business community to ensure that
inventions are brought to market .
Prior to the passage of Bayh-Dole in 1980 and subsequent related
legislation, the Government generally retained title to inventions made under
Federal funding and issued to companies either an exclusive license in rare
cases, or, more commonly, a nonexclusive license . However, it was argued that
without title (or at least an exclusive license) to an invention and the protection
it conveys, a company would not invest the time and money necessary for
commercialization . This contention was supported by the fact that, although a
portion of ideas patented by the Federal Government have potential for further
development, application, and marketing, by 1980 only about five percent of
these were ever used in the private sector .
Federal Funds for Research and Development : Fiscal Years 1991, 1992,
and 1993, op . cit ., p . 58.
U.S. Congress . House. Committee on the Judiciary . Report to
Accompany H.R. 6933. House Report No . 96-1307, Part 1, 96th Cong ., 2d Sess .
Washington, U.S. Govt . Print . Off., 1980 . p. 3.
CRS- 1 5
The patent system was created to promote innovation . Based on Article I,
Section 8 of the U .S . Constitution which states : "The Congress Shall Have
Power . . . To promote the Progress of Science and useful Arts, by securing for
limited Times to Authors and Inventors the exclusive Right to their respective
Writings and Discoveries . . .," the patent system encourages innovation by
simultaneously protecting the inventor and fostering competition . It provides the
inventor with an exclusive right for 17 years to further develop his idea,
commercialize, and thereby realize a return on his initial investment .
Concurrently, the process of obtaining a patent places the concept in the public
domain . 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 market needs .
Not everyone agrees that the patent system facilitates innovation . Critics
argue that patents provide a monopoly which induces additional social costs and
that cross licensing between companies can result in exploitation of markets .
It has also been claimed that the patent system was designed to assist the
individual inventor and the shift toward more R&D being performed in large
companies has diminished the patent's value to society since these firms can
utilize other methods to protect their investments (e .g., trade secrets) . For
example, in the pharmaceutical arena, a firm can strengthen its competitive
position over other companies because of the long lead time necessary to bring
a product to market and by utilizing the FDA approval process, clinical trials,
and the data generated, among other things, to capture "monopoly profits" prior
to similar goods reaching the marketplace ."
However, these arguments may not hold up well when considering the
biotechnology industry where similar products can be made by different
processes or identical processes used to make different products . Process
patents," which are of vital importance for much of the biotechnology and
pharmaceutical industries, are often harder to enforce and thus protect the
companies investment .
Not only is it difficult to detect and prove infringement of such a
patent [one that claims products or processes that are used only
during product development], but often the only effective remedy even
for proven infringement will be damages, because an injunction against
future use of the invention will not thwart the efforts of a competitor
who has already finished using the invention ."
Technology Transfer, Productivity, and Economic Policy, op . cit ., p . 134-
A process patent is a patent on the methodology used in creating or
producing a product .
Eisenberg, Rebecca S . Genes, Patents, and Product Development . Science,
v . 257, Aug . 14, 1992 . p . 906 .
In particular, as University of Pennsylvania professor Edwin Mansfield and his
colleagues found, patents are more important in the drug industry than in
others studied (e .g ., electronics, machinery) because of the ease which a drug can
be reproduced. These findings parallel " . . . Taylor and Silberston's conclusion
that the lack of patent protection would reduce the rate of expenditure on
innovative activity to a greater extent in drugs than in other industries ." 37 In
the drug industry, more than other industrial sectors, many patented
innovations would not have been introduced without patent protection . 38
Other relevant considerations include the fact that the majority of the
biotechnology companies seeking patent protection are likely to be small firms
originally intended to be protected by the patent system and which do not have
access to some of the resources of the larger companies . In addition, the time
lag traditionally found between research and application (but not
commercialization) is often substantially decreased in biotechnology because of
the nature of the industry and the type of R&D performed .
Despite the argument put forth during consideration of Bayh-Dole that title
should remain in the public sector where it is accessible to all interested parties
since Federal funds were used to finance the work, the Congress has accepted
(to some extent) the proposition that vesting title to the contractor will
encourage commercialization . The law states :
It is the policy and objective of the Congress to use the patent system
to promote the utilization of inventions arising from federallysupported research or development ; . . . to promote the
commercialization and public availability of inventions made in the
United States by United States industry and labor ; [and] to ensure
that the Government obtains sufficient rights in federally-supported
inventions to meet the needs of the Government and protect the public
against nonuse or unreasonable use of inventions . . 39
Each nonprofit organization (including universities) or small business is
permitted to elect (within a reasonable time) to retain title to any "subject
invention" made under federally-funded R&D ; 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 ."" The institution must
commit to commercialization within a predetermined, agreed upon, time frame .
As stated in the House report to accompany the bill, "the legislation establishes
a presumption [emphasis added] that ownership of all patent rights in
Technology Transfer, Productivity, and Economic Policy, op . cit ., p . 148 .
Ibid ., p . 150 .
