In the 1970s, European nations developed over half of the world’s new drugs and only 5% of patents based on federally funded research were ever used in the private sector. Since 1980, there have been hundreds of new medications and vaccines developed through public-private technology transfer partnerships in the United States, and today the United States develops two-thirds of the world’s new medications.
What changed? Mostly, the 1980 enactment of the Bayh-Dole Act.
Bayh-Dole created the incentive structure that propelled the United States to world leadership in new drug development. How? Bayh-Dole enabled universities and nonprofit research institutions to own, patent, and commercialize inventions that were developed under federally funded research programs. Prior to Bayh-Dole, patents that resulted from funded research were essentially in the public domain. By letting the patents accrue to the research institution, and, from there, to be exclusively licensed to a private, for-profit business, Bayh-Dole created the incentive structure that has fueled the remarkable surge in pharmaceutical innovation in the United States over the last four decades.
With due regard to the “take home message” of Bayh-Dole, there is an important footnote. Bayh-Dole includes provisions that provide the government with so-called “march-in” rights. If a patent is licensed via Bayh-Dole to a private entity that does not appropriately commercialize the patent, the Feds can “march-in” and license the patent to another entity that will presumably do a better job commercializing it. By way of example, consider a patent that a licensed entity “puts on the shelf” so as to limit competition for some other product or service the entity markets.
According to the original Bayh-Dole Act, the march-in provision is only applicable under limited circumstances, such as if the licensee fails to make efforts to bring the product to market or fails to reasonably satisfy public health and safety needs. Recently, some have called for the government to assert its march-in rights to drugs that are thought to be priced too high. Proponents of the change believe that price-triggered march-in rights would tamp down high drug prices and ensure that consumers enjoy the benefits of public research and development funding. Generally, they argue that U.S. taxpayers should be protected from too high prices on technology developed with public funding.
While some feel that march-in rights would be a good tool to reign in drug prices, there are reasons to question that. March-in rights based on price could discourage private enterprises from investing in the commercial development of publicly funded research. As important as publicly funded research is, private investment is needed to bring early-stage technology to the marketplace, and that private investment typically far outpaces the public investment. Studies have found that for every $1 spent on government research on a product, at least $10 of industry development, over five years or more, are typically required to bring products based on publicly funded research to market. The significant private investment required for the development of federally-funded drugs highlights the importance of Bayh-Dole licensing rights – no company would want to spend millions of dollars developing a drug just for the government to take away its license.
The risks related to using march-in rights in response to high drug prices is seen in the National Institute of Health’s “reasonable pricing” requirement imposed on Cooperative Research and Development Agreements (CRADAs) in 1989. These agreements were licensing deals between the government and private industry groups. Within two years of the NIH imposing a reasonable pricing requirement, the number of CRADAs had dropped by more than 25%. Soon after, a government study revealed that the reasonable pricing clause was driving industry away from scientific collaboration. As a result, the NIH abandoned the reasonable pricing clause in 1995. Within three years, the number of CRADAs quadrupled, demonstrating the constraining impact the reasonable pricing requirement had on these agreements.
The call for the use of march-in rights in response to high drug prices has happened before. In 2002, an article was published calling for the government to use its march-in rights to address high drug prices. In response, former Senators Birch Bayh and Robert Dole, the drafters of the original bill, wrote an editorial describing the purposes of the Bayh-Dole Act and the reasons why the march-in provision should not be used to tamp down high drug prices. The Senators noted that the act did not intend for the government to set prices on products, as the law “makes no reference to a reasonable price that should be dictated by the government.” The editorial noted that this pricing omission was intentional, and that the law instructs the government to revoke licenses “only when the private industry collaborator has not successfully commercialized the invention.”
The NIH itself has noted several reasons for turning down march-in petitions based on drug pricing. For example, in response to a 1997 petition, the NIH responded that it was “mindful of the broader public health implications of a march-in proceeding, including the potential loss of new health care products yet to be developed from federally-funded research.” Once again, in 2004, the NIH turned down another march-in petition aimed at a high drug price. This time, the NIH said that “the issue of drug pricing has global implications, and, thus, is appropriately left for Congress to address legislatively.” As the Congressional Research Service has noted, “Striking a balance between these competing views regarding the commercialization of federally-funded research remains a matter of congressional judgment.”
The Bayh-Dole Act has been a resounding public policy success. Over the past 25 years, the Act has contributed over $1.9 trillion to the U.S. economy while creating over 6.5 million jobs. American universities, small and large businesses, and individuals now bring to market around three new products that are based on federally funded inventions each day of the year.
Bayh-Dole is not broken and doesn’t need fixing.
Co-authors of this blog include Paul Jones and Michael Best Summer Associate Jack Darrow.