Federal R&D, Drug Discovery, and Pricing: Insights from the NIH-University-Industry Relationship
Federal R&D, Drug Discovery, and
Pricing: Insights from the
NIH-University-Industry Relationship
Updated April 1, 2008
Wendy H. Schacht
Specialist in Science and Technology Policy
Resources, Science, and Industry Division
Federal R&D, Drug Discovery, and Pricing: Insights
from the NIH-University-Industry Relationship
Summary
Public interest in approaches that might provide prescription drugs at lower cost,
particularly for the elderly, has rekindled discussion over the role the federal
government plays in facilitating the creation of new pharmaceuticals for the
marketplace. In the current debate, some argue that the government’s financial,
scientific, and/or clinical support of health-related research and development (R&D)
entitles the public to commensurate considerations in the prices charged for any
resulting drugs. Others view government intervention in price decisions based upon
initial federal funding as contrary to a long-term trend of government promotion of
innovation, technological advancement, and the commercialization of technology by
the business community leading to new products and processes for the marketplace.
The government traditionally funds R&D to meet the mission requirements of
the federal departments and agencies. It also supports work in areas where there is
an identified need for research, primarily basic research, not being performed in the
private sector. Over the past 25 years, congressional initiatives have expanded the
government’s role to include the promotion of technological innovation to meet other
national needs, particularly the economic growth that flows from the use of new and
improved goods and services. Various laws facilitate commercialization of federally-
funded R&D through technology transfer, cooperative R&D, and intellectual property
rights. The legislated incentives are intended to encourage additional private sector
investments often necessary to further develop marketable products. The current
approach to technology development attempts to balance the public sector’s interest
in new and improved technologies with concerns over providing companies valuable
benefits without adequate accountability or compensation.
Some question whether or not the current balance is appropriate, particularly
with respect to drug discovery. The particular nature and expense of health-related
R&D have focused attention on the manner in which the National Institutes of Health
(NIH) undertakes research activities. Critics maintain that any need for technology
development incentives in the pharmaceutical and/or biotechnology sectors is
mitigated by industry access to government-supported work at no cost, monopoly
power through patent protection, and additional regulatory and tax advantages such
as those conveyed through the Hatch-Waxman Act and the Orphan Drug Act.
Supporters of the existing approach argue that these incentives are precisely what are
required and have given rise to robust pharmaceutical and biotechnology industries.
It remains to be seen whether or not decisions related to federal involvement in issues
related to pharmaceutical R&D will change the nature of the current approach to
government-industry-university cooperation. This report will be updated as events
warrant.
Contents
Overview ........................................................1
Government Support for R&D........................................2
Industrial R&D....................................................4
Patents ..........................................................7
Legislative Initiatives..............................................10
The Stevenson-Wydler Technology Innovation Act..................10
The Bayh-Dole Act...........................................12
NIH-University-Industry Collaboration: The Results.....................13
Intramural Research...........................................14
Policies .................................................15
Fair Pricing Clause........................................16
Extramural Research..........................................18
Issues and Options................................................22
Pricing Decisions and Recoupment ..............................22
Research Tools...............................................28
Government Rights: Royalty Free Licenses and Reporting Requirements.30
Concluding Observations...........................................31
Federal R&D, Drug Discovery, and Pricing:
Insights from the NIH-University-Industry
Relationship
Overview
Public interest in approaches that might provide prescription drugs at lower cost,
particularly for the elderly, has rekindled discussion over the role the federal
government plays in facilitating the development and marketing of new
pharmaceuticals. In the current debate, some argue that the government’s financial,
research, and/or clinical support of health-related R&D entitles the public to
commensurate considerations in the prices charged for any resulting drugs. Others
view government intervention in price decisions based upon initial federal funding
of basic research as contrary to a long-term trend of government promotion of
innovation, technological advancement, and the commercialization of technology by
the business community leading to new products and processes for the marketplace.
The federal involvement in R&D stems, in part, from the understanding that
technological advancement is a key element in economic growth. Many of the
innovations that stimulate technological progress are rooted in basic research.
However, because the returns to basic research accrue to society as a whole and often
can not be captured by the firm performing the work, there tends to be
underinvestment in these activities. Thus, the government typically funds
fundamental research as a “public good.” Concurrently, the government has an
interest in ensuring that the results of this enterprise are applied to generate new
goods and services to meet the demands of citizens. The benefits of research emerge
when innovations are available in the marketplace. In recognition of this, the
Congress has passed legislation to facilitate the commercialization of new
technology.
Government policies implemented over the past 25 years include incentives to
increase private sector investment in technology development through technology
transfer, cooperative R&D, and intellectual property rights. The intent is to
encourage academia and industry to commit the necessary, and often substantial,
resources required to take the results of federally-supported R&D and generate
products or processes to meet market demand. Utilizing patent ownership and
facilitating collaborative government-university-industry efforts, the current
legislative approach attempts to balance the public’s need for new technologies and
techniques with concerns over providing companies valuable benefits without
adequate accountability or compensation. The reservation of certain rights for the
government that permit federal intervention in specific circumstances associated with
health and safety concerns are intended to act as safeguards for the public.
Some Members of Congress have questioned the adequacy of the current
balance between public and private needs. The particular nature of health-related
research and development, and the substantial federal investment in this area (over
$29 billion was appropriated to NIH for medical research in FY2007),1 has led critics
of the current system to argue that the necessity of incentives is mitigated by such
factors as free access to the results of federally funded work, by the monopoly power
permitted by patent protection, and by other regulatory and tax advantages such as
those conveyed by the Hatch-Waxman Act or the Orphan Drug Act. Therefore, some
maintain, a more direct payback should be required including recoupment of public
sector financial support or government involvement in price decisions. Others
counter that these inducements have played an important role in making the U.S.
pharmaceutical and biotechnology industries innovative, productive, and competitive.
They point out that while the government contributed to development of the Internet,
as well as to the telecommunications, semiconductor, and aviation industries, no one
is advocating federal involvement in cost considerations in these areas as they are in
the health field.
This paper explores the reasons behind government funding of research and
development and subsequent efforts to facilitate private sector commercialization of
the results of such work. It does not address issues associated with drug costs or
pricing. Instead, the report looks at the manner in which the National Institutes of
Health (NIH) supports research to encourage the development of new
pharmaceuticals and therapeutics, particularly through cooperative activities among
academia, industry, and government. The goal is to offer insights concerning the
discussion on whether or not use of the results of the federal R&D enterprise
warrants government input into price decisions made by the private sector. Concerns
surrounding innovation in health-related areas will be explored within the broader
context of the government’s role in facilitating technological progress.
Government Support for R&D
The U.S. government spent $137.0 billion for research and development in2
FY2007 (according to the National Science Foundation). Traditionally, the
government funds R&D to meet the mission requirements of the federal departments
and agencies (e.g., defense, public health, environmental quality). It also supports
work in areas where there is an identified need for research, primarily basic research,
not being performed in the private sector. Federal funding reflects a consensus that
while basic research is the foundation for many innovations, the rate of return to
society as a whole generated by investments in this activity is significantly larger than
the benefits that can be captured by any one firm performing it.3 “Government
1 See [http://www.officeofbudget.od.nih.gov/UI/2008/Congressional%20Approps.pdf].
2 National Science Foundation, Federal R&D Funding by Budget Function: Fiscal Years
3 Edwin Mansfield, “Social Returns From R&D: Findings, Methods, and Limitations,”
Research/Technology Management, November-December 1991, 24. See also: Charles I.
(continued...)
support of basic scientific research represents an example of the government
furnishing a good, scientific knowledge, that improves social well-being...a good that
cannot be sold because those who do not pay receive the benefits anyway.”4
Estimates of a social rate of return on R&D spending over twice that of the rate of
return to the inventor of the product often leads to underinvestment by the business
community.5 In addition, incentives for private sector financial commitments are
dampened by the fact that spending for R&D runs a high risk of failure. The rewards
of basic research tend to be long-term, sometimes are not marketable, and are not
always evident.
Congressional initiatives have expanded the government’s role in R&D to
include the promotion of technological innovation to meet other national needs,
particularly the economic growth that flows from the commercialization and use of
new products and production processes by the private sector.6 Technological
advancement is an important factor in the Nation’s economic growth. Experts widely
accept that technical progress is responsible for up to one-half the growth of the U.S.
economy and is one principal driving force for increases in our standard of living.7
Historically, industrial expansion was based on the use of technology to exploit
natural resources. Today, such growth tends to be founded on scientific discoveries
and engineering knowledge (e.g., biomedical applications, electronics) and is even
more dependent than before on the development and use of technology. Technology
can help drive the economy because it contributes to the creation of new goods and
services, new industries, new jobs, and new capital. It can expand the range of
services offered and extend the geographic distribution of those services. The
application of technologies also can contribute to the resolution of those national
problems that are amenable to technological solutions.
Technological progress is achieved through innovation, a process by which
industry provides new and improved products, manufacturing processes, and
3 (...continued)
Jones and John C. Williams, “Measuring the Social Return to R&D,” Quarterly Journal of
Economics, November 1998, 1119 and Richard R. Nelson and Paul M. Romer, “Science,
Economic Growth, and Public Policy,” in Bruce R. Smith and Claude E. Barfield, eds.
Technology, R&D, and the Economy, (Washington, The Brookings Institution and the
American Enterprise Institute, Washington, 1996), 57.
4 Baruch Brody, “Public Goods and Fair Prices,” Hastings Center Report, March-April
5 For a list of relevant research in this area see Council of Economic Advisors. Supporting
Research and Development to Promote Economic Growth: The Federal Government’s Role,
(October 1995), 6-7.
6 For information on relevant legislation see CRS Report RL33528, Industrial
Competitiveness and Technological Advancement: Debate Over Government Policy, by
Wendy H. Schacht.
7 Gregory Tassey, The Economics of R&D Policy (Connecticut: Quorum Books, 1997), 54.
See also Edwin Mansfield, “Intellectual Property Rights, Technological Change, and
Economic Growth,” in: Intellectual Property Rights and Capital Formation in the Next
Decade, eds. Charls E. Walker and Mark A. Bloomfield (New York: University Press of
America, 1988), 5.
services. Research and development are important to this technological advancement
in many ways. R&D contributes to economic growth by its impact on productivity.
For more than two decades various experts studying the effects of research and
development have found that productivity growth in an industry or a firm is generally
directly and significantly related to the amount spent previously on R&D in that
industry or company.8 Analysts estimate that one-half of productivity increases
(output per person) are the result of investments in research and development.9
Others argue that innovations arising from R&D are the most important ones.10
Profound changes in our society have been brought about by advances in research,
resulting in new products and processes in the areas of medicine, semiconductors,
computers, and materials, to name just a few.