39 P .L . 96-517, sec . 200 .
CRS- 1 7
government funded research will vest in any contractor who is a non-profit
research institution or a small business .,41
Certain rights are reserved for the Government to protect the public's
interests . 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" which enable the Federal agency to require the
contractor (whether he owns the 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 involve 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 which are not reasonably
satisfied by the contractor . . ."42
The Government is "authorized" to withhold public disclosure of
information for a "reasonable time" until a patent application can be made . This
supplements additional law (35 U .S .C . 205) which prohibits the Patent and
Trademark Office from releasing information associated with a patent until it
is issued . However, at NIH, the grant recipient is required to publish the
results of the federally-funded research .
This is augmented by tax code
regulations mandating expeditious publication of actual research results in order
for a university or research institution to retain its tax exempt status . NIH also
requires that the patented work be available for use by other scientists for
research purposes without acquisition of a license .
Licensing by any contractor retaining title under this act is restricted to
companies which will manufacture substantially within the United States .
Initially, universities were limited in the time they could grant exclusive licenses
for patents derived from Government-sponsored R&D to large companies (5 of
the 17 years of the patent) . This restriction, however, was voided by P .L .
98-620, Amendments to the Patent and Trademark Laws . According to Senate
Report 98-662, extending the time frame for licensing to large firms " . . . is
particularly important with technologies such as pharmaceuticals, where long
development times and major investments are usually required prior to
commercialization ." 4 3
It continues to be argued that patent exclusivity is important for both large
and small firms . In a February 1983 memorandum concerning the vesting of
Report to Accompany H .R. 6933, op . cit ., p . 5 .
P .L . 96-517, sec . 203 .
U .S . Congress . Senate . Committee on the Judiciary . Report to
Accompany S . 2171 .
Senate Report No . 98-662, 98th Cong ., 2d Sess .
Washington, U .S . Govt . Print . Off., 1984 . p . 3 .
title to inventions made under Federal funding, President Reagan ordered all
agencies to treat, as allowable by law, all contractors regardless of size as
prescribed in P .L . 96-517 . This, however, does not have a legislative basis . In
addition, as noted previously, the Federal Technology Transfer Act allows firms
regardless of size to be awarded patents generated under a CRADA with a
Federal laboratory .
NIH-UNIVERSITY-INDUSTRY COLLABORATION : THE RESULTS
Implementation of the Laws
Funding by the National Institutes of Health in biotechnology has proven
effective in terms of new products both on the market and in the pipeline,
leading to cost savings . According to Dr . Jay Moskowitz, former NIH Associate
Director for Science Policy and Legislation, "[flor a total investment of $800
million in applied research, NIH research advances provide the Nation with a
yearly total cost savings of $5 .2 billion . This is a conservative estimate ."" The
system of incentives to innovate and bring new products on the market
embodied in the patent and technology transfer laws--reflecting congressional
and Administrative mandates--appears to be working well . The CRADA process
at NIH has accelerated clinical development of several therapeutics and hastened
the development of animal models for a variety of human diseases ."
University patent and licensing activities have increased substantially since the
passage of Bayh-Dole . There has also been growth in the number of "spin-off'
companies emerging out of academic institutions . In the 10 years between 1980
and 1990, the number of applications for patents on NIH supported R&D
increased from 890 to 2,600, according to Dr . Bernadine Healy, former Director
of the National Institutes of Health . In addition, universities are receiving
licensing royalties of over $80 million annually as compared to approximately
$30 million in 1986 .46 And, perhaps most meaningful to this discussion is the
statement by the former Director of NIH, Dr. Bernadine Healy that Bayh-Dole
is responsible for the development and growth of the biotechnology industry ."
This was achieved by both the expansion of cooperative efforts among
Government, industry, and academia and by the intellectual property protection
this Act provided .
" The National Institutes of Health and Its Role in Creating U .S. HighTechnology Industry Growth and Jobs, op . cit ., p. 12.
Ibid ., p. 9.
46 Bayh-Dole May Need "Reasonable Amendment and Adjustment ."
Washington Fax, June 23, 1993 . p. 2.
U.S . Congress. House. Committee on the Judiciary . Biotechnology
Development and Patent Law . Hearings, 102d Cong ., 1st Sess ., Nov. 20, 1991.
Washington, U.S. Govt. Print . Off., 1993 . p. 48 .
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 ." 48
discussed above provides a general framework to achieve these objectives .
However, there are specific issues associated with health research which have
generated concerns not raised in other industrial sectors . Given the particular
interest in health-related R&D, the increased commercial potential, and cost
considerations, questions are being raised as to the adequacy of current
arrangements . Most agree that closer cooperation can augment funding sources
(both in the public and private sectors), increase technology transfer, stimulate
more innovation (beyond invention), lead to new products and processes, and
expand markets . However, others point out that cooperation may provide an
increased opportunity for conflict of interest, redirection of research, less
openness in sharing of scientific discovery, and a greater emphasis on applied
rather than basic research .
