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Economic considerations in cooperative research and development agreements (CRADA): The case of Taxol, NIH, and technology transfer
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Technology in Society 28 (2006) 321–331 www.elsevier.com/locate/techsoc
Economic considerations in cooperative research and development agreements (CRADA): The case of Taxol, NIH, and technology transfer Thomas A. Hemphill School of Management, University of Michigan-Flint, 4169 William S. White Building, Flint, Michigan 48502– 1950, USA
Abstract The General Accounting Office (GAO) of the U.S. Congress released a 2003 report examining the legal and financial issues by the National Institutes of Health (NIH) in the technology transfer of Taxol, a cancer treatment drug, which was commercialized quickly by Bristol-Myers Squibb (BMS). The GAO concludes that the 1991 cooperative research and development agreement (CRADA) transferring Taxol to the private sector met an NIH primary goal of facilitating the transferring of discoveries to the patients’ bedside: by 2001, Taxol had become the best-selling cancer treatment drug in pharmaceutical history. Nevertheless, criticism of NIH’s concern for economic and financial considerations when the agency negotiates CRADAs has generated the following four policy recommendations: (1) recognize reasonable pricing as good corporate citizenship; (2) encourage multiple partner CRADA applications; (3) require lowest federal fee schedule for all government purchases; and (4) calculate a royalty payback fee that covers NIH investment. r 2005 Elsevier Ltd. All rights reserved. Keywords: Cooperative research and development agreements; General Accounting Office; National Institutes of Health; Strategic options; Taxol; Technology transfer
1. Introduction In June of 2003, the General Accounting Office (GAO) of the U.S. Congress released a report examining the legal and financial issues involved in the National Institutes of Health Tel.: +1 810 762 0017.
E-mail address: thomashe@unflint.edu. 0160-791X/$ - see front matter r 2005 Elsevier Ltd. All rights reserved. doi:10.1016/j.techsoc.2005.08.008
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(NIH) technology transfer of research results enabling Taxol, a cancer treatment drug, to be commercialized quickly by Bristol-Myers Squibb (BMS). Requested by Senator Ron Wyden (D-Ore.), Technology Transfer: NIH-Private Sector Partnership in the Development of Taxol specifically examined (1) how the technology transfer partnership affected the research and development (R&D) of Taxol, (2) what NIH’s financial investment was in Taxol-related research, and what the financial outcomes were of the technology transfer process related to Taxol, and (3) what factors influenced how NIH exercised its authority in Taxol-related technology transfer activities [1]. Senator Wyden’s response to the results of the report was highly critical: It had to be apparent during negotiations that Taxol was going to be a huge seller, yet NIH failed to get an agreement that recognized what a vital investment the taxpayers had made. NIH dropped the ball—or didn’t even realize it had the ball— when it came to protecting the American people [2]. Taxol was developed through a cooperative research and development agreement (CRADA) between NIH and BMS and by 2001 had become the best-selling cancer drug in pharmaceutical history. Moreover, the 1991 NIH-BMS CRADA was one of the first CRADAs to result in a breakthrough drug. But before proceeding to the results of the GAO study, some further explanation of the origin of CRADAs, and the extent of the NIH role in such partnership agreements, is in order. 2. CRADAs and the NIH1 In 1980, in response to public concerns raised regarding the nation’s competitiveness in the global economy, the Bayh–Dole Act and the Stevenson–Wydler Act were passed by the U.S. Congress [3]. Bayh–Dole authorized federal agencies to execute license agreements with commercial entities (e.g. small businesses, universities, and non-profit research institutes) to encourage the commercialization of technologies developed with federal funding, and to collect royalties for such licenses. In 1983, an Executive Office memorandum extended this license agreement to large businesses. The Stevenson–Wydler Act focuses on inventions owned by the federal government; the Bayh–Dole Act focuses on inventions created under federal contracts and grants. In 1986, the Federal Technology Transfer Act amended Stevenson–Wydler and authorized federal agencies to enter into CRADAs with non-federal entities. CRADAs are formal R&D agreements of specified duration and scope between federal government investigators and non-federal partners (e.g. industry, academia or non-profits) [4]. The purpose of a CRADA is to make available federal government facilities, intellectual property, and expertise for institutional partnerships leading to useful, marketable products that benefit public health. The collaborating non-federal partner agrees to provide funds, personnel, services, facilities, equipment or other resources needed to conduct a specific research or development effort, while the federal government agrees to provide similar resources (but not funds) directly to the partner. For the non-federal partner, the major benefit is that it may acquire a first option for licensing patents resulting from the CRADA. By entering into this standard transfer agreement (STA) CRADA, the federal government and non-federal partners can optimize their resources and 1
Unless otherwise specified, this section draws heavily from [1].