To leverage the substantial federal investment in R&D, government policies and
practices provide incentives for private sector utilization of the results of this
endeavor to make products and processes for the marketplace. Legislative initiatives
(discussed below) facilitate the commercialization of government-funded research
and development through mechanisms that encourage government-industry-
university collaboration. Joint federal efforts with the private sector offer a means to
get government-generated research and technical know-how to the business
community where it can be developed, commercialized and made available for use
to meet the needs of government agencies or to stimulate economic growth vital to
the nation’s welfare and security. In addition, cooperative ventures among
government institutions, companies, and academia allow for R&D to cross traditional
boundaries of knowledge and experience. Ideas, expertise, and know-how are
combined, facilitating a mix that may lead to more creativity and invention.
Industrial R&D
Industry also has an interest in cooperative efforts with government and/or
academia. As new technologies are generated and their impact more widespread,
industry has had to commit an increasing amount of resources to the performance of
R&D. Concurrently, shortened product cycles have led to expanded demands for
new technology and higher costs for technology development as reflected in the
8 Alden S. Bean, “Why Some R&D Organizations Are More Productive Than Others,”
Research/Technology Management, January-February 1995, 26. See also: Edwin
Mansfield, “How Economists See R&D,” Harvard Business Review, November-December
9 Zvi Griliches, “The Search for R&D Spillovers,” Scandinavian Journal of Economics,
1992, 29-47. Cited in: Council of Economic Advisors, Supporting Research and
Development to Promote Economic Growth: The Federal Government’s Role, October,
10 Ralph Landau, “Technology, Economics, and Public Policy,” in: Technology and
Economic Policy, eds. Ralph Landau and Dale W. Jorgenson (Cambridge: Ballinger
Publishing Co. 1986), 5.
constant 2000 dollars).11 The rising expense of research and development has been
juxtaposed with increasing international competition and shareholder demands for
short-term returns. Thus, partnerships are a result of “today’s complex technologies,
intense competition, and information overload [that] have required new approaches”
beyond the funding of scientists to pursue their own interests.12 Cooperative R&D
permits work to be done which is too expensive for one company to fund or of
marginal value for any given firm.
Companies have developed alternative means of acquiring new technologies
while controlling the requisite costs. External alliances allow access to innovations
without the expense and risks of generating them independently. Thus, collaboration
permits firms to acquire the basic research they need from outside organizations.
Experts argue that, for certain industries, the more extensive a firm’s emphasis on
external sources of technical knowledge, the greater its total factor productivity
growth.13 A survey undertaken by PriceWaterhouseCoopers found “businesses that
outsource [their R&D] are growing faster, larger, and more profitable than those that
do not.”14 The perceived benefits to this approach are reflected in increasing
company support for external R&D. In 2005, companies funded $11.7 billion in
outside research and development, 5.7% of the total firm financed R&D, up from
3.7% in 1993.15 In the early 1980s, just after the passage of the Bayh-Dole Act, less
than 2% of industry funding was directed at extramural research.16
It should be noted that joint ventures are not always successful due, in part, to
failed concepts, cultural differences between companies or organizations, managerial
and financial issues, or conflicting goals and objectives. However, studies by
PriceWaterhouseCoopers identify numerous benefits that have resulted from
partnering including increased sales of existing products; improved competitive
position; increased productivity; development of more new products or business
lines; and better operations or technology. Of the fastest growing U.S. firms, 56%
have partnered in the past three years “resulting in more innovative products, more
profit opportunities — and significantly higher growth rates.”17 An earlier survey
undertaken by the company concluded that “collaborative growth firms are spending
more on new product development while focusing more on bigger winners and on
11 National Science Foundation, Science and Engineering Indicators, 2008, Appendix table
12 John Carey, “What Price Science?” Business Week, 26 May, 1997, 168.
13 Alden S. Bean, “Why Some R&D Organizations Are More Productive Than Others,”
Research/Technology Management, January-February 1995, 26.
14 PriceWaterhouseCoopers, Trendsetter Newsletter, March 13, 2000, available at
[http://www.barome tersurve ys .com].
15 Science and Engineering Indicators, 2008, Appendix table 4-50, available at
[http://www.nsf.gov/ statistics/ seind08/append/c4/at04-50.pdf].
16 John E. Jankowski, “R&D: Foundation for Innovation,” Research/Technology
Management, March-April 1998, 17.
17 PriceWaterhouseCoopers, “Partnerships Have Big Payoffs for Fast-Growth Companies,”
Trendsetter Barometer, August 26, 2002, available at [http://www.barometersurveys.com].
innovation ... [and] ... are not reluctant to go outside their organization to work with
others in the development of their innovative new products.”18
This trend is reflected in the pharmaceutical industry. There are an increasing
number of alliances, particularly between large businesses and small biotech
companies.19 According to one study, “nearly a third of new pharmaceutical products
are now developed through alliances.”20 Other research shows that “drugs developed
in alliances are more likely to succeed in clinical trials.”21 It appears that “merging
technological knowledge and skills from different companies improves the
innovation process.”22
In addition to joint projects among companies, industry-university cooperation
in R&D provides another important means to facilitate technological innovation.
Traditionally, much of the basic research integral to certain technological
advancement is funded by the government but performed in academia. Companies
are increasingly looking toward this community to provide the underlying knowledge
necessary for the development of commercial products without financing the large
overhead costs associated with in-house research. A study by the late Professor
Edwin Mansfield demonstrated that “over 10% of the new products and processes
introduced in [the 8 industries explored] could not have been developed (without
substantial delay) in the absence of recent academic research.”23 According to David
Blumenthal at the Harvard School of Medicine, by the mid to late 1990s, over 90%
of life science companies in the United States had a cooperative relationship with
universities.24
18 Coopers and Lybrand, L.L.P., “Partnerships Pay off for Growth Companies,” Trend Setter
Barometer, 6 January, 1997, available at [http://www/barometersurveys.com].
19 Patricia M. Danzon, Sean Nicholson, Nuno Sousa Pereira, Productivity in
Pharmaceutical-Biotechnology R&D: The Role of Experience and Alliances, National
Bureau of Economic Research, Working Paper 9615, April 2003, 5 available at
[http://www.nber.org/papers]. See also, Nadine Roijakkers and John Hagedoorn, Inter-firm
R&D Partnering in Pharmaceutical Biotechnology since 1975: Trends, Patterns, and
Networks, Research Policy, April 2006, 444.
20 Jon Hess and Elio Evangelista, Pharma-Biotech Alliances, Contract Pharma, September
alliances].
21 Patricia M. Danzon, Sean Nicholson, Nuno Sousa Pereira, Productivity in
Pharmaceutical-Biotechnology R&D: The Role of Experience and Alliances, Journal of
Health Economics 24, 2005, 319.
22 Francis Bidault and Thomas Cummings, “Innovating Through Alliances: Expectations and
Limitations,” R&D Management, January 1994, 33.
23 Edwin Mansfield, “Academic Research and Industrial Innovation: An Update of Empirical
Findings,” Research Policy 26, 1998, 775.
24 David Blumenthal, “Academic-Industrial Relationships in the Life Sciences,” The New
England Journal of Medicine, December 18, 2003, 2453.
Patents
Much of this cooperative work, whether government-industry, government-
university, industry-university, or industry-industry, is facilitated by the patent
system. Patents protect the inventor’s investments in generating the knowledge that
is the basis for innovation. The U.S. Constitution states that patents are intended to
promote “the progress of science and the useful arts.” As research and development
become more expensive, ownership of title to inventions has been used by the federal
government as a means to foster increased private sector activities to generate new
and improved products and processes for the marketplace. In an academic setting,
the possession of title is expected to provide motivation for the university to license
the technology to industry for further refinement and application in expectation of
royalty payments.
The patent system is grounded in Article I, Section 8, Clause 8 of the
Constitution and is intended to stimulate new discoveries and their reduction to
practice, commonly known as innovation. The grant of a patent provides the inventor
with a means to capture returns to his invention through exclusive rights on its
practice for 20 years from date of filing. This is designed to encourage those
investments necessary to further develop an idea and generate a marketable
technology. At the same time, the process of obtaining a patent places the concept
on which it is based in the public domain. In return for a time limited monopoly right
to specific applications of the knowledge generated, the inventor must publish the
ideas covered in the patent. Proponents argue that, as a disclosure system, the patent
can, and often does, stimulate other firms or individuals to invent “around” existing
patents to provide for parallel technical developments or meet similar and expanded
demands in the marketplace.25
Innovation produces new knowledge. One characteristic of this knowledge is
that it is a “public good,” a good that is not consumed when it is used. This “public
good” concept underlies the U.S. patent system. As Professor John Shoven points
out, “The use of an idea or discovery by one person does not, in most cases, reduce
the availability of that information to others.”26 Therefore the marginal social cost
of the widespread application of that information is near zero because the stock of
knowledge is not depleted. This is why the federal government funds basic research.
“Ordinarily, society maximizes its welfare through not charging for the use of a free
good.”27 However, innovation typically is costly and resource intensive. Patents
permit novel concepts or discoveries to become “property” when reduced to practice
and therefore allow for control over their use. They “create incentives that maximize
25 For more information see CRS Report 97-599, Patents and Innovation: Issues in Patent
Reform, and CRS Report 98-862, R&D Partnerships and Intellectual Property: Implications
for U.S. Policy, both by Wendy H. Schacht.
26 John B. Shoven, “Intellectual Property Rights and Economic Growth,” in eds. Charls
Walker and Mark A. Bloomfield, Intellectual Property Rights and Capital Formation in the
Next Decade, (New York, University Press of America, 1988), 46.
27 Robert P. Benko, “Intellectual Property Rights and New Technologies,” in Intellectual
Property Rights and Capital Formation in the Next Decade, 27 [see footnote 7].
the difference between the value of the intellectual property that is created and used
and the social cost of its creation.”28
The patent process is designed to resolve the problem of appropriability. If
discoveries were universally available without a means for the inventor to realize a
return on investments, most commentators are convinced that there would result a
“much lower and indeed suboptimal level of innovation.”29 Although research is
often important to innovation, it appears that, on average, it constitutes approximately
25% of the cost of commercializing a new technology or technique, thus requiring
the expenditure of a substantial amount of additional resources to bring most
products or processes to the marketplace. The grant of a patent provides the inventor
with a mechanism to capture the returns to his invention through exclusive rights on
its practice for 20 years from date of filing. That is intended to encourage those
investments necessary to further develop an idea and generate a marketable
technology.