These issues were extensively explored in the discussion surrounding
changes to the patent laws in 1980 and 1986, and the debate over technology
transfer since the late 1970s . As a result of these concerns, safeguards have
been built into the activities authorized by law . As discussed previously, marchin rights, the Government's retention of a irrevocable license to these patents,
publication requirements, and commercialization schedules, among other things,
all are incorporated into the process to protect the public interest . While there
is a potential for creating an "unfair" advantage for one company over another,
this is balanced against the need for new technologies and techniques and their
contribution to the well-being of the Nation. During the 1980s, Congress
determined that the dispensation of patent rights to universities, small
businesses, and nonprofit institutions and the issuance of CRADAs takes
precedence because of the greater good generated by new products and processes
which improve the country's health and welfare and by the understanding that
the economy gets a significant payback through increased taxes on profits,
through new jobs created, and expanded productivity . The Government benefits
through increases in tax revenues from profits, wages, and salaries .
The National Institutes of Health, in its cooperative ventures, has taken
into account many of the concerns arising specifically from the health-related
field, as well as from political considerations . Thus, the NIH approach to
cooperative research and development agreements differs from that of other
Federal laboratories . Although CRADAs are exempt from disclosure under the
Freedom of Information Act, "[clonsistent with our mission responsibilities, . . .
NIH declines to protect the results of CRADA research as trade secrets for
collaborators . This allows the results of CRADA research to join intramural
research results in being communicated broadly to the scientific and medical
48 President's Council of Advisors on Science and Technology . Achieving the
Promise of the Bioscience Revolution : The Role of the Federal Government.
Washington, Dec . 1992 . Introductory letter. [No page number]
community ."49 Open dissemination of research data is promoted" with the
agency reserving the right to publish information on NIH generated R&D even
under a CRADA . 51
The Fair Pricing Clause
The major difference, however, in the way the National Institutes of Health
and other Federal laboratories do joint work with the private sector is the
inclusion of a "fair pricing clause" in NIH's cooperative research and
development agreements and most licensing arrangements . This clause, adopted
by NIH in 1989, requires that any commercial product (e.g., a new drug)
resulting from a CRADA be sold at a price which reflects both the Federal and
private sector contributions to the technology's development as well as the
"health and safety needs of the public ." The official language states that there
be a "reasonable relationship" between these factors . Dr . Healy testified that the
emphasis is on "reasonableness :"
. . . NIH is not in the business, and does not intend to get into the
business, of price fixing or being a regulatory agency for
pharmaceutical prices . It does, however, intend to take seriously the
reasonable pricing clause in the sense of dialogue, discussion, and
persuasion, when necessary, in dealing with industry ."
The fair pricing clause 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, as well as the past director's judgement that it is ".. .
important for the public health ."53 There is no legislative mandate for such a
requirement, although a bill has been introduced to augment the clause . [H.R.
1334, introduced March 11, 1993, would prohibit NIH from entering into a
CRADA that does not include a set formula for pricing any future commercial
products .] At this point, it is unclear if the clause can be enforced as written
U.S. Congress . House . Committee on Science, Space and Technology .
Subcommittee on Technology and Competitiveness . Transfer of Technology
from Federal Laboratories . Hearings, 102d Cong., 1st Sess ., May 30, 1991.
Washington, U.S. Govt. Print . Off., 1991 . p. 158 .
The National Institutes of Health and Its Role in Creating U .S. HighTechnology Industry Growth and Jobs, op . cit ., p . 13.
Ibid., p. 29.
Ibid ., p . 19 .
Ibid ., p. 22 . For a discussion of the concerns expressed over the price of
AZT see: Pharmaceutical R&D : Costs, Risks, and Rewards, op . cit .
and NIH is reluctant to make definitive decisions on pricing ." Currently,
reasonable pricing is defined as a price within the range of existing therapies ."
However, it is necessary to differentiate between the reasonable pricing clause
and "price setting:" the latter is regulation and has been considered
inappropriate for NIH . As Healy testified, the laboratory is ". . . 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 ." Guidelines should be established ahead of time . The
laboratory should not be "too intrusive" or get " . . . too involved in the financial
and proprietary activities of companies ." 56
The reluctance of a Federal laboratory to enter into determinations of "fair"
pricing may be understood within the context of the wide range of variables
which might need to be taken into consideration . Among these are : (1) What
is the value of the Federal contribution since the Government is specifically
prohibited from providing direct funding under a CRADA? (2) What is the cost
of Government-sponsored research in relation to the total costs incurred by the
company (including research, development, clinical trials, FDA approval,
production, distribution, marketing)? (3) What costs were incurred in related
work which did not result in a marketable product or process? (4) Who owns the
intellectual property rights and what is their value to the company? (5) What
are the costs of not having the drug available? (6) What are the replacement
and/or substitution costs associated with the therapeutic?
Representatives from NIH have argued that as a result of the reasonable
pricing clause, ddI (an antiviral drug used in the treatment of AIDS) came to the
market at a cost to the consumer which was several hundred dollars less than
expected ." However, this requirement has generated additional uncertainties
in a process already fraught with risk . Not knowing what the determination of
"fair" will be at the end of a long and expensive research, development, and
commercialization process, is a strong deterrent to entering into a cooperative
arrangement . Accordingly, ". . . many pharmaceutical and biotechnology
companies are reconsidering CRADAs, and NIH officials say four of the largest-Pfizer, Abbott Laboratories, Merck and The UpJohn Company--have told the
laboratory that they plan to forego new CRADAs unless the pricing clause is
Anderson, Christopher . Rocky Road for Federal Research Inc . Science, v .
