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 NIH intellectual property rights may require that this relationship be supported by reasonable evidence.” Such pricing provisions also are included in NIH exclusive licensing agreements.11 The clause is not contained in nonexclusive licenses, however, because of the expectation that market competition will act to restrain prices when there are multiple manufacturers.12

Drug pricing remains a hotly debated and politically controversial issue. Since the 1987 Waxman hearing, several members of Congress have called for more direct and restrictive participation by the federal government in the pricing of drugs, particularly those that are discovered or developed from government-supported research.

IMPEDIMENTS TO COLLABORATION IN HIV DRUG DEVELOPMENT13

Pharmaceutical research and development is an inherently risky, time-consuming, and costly venture. The process spans 13.5 years on average,14 and only about 20 percent of all drugs that enter clinical testing ultimately reach the marketplace.15 On average, the after-tax research and development cost per new

11  

Article 5.04 of the Model PHS Exclusive Patent License Agreement states: “DHHS has responsibility for funding basic biomedical research, for funding medical treatment through programs such as Medicare and Medicaid, for providing direct medical care, and more generally, for protecting the health and safety of the public. Because of these responsibilities, and the public investment in the research that culminated in the Licensed Patent Rights, PHS may require LICENSEE to submit documentation in confidence showing 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. This paragraph shall not restrict the right of LICENSEE to price a Licensed Product or Licensed Process so as to obtain a reasonable profit for its sale or use. This paragraph 5.04 does not permit PHS or any other government agency to set or dictate prices for Licensed Products or Licensed Processes.”

12  

B. Artim, Pricing of Pharmaceuticals and Other Therapies Developed in Part with NIH Funds,Background Paper, Office of Technology Transfer, National Institutes of Health, 1994.

13  

This section is based on material presented by Patrick Gage, Thomas Mays, Bruce Chabner, Stephen Carter, Harold Edgar, and Martin Delaney.

14  

D. Dranove and D. Meltzer, “Do Important Drugs Reach the Market Sooner?,” RAND Journal of Economics, 25(Autumn 1994):1–22.

15  

J. A. DiMasi, R. W. Hansen, H. G. Grabowski, and L. Lasagna, “Cost of Innovation in the Pharmaceutical Industry,” Journal of Health Economics, 10(1991):107–142.



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Government and Industry Collaboration in AIDS Drug Development: Summary of a Workshop Held on May 6, 1994 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 NIH intellectual property rights may require that this relationship be supported by reasonable evidence.” Such pricing provisions also are included in NIH exclusive licensing agreements.11 The clause is not contained in nonexclusive licenses, however, because of the expectation that market competition will act to restrain prices when there are multiple manufacturers.12 Drug pricing remains a hotly debated and politically controversial issue. Since the 1987 Waxman hearing, several members of Congress have called for more direct and restrictive participation by the federal government in the pricing of drugs, particularly those that are discovered or developed from government-supported research. IMPEDIMENTS TO COLLABORATION IN HIV DRUG DEVELOPMENT13 Pharmaceutical research and development is an inherently risky, time-consuming, and costly venture. The process spans 13.5 years on average,14 and only about 20 percent of all drugs that enter clinical testing ultimately reach the marketplace.15 On average, the after-tax research and development cost per new 11   Article 5.04 of the Model PHS Exclusive Patent License Agreement states: “DHHS has responsibility for funding basic biomedical research, for funding medical treatment through programs such as Medicare and Medicaid, for providing direct medical care, and more generally, for protecting the health and safety of the public. Because of these responsibilities, and the public investment in the research that culminated in the Licensed Patent Rights, PHS may require LICENSEE to submit documentation in confidence showing 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. This paragraph shall not restrict the right of LICENSEE to price a Licensed Product or Licensed Process so as to obtain a reasonable profit for its sale or use. This paragraph 5.04 does not permit PHS or any other government agency to set or dictate prices for Licensed Products or Licensed Processes.” 12   B. Artim, Pricing of Pharmaceuticals and Other Therapies Developed in Part with NIH Funds,Background Paper, Office of Technology Transfer, National Institutes of Health, 1994. 13   This section is based on material presented by Patrick Gage, Thomas Mays, Bruce Chabner, Stephen Carter, Harold Edgar, and Martin Delaney. 14   D. Dranove and D. Meltzer, “Do Important Drugs Reach the Market Sooner?,” RAND Journal of Economics, 25(Autumn 1994):1–22. 15   J. A. DiMasi, R. W. Hansen, H. G. Grabowski, and L. Lasagna, “Cost of Innovation in the Pharmaceutical Industry,” Journal of Health Economics, 10(1991):107–142.