The utility of patents to companies varies among industrial sectors. Patents are
perceived as critical in the drug and chemical industries. That may reflect the nature
of R&D performed in these sectors, where the results often are relatively easy to
reproduce.30 Others have pointed out that drug patents are more detailed in their
claims and therefore easier to defend.31 In contrast, studies have found that in many
other industries the protection offered by patents is diminished by the ability to invent
around the patent and limited by the disclosure of vital information in the patent
itself.32 In the aircraft and semiconductor industries patents have not been the most
successful mechanism for capturing the benefits of investments. Instead, lead time
and the strength of the learning curve were determined to be more important.33
According to one study, in the semiconductor and related equipment industry, secrecy
and lead time were deemed significantly more important than patents. Similar
findings characterize the aerospace and machine tool industries, among others.34
The degree to which industry perceives patents as effective has been characterized
28 Stanley M. Besen and Leo J. Raskind, “An Introduction to the Law and Economics of
Intellectual Property,” Journal of Economic Perspectives, Winter 1991, 5.
29 Kenneth W. Dam, “The Economic Underpinnings of Patent Law,” Journal of Legal
Studies, January 1994, 247.
30 Henry Grabowski, “Patents, Innovation and Access to New Pharmaceuticals,” Journal of
International Economic Law, December 2002, 849.
31 Levin, Richard C. and Alvin K Klevorick, Richard R. Nelson, and Sidney G. Winter.
Appropriating the Returns for Industrial Research and Development, Brookings Papers on
Economic Activity, 1987, printed in The Economics of Technical Change, ed. Edwin
Mansfield and Elizabeth Mansfield. (Vermont, Edward Elgar Publishing Co., 1993), 255
and 257.
32 Wesley M. Cohen, Richard R. Nelson, and John P. Walsh, Protecting Their Intellectual
Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not),
NBER, February 2000, available at [http://www.nber.org/papers/w7552].
33 Appropriating the Returns for Industrial Research and Development, 253.
34 Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S.
Manufacturing Firms Patent (or Not), Table 1.
as “positively correlated with the increase in duplication costs and time associated
with patents.”35
The patent system has dual policy goals — providing incentives for inventors
to invent and encouraging inventors to disclose technical information.36 Disclosure
requirements are factors in achieving a balance between current and future innovation
through the patent process, as are limitations on scope, novelty mandates, and
nonobviousness considerations.37 Patents can give rise to an environment of
competitiveness with multiple sources of innovation, which is viewed by some
experts as the basis for technological progress. This is important because, as
Professors Robert Merges and Richard Nelson found in their studies, in a situation
where only “a few organizations controlled the development of a technology,
technical advance appeared sluggish.”38
The patent system has long been subject to criticism, however. Some observers
have asserted that the patent system is unnecessary due to market forces that already
suffice to create an optimal level of innovation. The desire to obtain a lead time
advantage over competitors, as well as the recognition that technologically backward
firms lose out to their rivals, may well provide sufficient inducement to invent
without the need for further incentives.39 Other commentators believe that the patent
system encourages industry concentration and presents a barrier to entry in some
markets.40 Still other observers believe that the patent system too frequently attracts
speculators who prefer to acquire and enforce patents rather than engage in socially
productive activity.41
When analyzing the validity of these competing views, it is important to note
the lack of rigorous analytical methods available for studying the effect of the patent
law upon the U.S. economy as a whole. The relationship between innovation and
patent rights remains poorly understood. As a result, current economic and policy
tools do not allow us to calibrate the patent system precisely in order to produce an
optimal level of investment in innovation. Thus, each of the arguments for and
35 Appropriating the Returns for Industrial Research and Development, 269.
36 Robert P. Merges, “Commercial Success and Patent Standards: Economic Perspectives
on Innovation,” California Law Review, July 1988, 876.
37 The Economic Underpinnings of Patent Law, 266-267. Scope is determined by the
number of claims made in a patent. Claims are the technical descriptions associated with
the invention. In order for an idea to receive a patent, the law requires that it be “...new,
useful [novel], and nonobvious to a person of ordinary skill in the art to which the invention
pertains.”
38 Robert P. Merges and Richard R. Nelson, “On the Complex Economics of Patent Scope,”
Columbia Law Review, May 1990, 908.
39 See Frederic M. Sherer, Industrial Market Structure and Economic Performance (1970),
40 See John R. Thomas, “Collusion and Collective Action in the Patent System: A Proposal
for Patent Bounties,” University of Illinois Law Review (2001), 305.
41 Ibid.
against the patent system remains open to challenge by those who are unpersuaded
by their internal logic.
Legislative Initiatives
Reflecting the importance of cooperative R&D to the government, a series of
legislative provisions use intellectual property rights to foster collaboration between
all the parties in the research and development enterprise leading to the generation
of new and improved products and processes for the marketplace. Both P.L. 96-418,
the Stevenson-Wydler Technology Innovation Act (known as the “Stevenson-Wydler42
Act”), as amended, and P.L. 96-517, Amendments to the Patent and Trademark Act
(commonly referred to as the “Bayh-Dole Act” after its two main sponsors, former43
Senators Birch Bayh and Robert Dole), are the basis for efforts at using patents and
licensing to facilitate cooperative R&D, technology transfer, and the
commercialization of technology supported by the federal government. These laws
affect the way the National Institutes of Health, and other government agencies,
interact with the academic community and industry in the R&D arena. It is in this
area where the sometimes competing goals of prescription drug cost containment and
encouragement of technology-based innovations may conflict.
While the result of different legislative histories and concerns, the Stevenson-
Wydler Act and the Bayh-Dole Act were passed to encourage the use of technologies
funded by and/or developed by the federal government in pursuit of the departments’
and agencies’ mission requirements. However, they address intellectual property
issues that arise from different R&D relationships. The Stevenson-Wydler Act
contains provisions concerning assignment of title to inventions arising from
collaborative work between federal laboratories and outside cooperating parties
where no direct federal funding is involved. The Bayh-Dole Act primarily addresses
the distribution of patents resulting from federally-funded research and development
performed by outside organizations and prescribes the licensing of government-44
owned inventions.
The Stevenson-Wydler Technology Innovation Act
P.L. 96-480, the Stevenson-Wydler Act, as amended, was enacted to encourage
use of technologies developed in the federal laboratory system. This is to be
accomplished by technology transfer, the process by which technology generated in
one organization, in one area, or for one purpose is applied in another organization,
42 15 U.S.C. sec. 3701 and following.
43 35 U.S.C. sec. 200 and following.
44 For a detailed discussion of the legislative provisions of the Stevenson-Wydler Act and
the Bayh-Dole Act see CRS Report RL33527, Technology Transfer: Use of Federally
Funded Research and Development; CRS Report RL32076, The Bayh-Dole Act: Selected
Issues in Patent Policy and the Commercialization of Technology; and CRS Report
RL30320, Patent Ownership and Federal Research and Development: A Discussion on the
Bayh-Dole Act and the Stevenson-Wydler Act, all by Wendy H. Schacht.
in another area, or for another purpose. In the defense and space arenas it is often
called “spin-off.” The original Act, provided federal departments and agencies with
a mandate to transfer technology as well as established mechanisms by which to
accomplish this goal. P.L. 99-502, the Federal Technology Transfer Act of 1986 and
P.L. 101-189, the FY1990 Department of Defense Authorizations, amended the law
and created cooperative research and development agreements (CRADAs) as a means
to undertake the transfer activity.
A CRADA is a specific legal document (not a procurement contract) that
defines the collaborative venture. It is intended to be developed at the laboratory
level, with limited agency review. The work performed must be consistent with the
laboratory’s mission. In pursuing these joint efforts, the laboratory may accept funds,
personnel, services, and property from the collaborating party and may provide
personnel, services, and property to the participating organization. The government
can cover overhead costs incurred in support of the CRADA, but is expressly
prohibited from providing direct funding to the industrial partner.
The act does not specify the dispensation of patents derived from the
collaborative work, allowing agencies to develop their own policies. At the least, the
law permits the non-federal collaborating party the “option to choose an exclusive
license for a pre-negotiated field of use for any such invention under the agreement.”
The laboratory director also may negotiate licensing agreements for related
government-owned inventions previously made at that laboratory to facilitate
cooperative ventures.
In all cases, the government retains certain rights, including a “nonexclusive,
nontransferable, irrevocable, paid-up license to practice the invention or have the
invention practiced throughout the world by or on behalf of the Government for
research or other Government purposes.” Under “exceptional circumstances,” the
government may exercise its right to require a party, to which it assigned title or
granted exclusive license to an invention, to license the technology to another
organization if it is necessary to address health and safety needs not being addressed;
to meet requirements for public use specified by federal regulation not being met; or
if the cooperating party has not performed its obligations as specified in the
agreement.
Preference in determining CRADAs is given to small businesses, companies
that will manufacture in the United States, or foreign firms from countries that permit
American companies to enter into similar arrangements. According to Senate report
99-283 that accompanied the legislation, “the authorities conveyed by [the section
dealing with CRADAs] are permissive” to promote the widest use of this
arrangem ent . 45
It should be noted that CRADAs are only one form of cooperative activity, but
because they can be easily identified and quantified they tend to be the most visible.
45 Senate Committee on Commerce, Science, and Transportation, Federal Technology
Transfer Act of 1986, Report to Accompany H.R. 3773, 99th Cong. 2nd sess., 1986, S.Rept.
Other mechanisms include personnel exchanges and visits; licensing of patents; work
for others; educational initiatives; information dissemination; the use of special
laboratory facilities and centers set up in particular technological areas; cooperative
assistance to state and local programs; and the spinoff of new firms. Currently,
federal laboratories legislatively are prohibited from competing with the private
sector and can only offer the use of expertise and equipment which is not readily
available elsewhere. Technology transfer and cooperative efforts are expressly
forbidden to interfere with the laboratories’ R&D mission-related activities.
The Bayh-Dole Act
P.L. 96-517, the Bayh-Dole Act, evolved out of congressional interest in
developing a uniform federal patent policy to promote the utilization of inventions
made with the support of the federal research establishment.46 Such action was
deemed necessary because, at the time the legislation was under consideration, only
5% of federally-owned patents were being used. While there were several possible
reasons for such a low level of utilization (including no market applications), this
was thought by many to be one consequence of the practice by most agencies of
taking title to all inventions made with government funding while only permitting the
nonexclusive licensing of contractor inventions.47 Without title to inventions, or at
least exclusive licenses, companies may be less likely to engage in and fund the
additional R&D necessary to bring an idea to the marketplace. The Bayh-Dole Act,
by providing universities, nonprofit institutions, and small businesses with ownership
of patents arising from federally-funded R&D, offers an incentive for cooperative
work and commercial application. Royalties derived from intellectual property rights
provides the academic community an alternative way to support further research and
the business sector a means to obtain a return on their financial contribution to the
endeavor.