262, Oct . 22, 1993 . p . 497 .
NCI Seeking Prices for CRADA Products in Line with Existing Therapies ;
Indigent Care Important . "The Blue Sheet," Jan . 27, 1993, p . 10 .
The National Institutes of Health and Its Role in Creating U .S. HighTechnology Industry Growth and Jobs, op . cit ., p . 22-23 .
p . 22 .
removed."" Some firms are even declining opportunities for joint clinical trials
with NIH in anticipation of future price control demands ." Some observers
are concerned that similar problems might arise with the cost containment
mechanisms proposed in the Clinton health care plan .
A study by the DHHS Inspector General found that companies viewed the
clause as a major problem in the NIH CRADA approach ." It appears that
fewer companies are interested in entering into cooperative research and
development agreements with the laboratory since the implementation of the
fair pricing requirement and other arrangements are being used to avoid it . For
example, Pfizer gave up exclusivity to commercial rights in a cooperative effort
with NIH to develop a drug to treat tooth pain in exchange for a waiver of the
clause . They were able to enter into a non-exclusive CRADA because of the
company's strong patent position regarding previous work . Several companies
are using a similar approach 6' However, some other firms, particularly small
ones like many biotechnology companies, can not afford to avoid the fair pricing
clause or make other cooperative arrangements . Thus, the sector which was
provided preference in entering into CRADAs--the small business community-arguably could be the most adversely affected by the reasonable pricing clause .
THE HEALTH CARE PLAN: IMPLICATIONS
To date, the U .S. system of research, development, and commercialization
appears to be working in the biotechnology arena . As noted previously, it is one
of the industries where American firms have had a continual positive trade
balance, where 70-80 percent of all U.S . patents are held by Americans, and
where NIH officials argue that by 1992 Federal investments of under $1 billion
have resulted in cost savings of over $5 billion a year, among other things . The
application of NIH fundamental and clinical R&D can provide improved health
care through better diagnosis, screening, prevention, and more effective
therapeutics . However, if the trend towards private sector avoidance of
cooperative R&D with NIH continues due to the imposition of the fair pricing
clause, it might have significant effects on the future of the biotechnology
The same concerns over the cost of new drugs which resulted in the use of
the fair pricing clause in NIH CRADAs have entered into the debate over the
proposed Clinton health care plan . As reflected in 20 years of congressional
Rocky Road for Federal Research, Inc ., op . cit .,
p . 497 .
Rhein, Reginald. Will NIH's Fair Price Clause Make CRADAs Crumble?
The Journal of NIH Research, v . 6, Mar . 1994 . p . 41 .
p . 41 .
6 ' NIH CRADA Review Rate of 4-6 per Month Reflects Industry Wariness of
"Reasonable Price Clause ." The Blue Sheet, May 12, 1993 . p . 6 .
deliberation over patents and cooperative R&D, as well as indicated by recent
circumstances at the National Institutes of Health, it appears that firms which
are unable to control the results of their investments because of Government
policies may be less willing to engage in related R&D . Companies can avoid
both licensing Government-owned patents or entering CRADAs with NIH in
response to the fair pricing clause if they have access to other means by which
to support research and protect their resources . However, if under pricing
restraints, the biotechnology community can not convince investors that the
returns on risk capital will be sufficient, the major funding sources may
disappear with few alternatives .
In attempting to ascertain what the potential effects of price control
mechanisms might be, the following discussion first describes briefly the various
reasons put forth for such restraints on breakthrough drugs," These reasons
are, for the most part, derived from the Administration's assessment of pricing
practices within the pharmaceutical industry . However, as noted earlier,
although there is overlap, the biotechnology and pharmaceutical industries are
not identical .
While pharmaceutical companies do perform R&D in
biotechnology (estimates are 33 percent of current research), they are generally
large entities which fund their own work out of profits from sales of existing,
primarily chemically derived, drugs . Most of these firms have been in existence
for many years and have a record of high profitability . The biotechnology
industry is composed primarily of small companies which are research intensive,
have few, if any, products on the market, fewer profits, and are dependent on
venture capital, public stock offerings, or cooperative efforts with larger
pharmaceutical companies for funding . Several of these firms have evolved into
larger companies over the last few years, but the majority remain small and
have been in operation 10 years or less .
The Clinton health care proposal would institute price control mechanisms
that could affect all new breakthrough drugs regardless of whether they
emerged from an established pharmaceutical company or a small biotechnology
firm . In light of this, the discussion below explores whether the affects of such
provisions on the biotechnology sector might be significantly different than that
which could be expected on the traditional pharmaceutical industry . Are current
assumptions still valid? Might there be unintended consequences to
biotechnology firms because of assumptions based on the activities of
For additional discussion see : U .S . Library of Congress . Congressional
Research Service .
The President's Health Care Reform Plan and Drug
Development in the Biotechnology Industry, by Gary Guenther . Washington,
Mar. 9, 1994 .