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Table 1 NIH executed CRADAs CRADAs
Standard Materials
Fiscal years
Total
95
96
97
98
99
00
01
02
03
32 NA
44 43
32 121
43 106
48 78
34 75
44 76
34 87
30 67
341 653
(Source: Office of Technology Transfer, National Institutes of Health, Department of Health and Human Services, November 2003.)
cost-effectively perform research by sharing costs. It should be noted, however, that CRADAs are only one form of cooperative activity: others 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 spin-off of new firms. Both government and industry participants in NIH CRADAs report that they can facilitate the pooling of NIH and private-sector intellectual and financial resources, equipment, facilities, and research materials; protect the intellectual property rights of the government in inventions that result from collaborative efforts; and facilitate the transfer of technology from NIH laboratories to the private sector for development and commercialization [5]. NIH employs both the STA and materials transfer agreement (MTA) CRADA. The MTA CRADA may be necessary where a company is providing an otherwise non-available research material and it requests an option to exclusively license intellectual property arising from the research. As can be seen from NIH data in Table 1, MTA CRADAs have been utilized over an eight-year period (FY95-03) at a ratio of over 2-to-1 (566:279) over STA CRADAs. One goal of CRADAs is to speed the transition from laboratory ‘bench’ to the consumer’s medicine cabinets [6]. To that end, NIH has credited CRADAs with promoting the exchange and use of experimental compounds, scientific advice and discussion, and spurring increased government and industry funding for biomedical and clinical research. The agency recently determined that most CRADAs have resulted in new scientific knowledge in pharmaceutical and non-pharmaceutical applications and not new products that can be patented or licensed for commercial profit (75% of licensed NIH inventions amounted only to proofs of a concept, such as basic research that confirmed that HIV is the cause of AIDS) [7]. NIH, comprising 27 separate institutes and centers, is one of eight health agencies of the U.S. Public Health Service which, in turn, is part of the U.S. Department of Health and Human Services and is the principal federal agency that conducts and funds biomedical research, including research on drugs. In FY2004, NIH received $27.8 billion to fund biomedical research [8] and is directly responsible for 2% of new medicines (with private industry developing more than 90% of all Food and Drug Administration (FDA) approved new medicines and universities contributing to the remaining 7%). Approximately 10% of NIH funding is spent on internal R&D projects (intramural research), while the other 90% is utilized to support the efforts of non-governmental investigations (extramural research).
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The agency’s overall goals are two-fold: (1) promoting the health of the American people and all mankind through research in the biosciences, and (2) fostering a vigorous domestic biotechnology industry [9]. Specifically, NIH’s stated pharmaceutical technology transfer goals are, in order of priority, to foster scientific discoveries, to facilitate the rapid transfer of discoveries, to make resulting products accessible to patients, and to earn income. The agency’s approach to CRADAs differs from that of other federal laboratories. For example, NIH declines to protect the results of CRADA research as trade secrets for collaborators. Open dissemination of research data is promoted with the agency reserving the right to publish information on R&D generated by NIH—even under a CRADA. Furthermore, the policy of the Public Health Service (the parent agency of NIH) is to obtain ownership of inventions arising from agency funded R&D within the provisions of the law and to transfer the technology through the use of licensing whenever possible (instead of assignment of patent title). Although NIH has a strong policy preference for non-exclusive licensing of its technologies, the agency does allow them for patents requiring significant private risk and investment, including those that grow out of CRADAs. Over the past ten years, NIH executed more than 1800 licenses to inventions made by its intramural research program resulting in more than $350 million in royalties [10]. Despite its preference for non-exclusive licensing agreements, royalty payments and license agreements for NIH have continued to rise annually, reaching $52 million in FY2001. Furthermore, according to U.S. Department of Commerce data, approximately 70% of the total federal government invention royalties are captured by NIH. More importantly though, these efforts have resulted in the development, by its commercial partners, of more than 20 life-saving drugs, vaccines, and diagnostics and more than 100 other biomedical products. Most of these new drugs, vaccines, diagnostics and biomedical products are the result of NIH licensing inventions directly to pharmaceutical companies; only three have involved a CRADA. In a 2001 report to Congress, NIH concluded that none of the topselling prescription drugs were developed entirely by the agency, and only four of 47 drugs with U.S. sales of $500 million a year had been developed in part with technologies created with NIH funding [7]. Generally speaking, NIH conducts preclinical and clinical testing of drugs (Phase 1and 2 trials), while the pharmaceutical industry conducts more extensive clinical trials (Phase 3) and markets the drugs, although there is some overlap between Phase 1 and 2 responsibilities. 3. GAO results2 According to the GAO analysis, prior to the CRADA and during the first two years of the agreement, NIH conducted most of the clinical trials associated with Taxol. Specifically, five of the six studies submitted to the FDA by BMS in support of its marketing applications (Phase 2 trials), were conducted by NIH, while one study was conducted by BMS. The results of these trials were critical for BMS to secure FDA approval in 1992 to market Taxol for the treatment of advanced ovarian cancer. Under the terms of the CRADA, BMS supplied hundreds of thousands of vials of paclitaxel (the generic term for Taxol) so NIH researchers could overcome previous shortages. The additional supplies of paclitaxel from BMS allowed NIH to increase the number of 2
Unless otherwise specified, this section draws heavily from [1].