Each nonprofit organization (including universities) or small business is
permitted to elect (within a reasonable time frame) to retain title to any “subject
invention” made as a result of R&D funded by the federal government; except under
“exceptional circumstances when it is determined by the agency that restriction or
elimination of the right to retain title to any subject invention will better promote the
policy and objectives of this chapter.”48 The owner of the intellectual property must
commit to commercialization of the patent within a predetermined time frame agreed
to by the supporting agency and the performing organization. As stated in the House
report to accompany the bill, “the legislation establishes a presumption [emphasis
added] that ownership of all patent rights in government funded research will vest in49
any contractor who is a nonprofit research institution or a small business.”
46 House Committee on Science and Technology, Government Patent Policy, 95th Cong., 2nd
sess., May 1978, H.Rept. Prt. 4.
47 Government Patent Policy, 5.
48 Ibid.
49 Federal Technology Transfer Act, Report to Accompany H.R. 6933, 3.
Certain rights are reserved for the government to protect the public interest. The
government retains “a nonexclusive, nontransferable, irrevocable, paid-up license to
practice or have practiced for or on behalf of the United States any subject invention
throughout the world....” The government also retains “march-in rights” that enable
the federal agency to require the contractor (whether he owns title or has an exclusive
license) to “grant a nonexclusive, partially exclusive, or exclusive license in any field
of use to a responsible applicant or applicants...” with due compensation, or to grant
a license itself under certain circumstances. The special situation necessary to trigger
march-in rights involves a determination that the contractor has not made efforts to
commercialize within an agreed upon time frame or that the “action is necessary to
alleviate health or safety needs...” that are not being met by the contractor (15 U.S.C.
sec. 203).
The Bayh-Dole Act also addresses the licensing of inventions to which the
government retained title typically because of past agency practices or because of a
public interest. Title 35 U.S.C. §209 proscribes the licensing of this type of
invention. The law permits federal departments to offer nonexclusive, exclusive, or
partially exclusive licenses under certain conditions and with specific rights retained
by the government. These include the right to terminate the license if
commercialization is not pursued as provided in the business plan or if the
government needs the license for public use. The agencies are required to inform the
public about the availability of a patent for licensing. Notices are to be published in
the Federal Register for a period of three months and if a company displays intent
to license, the laboratory must place an additional notice and offer 60 days for
objections. In providing licenses, small businesses are given preferences and
licensees must agree that “any products embodying the invention or produced
through the use of the invention will be manufactured substantially in the United
States.”
NIH-University-Industry Collaboration:
The Results
The primary mission of the National Institutes of Health “is science in pursuit
of fundamental knowledge about the nature and behavior of living systems and the
application of that knowledge to extend healthy life and reduce the burdens of illness
and disability.”50 To achieve this, NIH funds over $29 billion of both in-house and
extramural R&D; 10% of this total is for work within NIH laboratories and 80% goes
to contractors, primarily universities and non-profit research institutions.51
Simultaneously, the Stevenson-Wydler Technology Innovation Act and the Bayh-
Dole Act provide the agency with the “statutory mandate to ensure that new
technologies developed in those laboratories are transferred to the private sector and
50 National Institutes of Health, About NIH, available at [http://www.nih.gov/about/].
51 See [http://www.officeofbudget.od.nih.gov/UI/2008/Congressional%20Approps.pdf] and
[http://www.nih.gov/about/budget.htm] .
commercialized in an expeditious and efficient manner.”52 Thus, NIH is faced with
two interrelated goals: “promoting the health of the American people and all mankind
through research in the biosciences, and fostering a vigorous domestic biotechnology
industry.”53 While the legislation discussed in this paper provides a general
framework within which to achieve some of these objectives, there are specific issues
associated with health research that have generated concerns not raised in other
industrial sectors. Given the particular interest in health-related R&D, the increased
commercial potential, and cost considerations, questions are being raised within
Congress as to the adequacy of current arrangements. Most experts agree that closer
cooperation can augment funding sources (both in the public and private sectors),
increase technology transfer, stimulate additional innovation, lead to new products
and processes, and expand markets. Yet, others point out that collaboration may
provide an increased opportunity for unfair advantages, excessive private sector
profits at the expense of the public, conflicts of interest, redirection of research, and
less openness in sharing of scientific discovery.
Intramural Research
Intramural research performed at the National Institutes of Health accounts for
approximately 10% of the NIH budget. Typically, NIH keeps title to inventions
made in its laboratories. In FY2007, NIH (and FDA) scientists filed 419 invention
disclosures and 178 new patent applications, while 117 patents were issued. During
that year, 264 licenses were executed and $87.7 million in royalties collected on
existing licenses. This is in contrast to 10 years earlier in FY1997 when 268
inventions were disclosed, 148 patent applications filed, and 152 patents issued. At
that time, 208 licenses were executed and royalty payments totaled $35.7 million.
Over the FY1997-FY2007 time period, $647.6 million in royalties were generated
on NIH-owned patents that were licensed.54
To date, NIH has identified 25 FDA approved products that have been
developed with technology from the NIH intramural research program.55 It should
be noted that NIH did not develop the final product; technologies derived from NIH
supported research are involved in producing or administering the product.56
According to the General Accounting Office (now the Government Accountability
52 Office of Technology Transfer, National Institutes of Health, Public Health Service (PHS)
Patent Policy, available at [http://ott.od.nih.gov/policy/phspat_policy.html].
53 President’s Council of Advisors on Science and Technology. Achieving the Promise of
the Bioscience Revolution: The Role of the Federal Government. Washington, December
54 Information on NIH patent and licensing procedures in this section, unless otherwise
noted, is available at [http://ott.od.nih.gov/about_nih/statistics.html].
55 National Institutes of Health, FDA Approved Therapeutic Drugs and Vaccines Developed
with Technologies From the Intramural Research Program at the National Institutes of
Health, available at [http://ott.od.nih.gov/about_nih/fda_approved_products.html].
56 Mark L. Rohrbaugh, NIH: Moving Research from the Bench to the Bedside, Testimony
before the House Committee on Energy and Commerce, Subcommittee on Health, July 10,
Office), NIH was responsible for 95% of the royalties collected by six agencies
(Department of the Army, Department of the Navy, Department of the Air Force,
Department of Energy, and the National Aeronautics and Space Administration)
studied between 1996 and 1998. In addition, NIH had the largest number of licensing
agreements.57 A 2004 report by the Department of Commerce found that income
from technologies licensed by the Department of Health and Human Services (HHS)
accounted for 56% of the total amount of license fees collected by all federal
laboratories during FY2003. The number of licenses issued by HHS comprised 21%
of the total number of licenses, second only to the Department of Energy.58
Policies. The articulated policy of the Public Health Service (PHS), the parent
agency of NIH, as well as the Food and Drug Administration, and the Centers for
Disease Control, is to “ensure that new technologies developed in those laboratories
are transferred to the private sector and commercialized in an expeditious and59
efficient manner” while protecting the public interest. The policies associated with
the patenting and licensing of inventions made within NIH are designed to “balance60
new product development with appropriate market competition.”
Cooperative Research and Development Agreements (CRADAs) must reflect
the mission requirements of NIH and not divert resources from the agency’s61
mandate. It also is expected that scientific input from the collaborating party will
advance the capabilities of government scientists in their work. In this environment,
ideas and results are to be discussed openly. Publication of the knowledge generated
by NIH-supported research is required, after providing time to apply for patent
protection. To support the transfer of technology and the widespread use of the
intellectual property, as well as to further
a longstanding tradition of scientific freedom, PHS research results are published
freely. Publication of research is not to be significantly delayed for the purpose
of either filing patent applications on patentable subject matter, or conducting62
further research to develop patentable subject matter.
NIH practice is to patent inventions arising from intramural R&D within the
provisions of the law and to transfer the technology through the use of licensing
57 General Accounting Office, Technology Transfer: Number and Characteristics of
Inventions Licensed by Six Federal Agencies, GAO/RCED-99-173, June 1999, 6, 7.
58 Office of the Secretary, U.S. Department of Commerce, Summary Report on Federal
Laboratory Technology Transfer, December 2004, 10 and 11, available at
[ h t t p : / / www.t echnol ogy. go v/ r e por t s / T echT r ans/ 2004_Sum.pdf ] .
59 Public Health Service (PHS) Patent Policy.
60 National Institutes of Health, A Plan to Ensure Taxpayers’ Interests are Protected,
“Technology Transfer Mission Statement,” Appendix A-3.3, July 2001, available at
[http://ott.nih.gov/policy/ policy/ policy_protect_text.html ].
61 Office of Technology Transfer, National Institutes of Health, Cooperative Research and
Development Agreements (CRADAs) and Material Transfer Agreements (MTAs), available
at [http://ott.od.nih.gov/cradas/model_agree.html].
62 Public Health Service (PHS) Patent Policy.
whenever possible instead of assignment of patent title to the outside entity. The
organization “will seek patent protection on biomedical technologies only when a
patent facilitates availability of the technology to the public for preventive,
diagnostic, therapeutic, or research use, or other commercial use.”63 Under a
CRADA,
the producing Party will retain ownership of and title to all CRADA Subject
Inventions, all copies of CRADA Data, and all CRADA Materials produced
solely by its employee(s). The Parties will own jointly all CRADA Subject
Inventions invented jointly and all copies of CRADA Data and all CRADA64
Materials developed jointly.
Typically, the collaborating party has the option to elect an exclusive (or
nonexclusive) license to any subject invention not made solely by an employee of this
collaborating entity. Accordingly, the terms of the license
will fairly reflect the nature of the CRADA Subject Invention, the relative
contributions of the Parties to the CRADA Subject Invention and the CRADA,
a plan for the development and marketing of the CRADA Subject Invention, the
risks incurred by the Collaborator and the costs of subsequent research and65
development needed to bring the invention to the marketplace.
Decisions on licensing are to be made to “ensure development of each
technology for the broadest possible applications, optimizing the number of products
developed from PHS technology.” Thus, non-exclusive or co-exclusive licenses are
used if possible; exclusive licenses are to be for specific indications or fields of use.
When a mandatory exclusive license is used as under a CRADA, NIH requires that
the licensee grant sublicenses to “broaden the development possibilities when
necessary for the public health.” The resulting technology is to be made available for
research purposes. Technologies licensed to industry are required to be expeditiously
commercialized, “offered and maintained for sale, and made reasonably accessible
to the public.” The public interest is maintained through efforts to encourage
development of competing products and through royalty-bearing licenses that reflect
“a fair financial return on the public’s research investment.”66
Fair Pricing Clause. Prior to 1995, NIH had included what was known as
a “fair pricing clause” in its cooperative research and development agreements and
many licensing arrangements. In 1989, the Public Health Service (PHS) instituted
a policy addressing the pricing of products resulting from a government-owned
patent licensed by NIH on an exclusive basis to industry or an invention jointly
developed with industry under a CRADA and then licensed exclusively to the
collaborator. The language used in the contract stated:
63 Ibid.
64 Office of Technology Transfer, National Institutes of Health, PHS Model CRADA, 2005,
available at [http://ott.nih.gov/doc/CRADAModel2005.doc].