Rationale for Price Controls
There are several underlying considerations associated with the price
control provisions included in the Clinton health care proposal ." They are
based, in part, upon cost containment concerns and information that shows very
high profits in the pharmaceutical industry with drug prices rising in the 1980s
at twice the rate of inflation . For example, in 1991 it was estimated that
pharmaceutical companies had profit levels four times that of the average
Fortune 500 firm ." Because Medicare does not currently reimburse for most
outpatient prescriptions, the elderly have to pay for drugs out of pocket and are
acutely aware of price increases . For the population as a whole, prescription
drug purchases are necessary and not deferrable . A recent study by the General
Accounting Office comparing prices of prescription drugs in the United States
and the United Kingdom found prices lower in Great Britain for most
therapeutics reviewed . In introducing the report, Representative Henry
Waxman noted that the regulation of prices in Great Britain has not diminished
the performance of the indigenous drug industry."
The argument has been put forth that biotechnology products are unique
and therefore would not be subject to the type of intense competition which
would lower prices . Critics also charge that the pharmaceutical companies
spend more money on marketing and advertising than on research and
development 66 The Senate Select Committee on Aging has published data
indicating that the pharmaceutical industry is spending $1 billion more per year
on public relations than on research ." According to testimony by Hillary
Clinton before the House Energy and Commerce Committee in October 1993,
there is no
. . . longer doubt that we have a problem with the pricing of drugs in
the country . And what we are trying to do is to strike the right
balance between encouraging and motivating research, but not
permitting the public either through government programs or through
For additional discussion see : Prescription Drug Prices : Should the
Federal Government Regulate Them? op. cit .
64 U.S . Congress . Senate . Special Committee on Aging . Prescription Drug
Prices : Out-Pricing Older Americans . Hearings, 103d Gong., 1st Sess., Apr . 14,
1993. p. 3.
66 GAO Report on Drug Prices Hits U .S. Pharmaceutical Companies Hard .
Washington Fax, Feb. 4, 1994 . p. 2 .
ss An Industry in Pain, op . cit ., p. 2529 .
Prescription Drug Prices : Out-Pricing Older Americans, op . cit ., p. 3.
private insurance to bear more than a fair share of the costs of any
company recouping its research and development costs 68
Paralleling the arguments surrounding the NIH CRADA "fair pricing
clause," there are critics who contend that biotechnology and pharmaceutical
companies receive identifiable benefits from the Federal Government and should
price resulting therapeutics accordingly . 69 If, as proposed by the Clinton plan,
Medicare covers outpatient prescriptions, the Government should not have to
pay excessive prices under Medicare reimbursements for drugs resulting from
Federal support . Proponents of the use of price reviews argue that in
determining guidelines for these assessments, relevant criteria can be established
which adequately reflect a company's financial investment .
Concerns of the Biotechnology Industry
As these proposals are discussed, it might be helpful to examine the related
literature in this area, to review the current situation, and reiterate the effects
of the fair pricing clause on cooperative R&D between NIH and the private
sector. Several avenues of inquiry which might be explored include : Are the
indicators of price correct and relevant to the biotechnology industry? What do
recent studies show about the effects of price controls on biotechnology
companies? What has happened in the biotechnology industry since controls
have been suggested?
According to supporters of the biotechnology community, the focus on
"excessive" costs and "undue" profits is, in part, a result of misperceptions . Of
the $839 billion spent in 1992 on health care, drug expenditures were seven
cents for every one dollar expended elsewhere on health . Yet because 75 percent
of this seven cents is paid for directly by the consumer, the industry claims that
the public perceives drug prices as being too expensive . 0
Recent figures indicate that increases in prescription drug prices have fallen
to below 3 percent in 1993, from the over 10 percent rise which occurred in
68 Quoted in : Clinton, Shalala Testify on Future of Biomedical Research,
Pharmaceutical R&D Under Health Care Reform . Washington Fax, Oct . 13,
1993 . p . 1 .
U .S . Congress . House . Committee on Small Business . Subcommittee on
Regulation, Business Opportunities and Technology ; and U.S .
Senate . Special Committee on Aging . Hearings for discussion of the political
considerations advanced by the Hon . Ron Wyden and the Hon . David Pryor .
Hearings held Mar . 11 and Feb . 24, 1993 .
70 Biotech 94, op . cit ., p . 7-8 .
1991 . 71 This is considered less than inflation . It is argued the rate of drug
price increases is declining because of managed care, competition from generics,
and cost consciousness .' The movement towards large scale drug purchases
by HMOs, mail order drugs, and State Medicaid agencies has shifted market
share by making doctors prescribe drugs from formularies ; the ability to shift
market share is a key to keeping drug prices competitive ." It is also argued
that the "threat" of price controls has had a significant impact on slowing the
rate of drug price increases .
The price increases which are pointed to as the primary reason for
imposition of cost control measures are typically descriptive of new chemical
entities rather than biotechnology derivatives (of which there are still few
products) . According to the testimony of Kirk Raab, President and CEO of
Virtually no biopharmaceutical drug has increased its price beyond the
rate of inflation . Our medicines tend to be priced two to three times
higher abroad than here in the United States . Most have NEVER had
any price increases at all and some have actually declined in price .