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patients enrolled in NIH clinical trials from fewer than 500 patients (pre-CRADA) by 1989 to a final population of 28,882 patients. NIH made substantial investments in research related to Taxol, but its financial benefits from the collaboration with BMS have not been significant in comparison to BMS’s revenue from the drug. The agency estimates that it spent $183 million on all Taxol-related research from 1977 through the end of the CRADA’s term in 1997, although not all of this was for research supporting the 1991 CRADA. For one portion of its expenditures, NIH estimates that it spent $96 million to conduct clinical trials supporting the CRADA; this was offset by a $16 million payment from BMS. In addition, BMS supplied paclitaxel to NIH, the value of which GAO estimates to be $92 million. The agency spent an additional $301 million on Taxol-related research from 1998 through 2002, some of which was for cancer research, making NIH’s total Taxol-related spending $484 million through 2002. Overall, BMS calculated that the company spent $1 billion to research, develop and commercialize Taxol.3 BMS agreed to pay NIH royalties at a rate equal to 0.5% of worldwide sales of Taxol as part of a 1996 agreement to license three NIH Taxol-related inventions developed during the CRADA. Royalty payments to NIH have totaled $35.3 million, with 10 individual inventors receiving $7.7 million, while NIH kept the remaining $27.6 million. While the 1991 CRADA required that Taxol be reasonably priced given the public investment in the drug’s R&D and the health needs of the public, NIH did not require that reasonable evidence be presented.4 However, the National Cancer Institute collected this evidence and, through a detailed comparison with similar products (including those marketed in Canada, where Taxol is higher-priced), concluded that the pricing strategy of BMS for Taxol in the U.S. met the requirements of the CRADA. The federal government has been a major customer for Taxol, primarily through Medicare (Medicare payments for Taxol totaled $687 million from 1994 through 1999). The GAO found that Medicare’s payments reflect, in part, the price it pays for Taxol. Compared to other federal programs, Medicare pays relatively more for Taxol than it does for other widely used cancer drugs. However, Medicare does not purchase drugs directly, but instead pays providers for cancer drugs. Medicare payments are determined by the average wholesale price (AWP), a number reported by manufacturers. The AWP often considerably exceeds the price a manufacturer actually receives for a drug. In the fourth quarter of 2002, the GAO calculated Medicare paid 6.6 times the price other federal programs paid for Taxol, while it paid an average of 3.0 times the price other federal programs paid for other widely-used cancer drugs. Several factors affected NIH’s exercise of its broad authority in negotiating its Taxolrelated technology transfer activities. First, even though its research findings could be valuable in securing FDA approval for marketing the drug, NIH did not have a patent on paclitaxel (since it was already in the public domain) and thus could not grant an exclusive patent license to a CRADA partner. Second, in NIH’s evaluation it was limited by a shortage of available, qualified alternative CRADA partners; only four companies, including BMS, decided to apply for the CRADA opportunity. Moreover, NIH reviewers scored the BMS CRADA application substantially higher than the other three companies. 3
Studies show that research alone accounts for approximately 25% of expenditures associated with bringing a new product or process to market [11]. 4 The U.S. Public Health Service and the Bureau of Mines were the only federal agencies requiring a ‘reasonable pricing’ clause in their CRADAs [1].