65 Ibid.
66 Office of Technology Transfer, National Institutes of Health, Public Health Service (PHS)
Licensing Policy, available at [http://ott.od.nih.gov/policy/phslic_policy.html].
Because of [NIH’s] responsibilities and the public investment in research that
contributes to a product licensed under a CRADA, DHHS [Department of Health
and Human Services] has a concern that there be a reasonable relationship
between the pricing of a licensed product, the public investment in that product,
and the health and safety needs of the public. Accordingly, exclusive
commercialization licenses granted for the NIH intellectual property rights may67
require that this relationship be supported by reasonable evidence.
While there was no statutory requirement mandating this type of clause, it was
instituted in response to public and political pressures resulting from concern over
the cost of AZT, a drug used in the treatment of HIV infection. However, according
to the NIH, “AZT was not developed under a CRADA or exclusive license nor, to
date, has it been determined that the government has a patentable interest in this
medication.”68 No other federal department or agency, with the exception of the
Bureau of Mines, had established such a requirement.
The clause was removed in 1995 at the request of Dr. Harold Varmus, then
Director of NIH, after a review of the situation and several public hearings. He
concluded that the evidence indicated “the pricing clause has driven industry away
from potentially beneficial scientific collaborations with PHS scientists without
providing an offsetting benefit to the public.”69 While sharing concerns over the
“potential inaccessibility” of drugs due to costs, “NIH [agreed] with the consensus
of the advisory panels that enforcement of a pricing clause would divert NIH from
its primary research mission and conflict with its statutory mission to transfer
promising technologies to the private sector for commercialization.”70 A study by the
Department of Health and Human Services Inspector General found that companies
viewed the clause as a major problem in the NIH CRADA approach.71 Opponents
of the clause argued that the uncertainty of the pricing clause exacerbated a process
already fraught with risk. According to industry sources, not knowing what the
determination of “fair” pricing would be at the end of a long and expensive research,
development, and commercialization process was a strong deterrent to entering into
cooperative arrangements. Many of the pharmaceutical and biotechnology
companies declined to undertake CRADAs. Some firms even declined opportunities
for joint clinical trials with NIH in anticipation of future price control demands. At
the public hearings most of the patient advocacy groups called for repeal of the fair
pricing clause.
NIH reportedly was reluctant to make definitive decisions on pricing. At that
time, reasonable pricing was defined as a price within the range of existing
67 National Institutes of Health, “Press Release and Backgrounder,” NIH News, April 11,
68 Ibid., 4.
69 Ibid., 1.
70 Ibid., 3.
71 Reginald Rhein, “Will NIH’s Fair Price Clause Make CRADAs Crumble?,” The Journal
of NIH Research, March 1994, 41.
therapies.72 However, a differentiation was made between the reasonable pricing
clause and “price setting:” the latter was seen as regulation and had been considered
inappropriate for NIH. According to 1991 testimony of Dr. Bernadine Healy, then
Director of NIH, the laboratory was “probably...unqualified” to undertake drug
pricing because it has not been involved in such activities. Instead, NIH “should
approach fair pricing as a co-inventor of a fundamental discovery and use...leverage
as an agency that knows what we brought to the table.” Dr. Healy maintained that
the laboratory should not be “too intrusive” or get “too involved in the financial and
proprietary activities of companies.”73
The effect of abandoning the clause was immediate. Subsequent to rescission
of the clause in April 1995, the number of CRADAs executed by NIH increased
substantially (see Figure 1).
Extramural Research
Extramural research, primarily at universities or medical centers, comprises the
major portion of NIH research funding (approximately 84% of the total). Under law
mandated by the Bayh-Dole Act, federal departments and agencies do not retain title
to inventions made with government funding when the research is performed by an
outside contractor. Since the federal organization does own the patent, it does not
receive royalty payments for any licensing agreements. Nor does the agency have
direct say, other than as provided in the Bayh-Dole Act, in the way these technologies74
are commercialized.
Figure 1. NIH CRADAs
15314 9160
126 120140
109 10 1120
87 87 87 80100
80
42 32 30 41 32 51 4460
26 3140
2020
4 10
0
8 6 Y 8 7 Y8 8 Y 8 9 Y9 0 Y 9 1 Y9 2 Y 9 3 Y9 4 Y 9 5 Y9 6 Y 9 7 Y 9 8 Y 9 9 Y 0 0 Y0 1 Y 0 2 Y0 3 Y 0 4 Y0 5 Y 0 6 Y0 7
FY F F F F F F F F F F F F F F F F F F F F F
Source: National Institutes of Health, Office of Technology Transfer [http://www.ott.od.nih.gov/
about_nih/statistics.html] .
72 NCI Seeking Prices for CRADA Products in Line with Existing Therapies; Indigent Care
Important, The Blue Sheet, January 27, 1993, 10.
73 House Committee on Small Business, The National Institutes of Health and Its Role in
Creating U.S. High-Technology Industry Growth and Jobs, Hearing, 100th Cong., 1st sess.,
December 9, 1991, 22-23.
74 A Plan to Ensure Taxpayers’ Interests are Protected.
Across all technology areas, the Bayh-Dole Act appears to be successful in
facilitating the commercialization of technology.75 The latest published licensing
survey by the Association of University Technology Managers (AUTM) found that
in FY2006, 697 new commercial products were brought to market, 553 new
companies were created, and 4,963 new licenses/options were granted as a result of
technology transfer from the academic community.76 In 1980, 390 patents were
awarded to universities;77 by 2005, this number increased to 2,725.78 While these
figures include all types of R&D, funding for university research in the life sciences
comprises by far the largest portion of academic research support. In 2006, 54.5%
of total R&D expenditures at academic institutions went to finance the medical,
biological, and life sciences. The federal government remains the primary source of
this funding.79
The use of this academic research, funded in large part by the federal
government, appears to be particularly important to the business community. Studies
have found that “growth companies with university ties have productivity rates
almost two-thirds higher than peers....”80 In the pharmaceutical industry, over one-
quarter of new drugs depended on academic research for timely commercialization.81
Further, there is evidence demonstrating that public science, “research performed in
and supported by governmental, academic and charitable research institutions,” plays
a crucial role in private sector technology development.82 Work prepared for the
National Science Foundation indicated that “public science plays an essential role in
supporting U.S. industry, across all the science-linked areas of industry, amongst
companies large and small, and is a fundamental pillar of the advance of U.S.
75 For a detailed discussion of the impact of this legislation across the federal government
see The Bayh-Dole Act: Selected Issues in Patent Policy and the Commercialization of
Technology.
76 Association of University Technology Managers, U.S. AUTM Licensing Survey: FY2006,
available at [http://www.autm.net/events/file/AUTM_06_US%20LSS_FNL.pdf].
77 National Science Board, Science and Engineering Indicators — 1993, National Science
Foundation, Washington, 430.
78 U.S. Patent and Trademark Office, Utility Patents Assigned to U.S. Colleges and
Universities, available at [http://www.uspto.gov/web/offices/ac/ido/oeip/taf/univ/asgn/
table_1_2005.htm] .
79 Science and Engineering Indicators, 2008, Appendix table 5-3, available at
[http://www.nsf.gov/ statistics/ seind08/append/c5/at05-03.pdf].
80 Coopers and Lybrand L.L.P., “Growth Companies with University Ties Have Productivity
Rates Almost Two-Thirds Higher Than Peers,” Trend Setter Barometer, January 26, 1995,
81 Nathan Rosenberg and Richard R. Nelson, “American Universities and Technical
Advance in Industry,” Research Policy, May 1994, 344.
82 G. Steven McMillian, Francis Narin, and David L. Deeds, “An Analysis of the Critical
Role of Public Science in Innovation: The Case of Biotechnology,” Research Policy, 2000,
technology.”83 This study demonstrated that of the papers cited in patents granted to
U.S. companies during the years 1987-1988 and 1993-1994, 73% were authored at
academic, governmental, and other public facilities (domestic or foreign) as
compared with 27% from industrial sources. Similarly, research by Professors
Cohen, Nelson, and Walsh found “...that public research importantly affects
industrial R&D in a broad range of industries...” and “...the share of R&D projects
affected by public research is likely even greater than that which makes use of either
the research findings or the techniques and instruments generated by public
research.”84 The biomedical community relies on this basic work more heavily than
other industries with 79% of drug and medicine patents citing the results of public
sci ence. 85
A May 2000 internal study on NIH Contributions to Pharmaceutical
Development and a U.S. Congress, Joint Economic Committee report on The Benefits
of Medical Research and the Role of the NIH issued the same time, document the
part government funded research plays in drug development.86 Scientists supported
by the government “contributed by discovering basic phenomena and concepts,
developing new techniques and assays, and participated in clinical applications of the
drugs.”87 While it is often many years before the research is utilized to generate
marketable results, top selling pharmaceuticals “are the result of a great deal of basic
research on the disease mechanism which allowed more specific targeting of the
underlying problem.”88 Federal funding is also important in the search for new and
additional uses for existing drugs since private sector firms will not use a technology
covered by a patent because of infringement issues.89
Results of a study by Professor Andrew Toole demonstrated that “federally
funded basic research is a positive and significant contributing factor in
83 Francis Narin, Kimberly S. Hamilton, and Dominic Olivastro, “The Increasing Linkage
Between U.S. Technology and Public Science,” paper presented to the House Committee
on Science, March 17, 1997, 15.
84 Wesley M. Cohen, Richard R. Nelson, and John P. Walsh, “Links and Impacts: The
Influence of Public Research in Industrial R&D,” Management Science, January 2002, 21.
85 Francis Narin, Kimberly S. Hamilton, and Dominic Olivastro, “The Increasing Linkage
Between U.S. Technology and Public Science,” Research Policy, 1997, 328. See also: G.
Steven McMillan, Francis Narin, and David Deeds, “An Analysis of the Critical Role of
Public Science in Innovation: The Case of Biotechnology,” Research Policy, 2000, 1.
86 National Institutes of Health, NIH Contributions to Pharmaceutical Development, Case
Study Analysis of the Top-Selling Drugs, May 2000, administrative document and U.S.
Congress, Joint Economic Committee, The Benefits of Medical Research and the Role of the
NIH, May 2000, available at [http://jec.senate.gov].
87 NIH Contributions to Pharmaceutical Development, Case Study Analysis of the Top-
Selling Drugs.