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Government and Industry Collaboration in AIDS Drug Development: Summary of a Workshop Held on May 6, 1994 drug approved for marketing is between $140 million and $194 million (in 1990 dollars).16 Industry executives maintain that these features are compounded in HIV/AIDS drug development. The following are among the reasons cited: the ultimate market and commercial lifetime of a given drug may be limited and the research and development process is accelerated, which means that substantial resources must be invested in a compressed time frame. Pharmaceutical companies, then, are reluctant to enter into collaborations with government that they believe may hinder this already complex enterprise. Government and industry representatives agree that although federal policies governing collaborative research were generally implemented with good intentions, these policies have sometimes led to contentious negotiations or inhibited research collaboration altogether. The single most significant obstacle cited by pharmaceutical executives is the role that government has assumed in setting prices for jointly developed products. A second major impediment is the possibility that government may assign rights to new intellectual property developed during the collaboration in ways that benefit a company's competitors or lead to uncertain licensing arrangements. Other obstacles include the federal government's operating policies for the management of clinical trials under the auspices of the AIDS Clinical Trials Group (ACTG)—a network of academic clinical research centers under the control and funding of the National Institute of Allergy and Infectious Diseases—and the burdensome, lengthy, and bureaucratic process of establishing cooperative research and development agreements. Underlying these specific barriers there exists an environment of uncertainty and instability fueled by the periodic shifts in federal policies governing research collaborations. There is also what many observers regard as a mutual lack of trust between government and industry. Workshop participants agreed that collaborative relationships would be improved by measures that each party might adopt to become more trusting and reliable partners. “Reasonable Pricing” Considerations As described earlier, NIH adopted the “reasonable pricing” clause as a means of achieving a balance between its dual statutory missions to conduct and promote biomedical research and education for the benefit of public health and to foster the transfer of federal technology. It is one of several mechanisms that NIH uses to help protect the public investment in collaborative research and 16   U.S. Congress, Office of Technology Assessment, Pharmaceutical R & D: Costs. Risks and Rewards, Report OTA-H-522 (Washington, D.C.: U.S. Government Printing Office), February 1993.

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Government and Industry Collaboration in AIDS Drug Development: Summary of a Workshop Held on May 6, 1994 ensure that the broadest spectrum of individuals has access to medical products arising from this research. NIH officials point to the successful commercialization of two drugs—the cancer drug Taxol and the AIDS drug ddI—both of which were jointly developed with the Bristol-Myers Squibb Company by using the CRADA mechanism and an exclusive licensing agreement, respectively. Both the CRADA and exclusive license carried “reasonable pricing” provisions requiring that the public's investment be considered along with the company's investment in setting market prices for the drugs. Despite these successes, however, the pharmaceutical industry generally views “reasonable pricing” provisions as too broad and threatening to their proprietary interests in a highly competitive marketplace.17 Companies maintain that they will not know for years whether the prices allowed under “reasonable pricing” will permit a fair return on their investments. Faced with this uncertainty and the consequent inability to predict expenses, pharmaceutical companies that can afford to pursue research and development independently of government collaboration appear increasingly likely to do so. NIH also collaborates with industry through Clinical Trial Agreements (CTAs), in which a company's patented product is transferred to or shared with the federal government for further research or clinical testing—for example, to assess the safety, efficacy, or method of use or administration of the candidate drug. Although this collaborative mechanism has generally been productive, an official of the National Cancer Institute (NCI) pointed out that some CTAs are not sufficient to assure industry that their agent, when jointly developed with government, will not be subject to pricing restrictions if the drug proves to be effective and subsequently marketed. Furthermore, a CTA offers no assurance that the company will receive future rights to any invention that results from the clinical collaboration. In NCI's experience over the past 2 years, most large U.S. firms have been reluctant to collaborate with the institute in clinical drug testing. Only the smallest companies, which need this support for their clinical trials, can accept the unpredictability of collaboration. Much of industry's concern centers around the uncertainties associated with “reasonable pricing” provisions. Industry representatives contend that they must agree to the provisions without knowing how the government will attempt to implement their intent when it comes time to market a product. 18 In addition, there is no ready definition of what a “fair or reasonable price” should be, and experience has demonstrated that perceptions about drug prices—within industry 17   U.S. Department of Health and Human Services, Office of the Inspector General, Technology Transfer and the Public Interest: Cooperative Research and Development Agreements at NIH, Report OEI-01-92-01100, November 1993. 18   Seenote 17.