Moreover, the manufacturer of every biopharmaceutical has instituted
a "free goods" program to ensure that no American is denied treatment
because of inability to pay .'
Additional information from the GAO study of drug pricing in the United States
and Great Britain appears to support this argument to some extent . Analysis
of the data show that while drugs sold before 1980--prior to the development of
the biotechnology industry--were 121 percent more expensive in the U.S ., the
differentials were only 17 percent for those drugs--both chemical and
biotechnology--first marketed between 1986 and 1993 . 7' In addition, these
breakthrough drugs may not remain unique for long as competing therapeutics
are developed and introduced. The Boston Consulting Group found that those
drugs marketed during 1991 and 1992 had an average price 14 percent lower
71 Economists Dispute Clinton Claim Health System is Anti-Competitive .
Inside the White House, Jan . 6, 1994 . p . 20 .
The Pharmaceutical Industry's Role in Health-Care Reform, op . cit ., p . 2 .
Tully, Shawn . The Plots to Keep Drug Prices High . Fortune, Dec . 27,
1993 . p . 121 .
Raab, Kirk . Written Statement submitted to the House Committee on
Energy and Commerce, Subcommittee on Health and the Environment, Feb . 8,
1994 . p . 7 . [Unpublished hearings]
GAO Report on Drug Prices Hits U .S . Pharmaceutical Companies Hard,
op . cit ., p . 2 .
than the leading medicine in the same therapeutic category .76 If, in fact,
chemically derived drug prices are excessive, controls on new, breakthrough
therapeutics which are expected to result from biotechnology may not have
application or produce the intended effects .
The majority of companies doing R&D in the biotechnology arena have few
if any products now on the market and therefore few if any profits . Drug
profits pay for more research ; as noted previously, biotechnology companies
invest a larger percentage of sales revenue into R&D than other types of firms .
Supporters argue that if profits, where they exist, are curtailed there will be less
money for reinvestment particularly by the smaller firms . At the same time,
other sources of financial support seem to be diminishing . Under current
budgetary constraints, the increased demand for NIH grants means a smaller
percentage are being funded . Most firms in this community are dependent on
private sector, high risk funding . However, it appears that the public equity
market is moving away from biotechnology investments .
According to the Ernst and Young report, 1992 biotechnology initial public
offerings (IPOs) were $900 million, 31 percent less than the previous year ."
The Biotechnology Industry Organization (BIO) reports that the value of IPOs
through June 30, 1993 was $253 million . This figure appears to reflect a recent
trend of decreasing value of IPOs as evidenced by BIO's figures of $1 .203 billion
for 1992 and $1 .542 billion in 1991 ." Reasons for the decline include the
inability of certain therapeutics to meet their expectations both on the market
and in clinical trials and reduced profits in the industry . A 25 percent decline in
the value of biotechnology companies between December 31, 1992, and March
31, 1993, has been attributed by some analysts to announcements concerning
price constraint aspects of the Clinton health care proposal ." CommScan has
figured that, in 1993, $520 .8 million in public and private stock offerings for
drugs and medical devices were canceled due to the specter of price controls .
The potential for the approximately 4,000 jobs which reportedly would have
been created due to this financing was eliminated . J.D . Kleinke of HCIA, a
health care data analysis and research firm, points out that 35,000 actual
positions have been cut by pharmaceutical companies since this debate began .
Most of these jobs were well paid, high tech, highly skilled positions ."
However, others have attributed this to drugmakers downsizing due to a more
's Ibid ., p. 12.
" Biotech 94, op . cit., p. 55 .
Biotechnology Industry Organization . September 1993 Report on the
Unpublished report .
Financial Markets for Biotechnology Companies .
79 Biotech 94, op . cit., p. 6 .
Kleinke, J. D. Expensive Drugs Lower Health Care Costs . Wall Street
Journal, Feb . 16, 1994. p. 18.
competitive environment . It has also been reported that biotechnology firms
raised approximately $3 billion in 1993, the second largest yearly total to date
which may mean other funding sources are being utilized ."
The rate of R&D investment in both the pharmaceutical and biotechnology
sectors is expected to decline . This year, pharmaceutical industry increases in
R&D of as little as 4 percent to approximately $13 .1 billion are anticipated in
contrast to last year's 13 .5 percent increase ; and there are concerns that health
care reform may "curtail" spending even further ." Last year's increase in
funding was less than the 16 percent average between 1980 and 1992 .83 Yet,
it can be noted that this decline comes following a decade of substantial yearly
increases in profits . According to Standard and Poor's, between 1982 and 1992
the pharmaceutical industry had an average annual earnings growth rate of 18
Similar declines in R&D growth rates are expected in the biotechnology
sector. The effects of this change in R&D may be dramatic, if, as P . Roy
Vagelos, M.D., Chairman and Chief Executive Officer of Merck and Company,
Inc . argues, R&D investment decisions are based on the availability of funding .