88 Ibid.
89 The Benefits of Medical Research and the Role of the NIH.
pharmaceutical product innovation.”90 However, it is often particularly difficult to
exactly identify the government’s contribution to a new drug, particularly since a
product typically embodies more than one patent. Generally, there are multiple
sources of input from multiple parties in drug development. This is demonstrated by
NIH’s detailed analysis of the top 5 drugs with sales of over $1 billion in 1994 and
1995 cited in the paragraph above. In its 2000 case study, NIH found that
[r]esearch may be targeted to the cure of a particular disease, or aimed at
understanding basic mechanisms and gaining knowledge for which no immediate
application is apparent. Disease-targeted research can be effective in fueling
progress in a given area. However, just as often results from other fields of
research led to breakthroughs in disease concepts or in drug discovery. These91
five drugs all arose from both disease-specific and unrelated fields of research.
In response to congressional direction, the National Institutes of Health looked
at 47 FDA-approved drugs that had sales of $500 million or more a year to determine
the role of NIH-sponsored technologies in their development. As described in the
resulting July 2001 report, A Plan to Ensure Taxpayers’ Interests are Protected,
“NIH sought to determine whether the agency, directly, or through a grantee or92
contractor, held any patent rights to the drugs.” NIH funded technologies were
found to have been used in the development of four of these pharmaceuticals:
Epogen® and Procrit® are based on different uses of a patented process
technology developed at Columbia University with support from NIH grants.
Columbia licensed their technology to Amgen for Epogen® and to Johnson &
Johnson for Procrit®.
Neupogen® is manufactured by Amgen using patented technologies for a process
and a composition licensed from Memorial Sloan-Kettering Cancer Center
(MSKCC). These technologies were developed with NIH grant support.
Taxol® is manufactured by Bristol Myers Squibb (BMS) using a patented
process technology developed by Florida State University (FSU) with NIH grant
funds. In addition, the NIH has rights to an underlying technology arising from
a NIH CRADA collaboration with BMS. The NIH has received from BMS tens
of millions of dollars in royalties from FY1997 to FY2000 under the license to93
the NIH technology.
A 2003 study by GAO found that government financial support of extramural
research and development had resulted in inventions that “were used to make only
6 brand name drugs associated with the top 100 pharmaceuticals that VA [the
Veteran’s Administration] procured for use by veterans and 4 brand name drugs
90 Andrew A. Toole, The Impact of Public Basic Research on Industrial Innovation:
Evidence From the Pharmaceutical Industry, Discussion Paper, Stanford Institute for
Economic Policy Research, November 2000, available at [http://siepr.stanford.edu/
home.html].
91 NIH Contributions to Pharmaceutical Development.
92 A Plan to Ensure that Taxpayers’ Interests are Protected.
93 Ibid.
associated with the top 100 pharmaceuticals that DOD dispensed in 2001.”94 What
these, and other reports document is that “while NIH’s federally funded research has
contributed in a substantial, dramatic, yet general, way to advances in medicine and
biology, the direct contributions to a final therapeutic product as a consequence of
the Bayh-Dole process is limited and difficult to determine.”95 In addition to multiple
sources of innovation, tracking the federal contribution is made more difficult by the
fact that the government does not retain ownership of inventions made by
contractors.
Issues and Options
The actual and expected benefits flowing from the biomedical community go
beyond economic consideration of the importance of technological progress to the
Nation. The potential life saving quality of many of the products associated with this
type of R&D provides an additional dimension. In addition to the opportunities to
generate profits on sales of products, provide jobs, and stimulate investments,
advances in biotechnology and pharmaceuticals also can facilitate economic growth
through improvements in productivity resulting from a healthier population.
Professor Frank Lichtenberg suggests that the benefits of new drugs include “longer
life, better quality of life, and reductions in total medical expenditure.”96
Pricing Decisions and Recoupment
Federal support for health-related R&D amounts to approximately 22% of the
total federal R&D budget, second only to the R&D funding spent for defense.97 The
sizable public sector investment has raised the issue of a more direct return to the
federal government and taxpayers for their support of R&D. The significant portion
of public resources spent by the government in this arena, and provided to the private
sector at no cost, has prompted some observers to call for government involvement
in the establishment of some pharmaceutical prices. Others argue that the
government should “recoup” its investment from firms using federally supported
R&D after profits are generated.
Such suggestions are based on several factors. In addition to funding research
performed by individual companies, under certain circumstances, the government
furnishes the private sector ownership of the intellectual property resulting from this
public investment. Patent protection gives firms monopoly rights on these
innovations for a specified amount of time. Concurrently, the government has
94 General Accounting Office, Technology Transfer, Agencies’ Rights to Federally
Sponsored Biomedical Inventions, July 2003, GAO-03-536, 2.
95 A Plan to Ensure that Taxpayers’ Interests are Protected.
96 Frank Lichtenberg, “Cipro and the Risks of Violating Pharmaceutical Patents,” National
Center for Policy Analysis, Brief Analysis No. 380, November 15, 2001 available at
[http://www.ncpa.org/ pub/ba/ba38.PDF].
97 National Science Foundation, Federal R&D Funding by Budget Function Fiscal Years
conveyed added and substantial financial, regulatory, and tax advantages through
legislation such as the Hatch-Waxman Act and the Orphan Drug Act. According to
one commentator, “the drug industry was able to grow rapidly not only because its
structure evolved in an atmosphere relatively free from close examination, but also
because it developed in a fairly unrestrictive regulatory setting.”98 Another critic of
existing policy, Daniel Zingale, formerly the executive director of AIDS Action,
offered the following analogy: “imagine if General Motors could get the American
taxpayer to heavily subsidize its research and development, fund government
programs that purchase half of its cars and then get many of those same taxpayers to
buy a new car each and every year.”99
Several years ago, an investigation of health-related R&D by the Boston Globe’s
Spotlight Team led them to conclude that pharmaceutical companies are
“piggybacking on government research” and then charging “onerous prices.”100 In
the article it was argued that “by funding the early stages of research and testing, NIH
assumes great risk while reaping few financial rewards.” The Globe’s research
indicated that 45 of 50 top-selling drugs resulted from government funding of
approximately $175 million. “The average net profit margin of the companies
making those drugs was 14 percent in 1997, more than double the 6 percent average
for industrial companies in the Standard & Poor’s 500.”
The government typically funds basic research because the resulting knowledge
is considered a public good. It is often assumed that incentives, including patent
protection, encourage firms to take steps to bring the results of this fundamental
research to market. However, it also has been argued that health care has both public
and private benefits and is therefore not a classical public good.101 By providing
patent protection to the results of federally-funded research, a company receives an
individual benefit based upon public investments. According to one observer, the
suggestion that incentives for drug development, particularly patent protection, are
necessary for innovation in this field may be “exaggerated, given governmental
subsidization of research and development costs.”102 The public investment in R&D
“replaces some portion of the patent-conferred incentives that are necessary to
encourage companies to undertake privately financed research.”103 For example, it
has been argued that the high prices associated with AIDS-related drugs can not be
attributed to the high cost of R&D and a lengthy regulatory process because of the
98 Mary T. Griffin, “AIDs Drugs and the Pharmaceutical Industry: A Need for Reform,”
American Journal of Law and Medicine, 1991, 6.
99 Adriel Bettelheim, “Drugmakers Under Siege,” CQ Outlook, September 25, 1999, 10.
100 Alice Dembner and the Globe Spotlight Team, “Public Handouts Enrich Drug Makers,
Scientists,” The Boston Globe, April 5, 1998.
101 Steven R. Salbu, “Aids and Drug Pricing: In Search of a Policy,” Washington University
Law Quarterly, Fall 1993, 13-14.
102 Ibid., 6.
103 Ibid., 7.
substantial federal investment in such research and fast track approval of these
drugs.104
Proponents of recoupment and/or federal cost controls assert that the monopoly
power of patents should be modified by “public subsidization”105 They contend that
the public has a right to a return on its investment. However, certain observers claim
that “this right is not preserved under the patent system, which ascribes solely to the
patent holder all proprietary rights and interests in the patented product or process.”
The “extraordinary gains” generated by prices on the resulting drugs “cannot be
explained by the usual ‘incentives’ rationale for conferring patent monopolies.”
Instead, those who favor government input into price decisions maintain that the
prices of the resulting pharmaceuticals and therapeutics should reflect the public
contribution to these products and processes. “In other words, public support of
quasi-public goods must be balanced by some degree of public sharing in the fruits
of the investment, as well as input into the nature of that sharing.”
Critics of policies to recoup federal research support or government involvement
in pricing decisions argue that advocates of such actions misunderstand the actual
nature of the NIH role in research and pharmaceutical development. They maintain
that federal support for basic research reflects a consensus that such work is critical
because it is the foundation for many new innovations and that any returns created
by this activity are generally long term, sometimes not marketable, and not always
evident. Yet the rate of return to society as a whole generated by investments in
research is significantly larger than the benefits that can be captured by the firm
performing the work. According to a study by Professors Iain Cockburn and Rebecca
Henderson, the rate of return to government funded biomedical research may be 30%
a year, a figure that may actually be higher because calculations do not account for
the broader effects of pharmaceutical innovation on health and well-being.106
The National Institutes of Health funds “basic research aimed at understanding
biological mechanisms and gaining knowledge for which no immediate application
is apparent has been a vital supply of new ideas, and can only be sustained through
public support.”107 This fundamental knowledge contributes to the general pool of
knowledge which industry may use to generate specific products. In the health-
related arena, NIH supports research, primarily at universities, directed at the
underlying mechanisms of disease; research and knowledge that are applied by the
private sector to develop specific treatments for disease.108 Studies demonstrate the
“important role that the public sector plays in providing fundamental insights in basic
104 AIDS Drugs and the Pharmaceutical Industry: A Need for Reform, 11.
105 Information and quotes in this paragraph from: Aids and Drug Pricing: In Search of a
Policy, 5-20.
106 Ian M. Cockburn and Rebecca M. Henderson, Publicly Funded Science and the
Productivity of the Pharmaceutical Industry, NBER Conference on Science and Public
Policy, April 2000, available at [http://www.nber.org].
107 National Institutes of Health, NIH Contributions to Pharmaceutical Development, Case
Study Analysis of the Top-Selling Drugs, Administrative document, May 2000.