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Government and Industry Collaboration in AIDS Drug Development: Summary of a Workshop Held on May 6, 1994 and government and among the public—are highly subjective and can vary widely. Industry therefore considers it impossible to calculate the risk and make responsible financial projections. Offers from NIH to “negotiate” when problems occur are considered equally vague and unpredictable. Even the examples of Taxol and ddI cited by NIH are widely viewed in industry as evidence of the potentially heavy hand of government. A Bristol-Myers Squibb executive expressed general satisfaction with the collaboration, but noted the company 's worry that government may alter its position under continued political or public pressure and exercise more burdensome requirements at indeterminate times in the future. NIH administrators readily acknowledge that the institutes lack the appropriate expertise to undertake meaningful analyses of private-sector product pricing decisions.19,20 Moreover, NIH recognizes that there is no statutory authority for government agencies to participate in the pricing of products developed under CRADAs or CTAs. Indeed, NIH is one of only two federal agencies (along with the Bureau of Mines, U.S. Department of the Interior) that bind collaborators to “reasonable pricing” provisions. NIH officials express a willingness to consider the implications for industry of “reasonable pricing” policies, but stress political pressure and the overarching need to safeguard the public's interest and ensure broad access to new drugs. For their part, industry executives maintain that the government and public interests are best served by increasing the flow of innovative medicines and letting market forces, such as competition, exert their customary control of prices. They argue that rather than ensuring access and lowering costs, pricing provisions are in fact discouraging collaboration and thereby the accelerated development and marketing of important new drugs. Society, in turn, is denied the benefits of their broad utilization. Intellectual Property Rights Patents are critical to the pharmaceutical industry because they protect developers' rights to medical products and processes that allow for an eventual 19   Seenote 17. 20   In its February 1993 report, the congressional Office of Technology Assessment noted: “At present, the PHS has no established mechanism or standards for reviewing the reasonableness of prices for products marketed under exclusive licenses and lacks the legal authority to enforce its policy in cases where prices would be deemed unreasonable ” (U.S. Congress, Office of Technology Assessment, Pharmaceutical R&D: Costs, Risks and Rewards, Report OTA-H-522 (Washington, D.C.: U.S. Government Printing Office), February 1993, p. 37.

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Government and Industry Collaboration in AIDS Drug Development: Summary of a Workshop Held on May 6, 1994 return on investment. In addition, patents on successful products help ensure a return on the company's investment capital that is adequate to cover the costs of research and development (which include the resources used to investigate and evaluate the many drugs that ultimately never obtain marketing approval). Only a small percentage of the drugs that are marketed eventually earn a rate of return sufficient to recover the costs of development.21 The federal government has an obligation to administer its patent rights in a responsible manner that benefits society. This means, for one thing, not privatizing patents covering “core research” technologies that are critical to the creation of a pool of common scientific knowledge on which everyone can draw equally. Although industry representatives recognize government's social obligations, they contend that the government guards its patents and licenses too closely and thus does not provide companies with the property-right assurances that they need to engage in collaborative research. Industry generally regards CRADAs as a useful framework for collaborative research. Their major advantage, as noted earlier, is that government and industry can negotiate in advance exclusive patent rights to some or all of the inventions that may arise. Under CTAs, however, the government generally does not assign intellectual property rights in advance to the industrial collaborator. In fact, most federal agencies interpret the licensing regulations and statutes as not permitting them to assign rights to future inventions outside of the CRADA mechanism; however, several workshop participants disagreed with this interpretation. If the research leads to follow-on inventions —such as new formulations or dosing strengths of an existing compound, novel ways to administer a drug, or new or combination uses for a drug—the government is not obligated to transfer patent rights or licenses to the company, which puts the ownership of key patents on the drug at risk. The government can in fact grant such rights to competitors, and a company could thus find itself competing with other companies that offer similar products based on its own initial research and development. Additionally, the increasing number of “use” patents, “compound” patents, and “process” patents makes it difficult to determine who has or who should have what level of rights in regard to intellectual property from research collaborations. Industry therefore would like to see an improved and clearer definition of the patent process itself. Of greatest concern is that the principles governing property rights in this area remain clear, consistent, and stable as political leadership changes. 21   H. Grabowski and J. Vernon, “A New Look at the Returns and Risks to Pharmaceutical R&D,” Management Science, 36(1990):804–821; P. Joglekar and M. L. Paterson, “A Closer Look at the Returns and Risks of Pharmaceutical R&D,” Journal of Health Economics, 5(1986):153–177.