"Numerous academic studies have documented the responsiveness of R&D to
changes in cash flow : for every $100 drop in cash flow, R&D investment
declines $30 to $40 ."85 In a survey undertaken by the industry association BIO
of its member firms in the area of cancer research, 44 percent of companies have
delayed or canceled their research activities and 41 percent attributed this to a
decline in investment resulting from uncertainty generated by the Clinton
proposal for price restraint mechanisms in the health care plan . Sixty-two
percent of respondents felt there would be additional cutbacks if this provision
became law ." In the field of AIDS research, 47 percent of the firms indicated
si Hamilton, Joan O'C . A Little Dose of Government Won't Kill Biotech .
Business Week, Feb . 28, 1994 . p. 65.
Weber, Joseph . A Big Dose of Uncertainty . Business Week, Jan . 10, 1994 .
p. 85 .
Mossinghoff, Gerald J . Written statement submitted to the House
Committee on Energy and Commerce, Subcommittee on Health and the
Environment, Feb . 8, 1994 . p. 6 . [Unpublished hearings]
84 Health Care Products and Services, Basic Analysis . Standard and Poor's
Industry Surveys, v . 161, Sept . 9, 1993 . p. H18 .
Vagelos, P . Roy . Written testimony submitted to the House Committee on
Energy and Commerce, Subcommittee on Health and the Environment, Feb . 8,
1994 . p . 8 . [Unpublished hearings]
Biotechnology Industry Organization . Cancer Research Suffers From
Investment Crunch, Biotech Industry Sees Further Cuts . BIO News Release,
Feb . 2, 1994 . p. 1 .
that R&D spending had declined, 40 percent blamed the fear of price controls .
Sixty-three percent noted that further cuts would be made if the plan became
law 87 A recent study by The Gordon Public Policy Center at Brandeis
University authored by Robert Goldberg found that of the 107 biotechnology
firms surveyed, 67 percent would be deterred from R&D for the population
served by Medicare because price controls would limit the availability of
investment capital ." However, the study also found that if, as intended under
health care reform, Medicare would pay for prescriptions, the number of
prescriptions filled may increase substantially and may offset some of the effects
of drug price limitations .
Several other recent studies have predicted that price controls would be
detrimental to innovation in the biotechnology arena . F . M . Scherer at Harvard
concluded that such a provision would "seriously impair" investment in new
products . Because, as he sees it, price controls would not take into account the
costs associated with drugs which did not make it to the market,
[i]f profits were held to "reasonable" levels on blockbuster drugs,
aggregate profits would almost surely be insufficient to sustain a high
rate of technological progress . This tendency would be aggravated
when, as is likely, individual companies are too small to pool internally
the combination of (highly skewed) market and regulatory risks . If in
addition developing a blockbuster is riskier than augmenting the
assortment of already known molecules, the rate at which important
new drugs appear could be retarded significantly ."
According to George M . Milne, President of Central Research at Pfizer Inc ., "The
stronger the focus on prices, the greater the danger that companies will be too
risk-adverse ." 90 Under price controls, it thus becomes increasingly important
to pick only winners if other investments which do not make it to the
marketplace can not be compensated for by those products that do . Some
analysts believe that the avoidance of risk may hinder the progress of science
where failures often are instructive and promote the evolution of new ideas and
Robert Goldberg, Brandeis University, found that in the global marketplace
there is a perfectly inverse relationship between drug price regulation and
new product innovation as measured by product introductions and world-wide
Ibid ., p . 3 .
Price Controls Would Force Biotech Companies to Look Offshore for
Funding, Says Survey . Washington Fax, Mar . 16, 1994 . p . 1 .
Pricing, Profits, and Technological Progress in the
Scherer F . M .
Pharmaceutical Industry. Journal of Economic Perspectives, v . 7 . Summer
1993 . p . 113 .
90 A Big Dose of Uncertainty, op . cit ., p . 85 .
CRS- 3 0
market share relative to domestic market size ." 91 Similarly, industry analyst
Heinz Redwood concluded that there is "an indisputable link between pricing
freedom and successful innovative research and development in the
pharmaceutical industry ." 92 A 1991 study by the U .S . International Trade
Commission reported that foreign efforts to implement cost-containment
programs, price controls, or both, on a national level, resulted primarily in
decreased R&D investments such that the pharmaceutical industries in several
countries have been weakened or have shifted their activities elsewhere ."
The industry and many analysts argue that the long-term cost effectiveness
of a therapeutic is more relevant to health care improvements than the drug's
initial price . Most medicine tends to be less expensive than surgery, hospitals,
or nursing home care . A recent study found that restrictions on the availability
of medicines (restricted formularies) may lower expenditures for drugs, but
increase expenditures for other health related services including hospitalization
and administrative costs' For example, it costs approximately $46,000 for a
coronary bypass in contrast to $60 per month for a drug designed to lower
cholesterol and prevent surgery .` At Duke University, cost efficiencies have
been achieved in a bone marrow transplantation program though the use of a
biotechnology-derived product that stimulates the growth of bone marrow .