108 Ibid.
knowledge as a basis for drug discovery.109 The basic research “feeds an
independent step in the discovery process called the ‘drug concept’ or ‘rock turning’
period...[which] is the very first point in the pharmaceutical innovative process and
necessarily precedes chemical synthesis.”110 This research generally is composed of
work supported by the government and publicly available as well as knowledge
resulting from internal firm R&D.111 The information and concepts generated by this
research have a “substantial impact” on pharmaceutical R&D.112 According to NIH:
The research supported and conducted by the NIH is sometimes mischaracterized
as necessarily resulting in the commercialization of drug products. In truth,
much of NIH funding supports the exploration of fundamental biological
mechanisms that would otherwise not be pursued due to the lack of market
incentives. Such research can lead to early-stage findings and provide clues that
may eventually lead to medical advancements for diseases for which existing
methods of therapy are nonexistent, inefficient, or suitable only for a select
population. 113
This is not to imply that the private sector does little in relation to the
government in the pharmaceutical arena. Pharmaceutical companies spend more than
NIH on R&D; primarily for applied research and development directed at generating
new drugs for the marketplace. Some analysts argue that the federal role is
overstated because existing studies use citations as a measure of each sector’s
contribution to drug development. This, critics maintain, skews the results because
the government encourages, and even requires, publication of research results while
industry often discourages such practices.114
What appears to be the case is that benefits move in both directions between the115
government and the private sector. A comprehensive study by NIH of 5 top
selling drugs demonstrated “that public and private sector biomedical research are
interwoven, complementary parts of the highly successful U.S. biomedical science
endeavor.”116 Taking the results of this study further, Janice Reichert and
109 Publicly Funded Science and the Productivity of the Pharmaceutical Industry.
110 The Impact of Public Basic Research on Industrial Innovation: Evidence From the
Pharmaceutical Industry.
111 Ibid.
112 Wesley M. Cohen, Richard R. Nelson, and John P. Walsh, “Links and Impacts: The
influence of Public Research on Industrial R&D,” Management Science, January 2002.
113 National Institutes of Health, Report to Congress on the Affordability of Inventions and
Products, July 2004, 3, available at [http://ott.od.nih.gov/policy/policies_and_
guidelines.html ].
114 Janice M. Reichert and Christopher-Paul Milne, “Public and Private Sector Contributions
to the Discovery and Development of ‘Impact’ Drugs,” American Journal of Therapeutics,
2002, 543-555. See also: Charles G. Smith and John R. Vane, “The Discovery of
Captopril,” The FASEB Journal, 2003, 788-789.
115 Publicly Funded Science and the Productivity of the Pharmaceutical Industry.
116 NIH Contributions to Pharmaceutical Development, Case Study Analysis of the Top-
(continued...)
Christopher-Paul Milne of the Tufts Center for the Study of Drug Development at
Tufts University noted that for the set of drugs looked at by NIH, the government’s
involvement
was greatest in the preclinical and clinical development of drugs that were
treatments for serious or life-threatening diseases . . .[where] there was clearly
a public health benefit derived from facilitating the development of these drugs.
The NIH was also involved in the discovery and/or development of compounds
that were in the “public domain” (i.e., knowledge of the existence and method
of preparation of the compounds was publicly available before therapeutic
potential was identified)...These types of compounds initially might not have
been of interest to the pharmaceutical industry, because possible patent claims117
were limited.
Those who oppose changes in the current approach to intellectual property
ownership of the results of federally funded R&D argue that the promise of a large
return on investment “is precisely the tool sanctioned by the Constitution to promote
the progress of science.”118 It is because pharmaceuticals and biotechnology are so
research intensive that they rely heavily on patents. Intellectual property is important
because the “costs of drug innovation are very high while the costs of imitation are
relatively low.”119 The domestic pharmaceutical industry typically reinvests 8 to
20% of its revenues in R&D, and oftentimes substantially more, in contrast to other
industries where the rates are about 3 to 4%, according to testimony presented by Dr.
Arthur Levinson, CEO of Genentech.120 Ownership of intellectual property is
particularly important to biotechnology companies that typically are small and do not
have profits to finance additional R&D. According to the Biotechnology Industry
Organization, most of these firms finance research and development from equity
capital not profits. Only 5% of biotech companies have sales and therefore depend
on venture capital and IPOs.121 Industry advocates maintain the patents are a
necessity for raising this equity capital and that price controls would deter
investors.122 Thus, some experts maintain that “the ability of companies to control
116 (...continued)
Selling Drugs.
117 Public and Private Sector Contributions to the Discovery and Development of “Impact”
Drugs.
118 Evan Ackiron, “Patents for Critical Pharmaceuticals: The AZT Case,” American Journal
of Law and Medicine, 1991, 18.
119 Patents, Innovation and Access to New Pharmaceuticals.
120 U.S. Congress, Joint Economic Committee, Putting a Human Face on Biotechnology: A
Report on the Joint Economic Committee’s Biotechnology Summit, February 23, 2000, 5
available at [http://www.senate.gov/~jec/bio_report.htm].
121 Information derived from: Richard Pops, BIO 2004 CEO and Investors Conference
Keynote Speech, February 25, 2004 and Biotechnology Industry Organization,
Biotechnology Industry Statistics, both available at [http://www.bio.org].
122 Drugmakers Under Siege.
their discoveries through the establishment of intellectual property rights is
fundamental to the competitiveness of [such] industry.”123
Elimination of the incentives associated with technology transfer and increased
R&D through patent ownership and control over intellectual property would reduce
innovation according to many experts. Columbia University’s Frank Lichtenberg
states that “weakening patent protection (e.g. by government violation of patents)
may have a chilling effect on private R&D investment, and therefore reduce the
health and wealth of future generations.”124 A similar opinion was expressed by John
E. Calfee of the American Enterprise Institute. Noting that, “one of the least-
appreciated effects of faster research and development is to quicken the competitive
process itself,” Calfee argues that “although the scientific effort required for new
drugs costs a great deal of money, the drugs are worth far more than they cost.
Eliminate the financial reward, however, and you cut off the supply.”125
Dr. M. Kathy Behrens, a director of the National Venture Capital Association,
testified at hearings before the Joint Economic Committee on September 29, 1999
that “health care proposals which impose drug price controls, or Medicare drug
benefits which provide marginal reimbursement, can create a perception or reality
that the industry’s potential return is limited or at greater risk.”126 Other experts
concur with this assessment. Research undertaken by Professor John Vernon found
“that pharmaceutical price regulation has a negative effect on firm R&D
investment...[and] could impose a very high cost in terms of foregone medical
innovation.”127 One study has suggested that the threat of price controls during the
first Clinton Administration had a detrimental effect on private sector support of
pharmaceutical research and development.128
Actual experience and cited studies suggest that companies which do not control
the results of their investments — either through ownership of patent title, exclusive
license, or pricing decisions — tend to be less likely to engage in related R&D. This
likelihood is reflected in the provisions of the Bayh-Dole Act (as well as other laws).
Providing universities, nonprofit institutions, and small businesses with title to
patents arising from federally funded R&D offers an incentive for cooperative work
and commercial application. Royalties derived from intellectual property rights
provide the academic community an alternative way to support further research and
the business sector a means to obtain a return on its financial contribution to the
123 U.S. Department of Commerce, Office of Technology Policy, Meeting the Challenge:
U.S. Industry Faces the 21st Century, The U.S. Biotechnology Industry (Washington, July
124 Cipro and the Risks of Violating Pharmaceutical Patents.
125 John E. Calfee, “Why Pharmaceutical Price Controls are Bad for Patients,” AEI On the
Issues, March 1999 available at [http://www.aei.org/oti].
126 Putting a Human Face on Biotechnology: A Report on the Joint Economic Committee’s
Biotechnology Summit, 8.
127 John A. Vernon, “Drug Research and Price Controls,” Regulation, Winter 2002-2003,
128 Cipro and the Risks of Violating Pharmaceutical Patents.
endeavor. While the idea of recoupment was considered by the Congress in hearings
on the legislation prior to the act’s passage in 1980, it was rejected as an unnecessary
obstacle, one which would be perceived as an additional burden to working with the
government. Policy makers thought such a program to be particularly difficult to
administer.129 Instead, Congress accepted as satisfactory the anticipated payback to
the country through increased revenues from taxes on profits, new jobs created,
improved productivity, and economic growth. For example, according to the MIT
Technology Licensing Office, in 1998, 15% of the sales of licensed products derived
from federally funded university research was returned to the government in the form
of income taxes, payroll taxes, capital gains taxes, and corporate income taxes. This
was estimated to be 6 times the royalties paid by companies to the universities.130
The emergence of the biotechnology industry and the development of new
therapeutics to improve health care are often cited indications of such benefits.
Research Tools
The focus on intellectual property ownership of the results of federally funded
R&D has led some critics to charge that the patenting of fundamental research
prevents further biomedical innovation. Law professors Rebecca Eisenberg and Arti
Rai argue that due to implementation of the Bayh-Dole Act “[p]roprietary claims
have increasingly moved upstream from the end products themselves to the ground-
breaking discoveries that made them possible in the first place.”131 While patents are
designed to spur innovation, Rai and Eisenberg maintain that certain patents hinder
the process. From their perspective, permitting universities to patent discoveries
made under federal funding, the Bayh-Dole Act “draws no distinction between
inventions that lead directly to commercial products and fundamental advances that
enable further scientific studies.”132 These basic innovations are generally known as
“research tools.”
Eisenberg and Professor Richard Nelson argue that ownership of research tools
may “impose significant transaction costs” that result in delayed innovation and
possible future litigation.133 It also can stand in the way of research by others:
129 For example see U.S. House of Representatives, Committee on Science and Technology,
Government Patent Policy, Hearings, September 23, 27, 28, 29, and October 1, 1976, 94thnd
Cong. 2 sess., 1976; United States Senate, Select Committee on Small Business,thst
Government Patent Policies, Hearings, December 19, 20, and 21, 1977, 95 Cong. 1 sess.,
Policy, Hearings, July 23 and 27, and October 25, 1979, 96 Cong. 1 sess., 1979.
130 Kenneth D. Campbell, “TLO Says Government Research Pays Off Through $3 billion
in Taxes, MIT Tech Talk, April 15, 1998, available at [http://web.mit.edu].
131 Arti K. Rai and Rebecca S. Eisenberg, “Bayh-Dole Reform and the Progress of
Biomedicine,” American Scientist, January- February 2003, 52.
132 Ibid.
133 Rebecca S. Eisenberg and Richard R. Nelson, “Public vs. Proprietary Science: A Fruitful
Tension?,” Daedalus, Spring 2002.
Broad claims on early discoveries that are fundamental to emerging fields of
knowledge are particularly worrisome in light of the great value, demonstrated
time and again in history of science and technology, of having many independent
minds at work trying to advance a field. Public science has flourished by134
permitting scientists to challenge and build upon the work of rivals.
Similar concerns were expressed by Harold Varmus, President of Memorial Sloan-
Kettering and former Director of the National Institutes of Health. In July 2000
prepared testimony, he spoke to being “troubled by widespread tendencies to seek
protection of intellectual property increasingly early in the process that ultimately
leads to products of obvious commercial value, because such practices can have
detrimental effects on science and its delivery of health benefits.”135 While the Bayh-
Dole Act and scientific advances have helped generate a dynamic biotechnology
industry, there have been changes that “are not always consistent with the best
interests of science.”136
However, as Varmus and others acknowledge, the remedies to this situation are
not necessarily associated with the Bayh-Dole Act or its implementation by NIH.
Yale President Richard Levin notes that while some research should be kept in the
public domain, including research tools, the fact that it is privatized is not the result
of the Bayh-Dole Act, but rather the result of patent law made by the courts and the
Congress. Therefore, he believes that changes to the act are not the appropriate
means to address the issues.137
Current law, as reaffirmed by court decisions, permits the patenting of research
tools. However, there have been efforts to encourage the widespread availability of
these tools. Marie Freire, formerly Director of the Office of Technology Transfer at
NIH, testified that the value to society is greatest if the research tools are easily
available for use in research. She asserted that there is a need to balance commercial
interests with public interests.138 To achieve this balance, the National Institutes of
Health has developed guidelines for universities and companies receiving federal
funding that make clear research tools are to be made available to other scientists
under reasonable terms.139 In 1999, NIH issued a policy paper, Sharing of Biomedical
Research Resources, Principles and Guidelines for Recipients of NIH Research
Grants and Contracts, which “calls for the sharing of [research] tools among non-
134 Ibid.
135 U.S. Congress, House Committee on the Judiciary, Subcommittee on Courts and
Intellectual Property, Hearings on Gene Patents and Other Genomic Inventions, July 13,
136 Ibid.
137 National Academy of Sciences, Board on Science, Technology, and Economic Policy,
Workshop on Academic IP: Effects of University Patenting and Licensing on
Commercialization and Research, April 17, 2001 [transcript], 262 available at
[http://www.nas.edu].
138 U.S. Congress, Senate Committee on Appropriations, Subcommittee on Labor, Health
and Human Services, Education and Related Agencies, Hearings, August 1, 2001.
139 Available on the NIH website at [http://www.nih.gov].
profit organizations with minimal terms and impediments.”140 This approach, now
included as a requirement in NIH grants, is reflective of subsequent changes to the
Bayh-Dole Act that stated the results of the federal R&D enterprise should be
achieved “without unduly encumbering future research and discovery....”141 In
addition, the U.S. Patent and Trademark Office made changes in the guidelines used
to determine the patentability of biotechnology discoveries.
A study by Professors John Walsh, Ashish Arora, and Wesley Cohen found that
although there are now more patents associated with biomedical research, and on
more fundamental work, there is little evidence that work has been curtailed due to
intellectual property issues associated with research tools.142 According to this view,
scientists are able to continue their research by “licensing, inventing around patents,
going offshore, the development and use of public databases and research tools, court
challenges, and simply using the technology without a license (i.e., infringement).”
According to the authors of the report, private sector owners of patents permitted
such infringement in academia (with the exception of those associated with
diagnostic tests in clinical trials) “partly because it can increase the value of the
patented technology.”
Government Rights: Royalty Free Licenses and Reporting
Requirements
The government retains certain rights under the Bayh-Dole Act to protect the
public interest. The act states that the government is provided a “nonexclusive,
nontransferable, irrevocable, paid-up license to practice or have practiced for or on
behalf of the United States any subject invention throughout the world....” This
license, commonly known as a “royalty free license,” has been the subject of some
discussion including whether or not this permits government purchasers to obtain
discounts on products developed from federally funded R&D, particularly
pharmaceuticals. A July 2003 GAO report addressed this issue and concluded that
the license entitles the government to practice or have practiced the invention on the
government’s behalf, but “does not give the federal government the far broader right
to purchase, ‘off the shelf’ and royalty free (i.e. at a discounted price), products that
happen to incorporate a federally funded invention when they are not produced under
the government’s license.”143 The study states that rights in one patent do not144
“automatically” permit rights in subsequent, related patents. Because the
government apparently holds few licenses on the biomedical products it purchases
140 NIH: Moving Research From the Bench to the Bedside.
141 Ibid., see also P.L. 106-404, Section 6.
142 John P. Walsh, Ashish Arora, Wesley M. Cohen, “Working Through the Patent
Problem,” Science, February 14, 2003, 1021, see also John P. Walsh, Charlene Cho, Wesley
M. Cohen, “View for the Bench: Patents and Material Transfers,” Science, September 23,
143 Technology Transfer: Agencies’ Rights to Federally Sponsored Biomedical Inventions,
144 Ibid., 8.
(generally through the Veteran’s Administration and the Department of Defense),145
federal officials indicated that procurement costs were best reduced by use of the
Federal Supply Schedule and national contracts.146 Government licenses are used
primarily in the performance of research in the biomedical area.147
A related issue is that of tracking the government’s interest in patents resulting
from federally funded research and development. Under the Bayh-Dole Act, grantees
are required to report annually on the utilization of any invention arising from
federally funded R&D. The Code of Federal Regulations (37 CFR 404.14(h)) states
that these “reports shall include information regarding the status of development, date
of first commercial sale or use, gross royalties received by the contractor, and such
other data and information the agency may reasonably specify.” [emphasis added]
In an August 1999 study, GAO noted that federal contractors and grantees were not
meeting the reporting requirements associated with the Bayh-Dole Act, making it
difficult to identify and assess what licenses the government retained, among other
things.148 Three years later, in a follow-up report, GAO stated that four of the five
agencies had taken steps to insure improved compliance with the law including
several new monitoring systems, although more needed to be done.149 To keep track
of inventions subject to the Bayh-Dole Act, in 1995 NIH created Interagency Edison
(iEdison), an Internet-based reporting system (that is also used by other federal
agencies). In response to the findings of GAO, suggestions by the NIH Interagency
Edison Working Group, and recommendations contained in the report A Plan to
Ensure Taxpayers’ Interests are Protected, new reporting requirements were
implemented effective January 1, 2002 that include “the commercial name of any
FDA-approved products, utilizing any subject invention, which have reached the
market during the annual reporting period.”150
Concluding Observations
To date, the U.S. system of research, development, and commercialization has
had a clear impact on the pharmaceutical and biotechnology industries. Policies
concerning funding for research, intellectual property protection, and cooperative151
R&D have played an important part in the economic success of these sectors.
145 Ibid., 8.
146 Ibid., 12.
147 Ibid., 10.
148 General Accounting Office, Technology Transfer: Reporting Requirements for Federally
Sponsored Inventions Need Revision, August 1999, GAO/RCED-99-242, 2.
149 General Accounting Office, Intellectual Property: Federal Agency Efforts in
Transferring and Reporting New Technology, October 2002, GAO-03-47, 29.
150 National Institutes of Health, Changes in Grantee/Contractor Reporting of Intellectual
Property Utilization, Notice NOT-OD-02-019, December 13, 2001.
151 Iain Cockburn, Rebecca Henderson, Luigi Orsenigo, and Gary P. Pisano,
“Pharmaceuticals and Biotechnology,” U.S. Industry in 2000 (National Academy Press,
(continued...)
American pharmaceutical firms have “consistently maintained a competitive edge in
international markets” and lead in new drug discoveries.152 According to industry
sources, U.S. investment in health-related R&D exceeds all other countries153 and has
demonstrated a pattern of R&D investment that has increased at approximately twice
the rate of R&D growth in Europe.”154
Incentives for innovation in the industrial community clearly have contributed
to substantial research and development by the pharmaceutical and biotechnology
sectors. Pharmaceuticals companies (that are members of the Pharmaceutical
Researchers and Manufacturers Association/PhRMA) spent $43.0 billion on R&D
in 2006, $34.0 billion for research performed within the United States.155 PhRMA
estimates that total pharmaceutical industry R&D totaled $55.2 billion in 2006.156
The industry employs approximately 291,000 individuals in highly skilled jobs.157
Prescription drug sales by PhRMA members in the United States totaled $174.7
billion in 2006.158 American biotechnology companies spent $19.8 billion on R&D,
generated $32.1 billion in product sales, and produced $50.7 billion in revenue
during 2005.159 An industry that did not exist 25 years ago, U.S. biotechnology has
provided new products and processes for the international marketplace, including
more than 200 biotech drugs and vaccines, with potential for many more advances.
Some observers question whether or not there are unintended consequences to
current policies and programs related to innovation that may need to be addressed.
As discussed in this paper, the current legislative approach promotes the private
sector use of the results of federally funded research and development, particularly
through incentives to cooperative activities among government, industry, and
academia. This approach attempts to balance the public’s interest in new or
improved products and processes for the marketplace with concerns over providing
companies valuable benefits without adequate accountability or compensation. In
general, incentives for the commercialization of government-supported R&D have
been created in response to the argument that the economic benefits to the Nation’s
research investment occur when new goods and services are available to meet public
151 (...continued)
Washington, 1999), 365.
152 Department of Commerce, International Trade Administration, U.S. Industry &Trade
Outlook 2000 (McGraw-Hill, 2000), 11-16.
153 PhRMA, Pharmaceutical Industry Profile 2006, 48, available at [http://www.phrma.org].
154 PhRMA, Pharmaceutical Industry Profile 2003, 16, available at [http://www.phrma.org].
155 PhRMA, Pharmaceutical Industry Profile 2007, 42, available at [http://www.phrma.org].
156 Ibid, inside front cover.
157 Bureau of Labor Statistics, U.S. Department of Labor, Career Guide to Industries, 2006-
oco/cg/cgs 009.htm] .
158 Pharmaceutical Industry Profile 2007, 47.
159 Biotechnology Industry Organization, Biotechnology Industry Statistics, available at
[http://www.bio.org/ speeches/pubs/er/statistics.asp].
demand, create new jobs, improve productivity, and increase our standard of living.
To date, these potential benefits have been considered more important than the initial
cost to the government.
However, the particular nature of health-related R&D and the substantial federal
investment in this area have caused uncertainty over whether or not the present
balance is appropriate. Critics of the current approach argue that the need for
technology development incentives in the pharmaceutical and/or biotechnology
sectors is mitigated by industry access to government-supported R&D at no cost,
monopoly power through patent protection, and other regulatory and tax advantages.
They maintain that the benefits to industry are such that the public has the right to
expect a more direct financial return for the federal investment and, therefore, the
government should be permitted to provide input into certain drug pricing decisions.
Those who disagree point out that the collaborative public-private environment
created by federal policies and practices has generated extraordinary innovation in
the pharmaceutical and biotechnology industries. These sectors have provided
significant benefits to the health and well-being of the Nation. It remains to be seen
if changes will be made and if the nature of government-industry-university
cooperation will be altered.