Application of granulocyte colony-stimulating factor has decreased hospital stays
from weeks in isolation to only four to five days and lowered the per-patient cost
by $75,000 (from $140,000 in 1990) . As described by Charles Sanders, M.D .,
Chairman and Chief Executive Officer of Glaxo Inc ., this therapy has " . . .
turned what was a high-mortality, inpatient procedure into a highly successful
procedure performed largely on an outpatient basis ." 96
An interesting analogy was offered by Dr . John Curd, Clinical Director at
Genentech during testimony at recent hearings . He pointed out that in the
early stages of development, satellite technology was extremely expensive but
now telecommunications technologies are both cheap and ubiquitous .
Ultimately, biotechnology research may result in drugs that are so medically
Quoted in : Expensive Drugs Lower Health Care Costs, op . cit ., p . 18 .
Quoted in : Sanders, Charles A . Written statement submitted to the
House Committee on Energy and Commerce, Subcommittee on Health and the
Environment, Feb . 8, 1994 . p . 4 . [Unpublished hearings]
sa Mossinghoff testimony, op . cit ., p . 13 .
sa Kozma, C . M. et. al . Economic Impact of Cost-Containment Strategies in
Third-Party Programmes in the United States . PharmacoEconomics, 1993 . p .
187-202, as summarized in : The NPC Report . The National Pharmaceutical
Council . Fall 1993 . p . 7 .
Expensive Drugs Lower Health Care Costs, op . cit ., p . 18 .
Sanders testimony, op . cit., p . 2-3 .
effective they will be cost effective also ." The "learning curve" is part of the
process of decreasing costs, argues Dr . Thomas Brown, Associate Professor,
Duke University School of Medicine . The cost of breast cancer treatment is
being lowered by new drugs and technologies which allow women to stay out of
hospital while receiving therapy . Similarly, three times the initial NIH
investment in R&D for testicular cancer has been recouped by the lives saved
and all the accompanying benefits ."
Some proponents of price reviews on breakthrough drugs maintain that
Federal support for biotechnology R&D, which often leads to new therapeutics,
provides a rationale for Government participation in price determinations,
particularly for drugs involved in expanded Medicare reimbursements under the
Clinton health care proposal . This justification is also the basis for the
inclusion of a fair pricing clause in cooperative research and development
agreements between the National Institutes of Health and the private sector.
It is argued that criteria can be established which take into consideration the
relative investments of both the Government and the company .
The position that the Federal Government should receive commensurate
cost considerations for its financial support of research and development was
part of the legislative debate over patent policy and cooperative R&D . Congress,
over 20 or more years, weighed the issues and the arguments and decided that,
in the case of patent and technology policies, the benefits to the Nation brought
about by increased innovation are paramount . It has been estimated that the
returns to society generated by investments in basic research are approximately
twice those to the company performing the work . The payback to the country
includes increased revenues from taxes on profits, new jobs created, improved
productivity, and economic growth . The growth of the biotechnology industry
and the development of new therapeutics to improve health care are prominent
examples of such benefits . These benefits have been considered more important
than the initial cost of the technology to the Government or any unfair
advantage created .
Actual experience and cited studies point to the conclusion 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 fact is reflected in the legislative approaches to
Curd, John . Oral testimony presented to the House Committee on
Science, Space and Technology, Subcommittee on Technology, Environment and
Aviation, Feb . 2, 1994. [Unpublished hearings]
Brown, Thomas . Oral testimony presented to the House Committee on
Science, Space, and Technology, Subcommittee on Technology, Environment and
Aviation, Feb . 2, 1994.
both patents institutionalized by Bayh-Dole and cooperative research mandated
by Stevenson-Wydler, as amended . Universities, non-profit institutions, and
small businesses are provided title to any patent arising from federally-funded
research and development as an economic incentive to encourage the commercial
application of these technologies or techniques . Cooperative R&D is designed
to facilitate the emergence of new products, processes, and services by fostering
an environment where the participants in the technology advancement process
can work together . There are provisions for the non-federal partners in the
joint effort to obtain certain rights to any resulting intellectual property . In
these ways, the business community can obtain a return on their financial
contribution to the endeavor .
NIH has decided to implement a "fair pricing clause" in its cooperative
research and development agreements . This limits the decisions that a company
can make in commercializing any result of federally-supported R&D . As a
result, fewer firms appear to be interested in joint research with the National
Institutes of Health . Speaking to the situation at the NIH, Robert Taber,
DuPont Merck Vice President for Extramural R&D, warned "`Until this pricing
issue ends up getting settled, it's going to cast a pall over our ability to work
with NIH at a time when the opportunities have never been greater .""' This
experience may be illustrative . The results of the pricing clause in NIH
CRADAs demonstrate, in practice, some of the actual effects of the imposition
of such conditions . Companies avoidance of cooperative R&D is contrary to
congressional initiatives to promote increased innovation . There is concern that
this may be a harbinger of the possible impact of price controls on breakthrough
drugs under the proposed Clinton health care plan. This is where the competing
goals of health care cost containment and the encouragement of technologybased breakthrough drugs may conflict . The implications could be significant,
not just for the companies involved, but for the development of new
biotechnology drugs to meet the health care, public welfare, and economic
growth needs of this Nation .
NIH CRADA Review Rate of 4-6 Per Month Reflects Industry Wariness of
"Reasonable Price Clause," op . cit., p. 6.