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For example, the applicant that received the second highest score was cited as having no experience in the U.S. involving natural products and in developing pharmaceutical agents and as providing incomplete responses, especially on how it would make Taxol available and how much it could supply annually. In 2000, NIH’s director of the Office of Technology Transfer (OTT) testified that the vast majority of NIH inventions require active marketing and more often than not only one firm is generally interested in licensing any particular type of technology. Furthermore, NIH’s OTT had approximately 2000 technologies available for licensing and 30% had been available for more than five years. This is actually a better situation than most federal agencies are faced with since research studies indicate that, due to a lack of commercial applications and deficiencies in marketing these technologies, only 10% of federally owned patents are ever used. Third, when NIH and BMS entered into the license agreement five years after the 1991 CRADA took effect, the royalty rate negotiations were likely affected by how the parties viewed the benefits of an agreement.5 NIH officials acknowledge that they generally balance eight factors in negotiating royalty rates. These include the stage of product development, the type of product, the uniqueness of the materials, the scope of the patent coverage, the market timing, NIH’s contribution to the product, and the public health benefit, which receives the highest consideration among all factors. In contrast, BMS officials report that the company considers three factors when negotiating royalty rates: scientific risk, coverage, and exclusivity. In the case of Taxol, it was reported that the company determined it had high scientific risk (i.e. it did not know if the inventions would be successful), narrow coverage (i.e. the license was for very specific ways of treating a tumor), and a lack of exclusivity (i.e. the treatment regimens BMS licensed would not prevent other firms from marketing generic paclitaxel after BMS’s period of marketing exclusivity expired), all making the inventions less valuable. In general, NIH’s leverage in negotiating royalty rates is affected by the amount of competition for a license. In the case of Taxol, it is unclear whether other companies would have been interested in the inventions developed out of the CRADA, as BMS had exclusive rights to market paclitaxel at that time. 4. Strategic options and research alliances In its report, the GAO concludes that the 1991 CRADA between NIH and BMS is an example of a successful collaboration between the public and private sectors in pharmaceutical technology transfer [1]. Senator Wyden comes to a somewhat different conclusion: he criticizes NIH for ‘failing to insist on affordability or to negotiate adequate returns on a $183 million taxpayer investment in the blockbuster cancer drug Taxol [2].’ Yet, as the GAO notes, ‘NIH’s goals in the technology transfer process emphasizes public health benefits over financial considerations [1].’ As mentioned earlier, the agency’s stated goals with regard to the pharmaceutical technology transfer process are, in order of priority, to foster scientific discoveries, to facilitate the rapid transfer of discoveries to the bedside, to make resulting products accessible to patients, and to earn income. For BMI, one would reverse these priorities in order of importance: to earn income, to create 5
At the time of the Taxol CRADA negotiations with BMS, the suggested CRADA royalty ceiling was in the 5–8% range [1].
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products accessible to consumers, to transfer discoveries to the marketplace, and to foster scientific discoveries. From an R&D strategy perspective, a firm such as BMS would want to optimize its limited financial resources. One approach to attaining this goal is for management to choose strategic investment options that best match the firm’s dynamic capabilities with environmental opportunities [12]. In the strategic options approach, collaborative partnerships are real options for a firm, allowing management the choice of exercising its option (and buying time before making a significant investment) to participate based on technological and market developments. When applied to technology research partnerships, the strategic option approach to a firm’s technology strategy offers many benefits. For example, a firm may decide to enter into a research partnership that has significant technological and/or market uncertainties attached to it, yet very high upside benefits if a product or process is successfully developed. The entry cost into the alliance (i.e. price to participate), however, may only require a minimal expenditure of firm resources. The shared nature of this technology alliance will allow the firm a certain level of access to new technology-based products and/or processes that are developed. If the research partnership is producing valuable information or a potentially marketable product, the firm can exercise its option to invest further resources into the venture; if not, management can exercise its option to exit the partnership. Under the strategic options approach to R&D firm strategy, BMS evaluated the ‘option’ of buying into a CRADA with NIH and commercializing paclitaxel. This technology alliance offered promising data covering clinical trials through Phase 1 and 2 of FDA approval. The investment in the early phases, clinical portion of the alliance by NIH totaled $96 million (47%); for BMS, its later phase, clinical investment was $108 million (53%). As the results of Phase 3 trials continued to verify the cancer treating attributes of paclitaxel, BMS chose to exercise its option and invest upwards of $1 billion to fully commercialize Taxol. This initial limited financial investment in R&D has generated $9.0 billion in global sales through 2002 for BMS. Most importantly, however, by the time NIH entered into licensing and royalty agreements in 1996, more than $1 billion of Taxol had been sold within three years. 5. Reinvigorating NIH financial priorities While NIH’s goals in technology transfer are heavily weighted toward public health, (i.e. commercializing a promising drug as quickly as possible) BMS concentrates on minimizing R&D expenditures in new product development and maximizing firm net profits on breakthrough drugs. Despite Senator Wyden’s harsh criticism, the results of this CRADA partnership successfully met both partners’ expectations. In less than two years, BMS had obtained U.S. FDA clearance for marketing, resolved the production and purity problems, developed alternative sources of supply, and begun rapid expansion of clinical trials. By 1998, annual worldwide sales of Taxol to consumers exceeded $1 billion. The Taxol CRADA partnership is a commercial success; less than a handful of other NIH CRADAs have resulted in anything approaching the drug sales of Taxol. Yet, given the positive NIH clinical results on paclitaxel and the latitude that the agency had in negotiating, the less important (to NIH) financial objective initially appeared as if it had been inadequately addressed. Considering the R&D clinical investment of $96 million in paciltaxel (Taxol), a royalty rate of 0.5% would not approach NIH expenditures.
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However, BMS supplied $92 million in paclitaxel to NIH and made a $16 million payment to NIH for initial total investment of $108 million, more than offsetting the NIH R&D investment. Nevertheless, given the factors present when negotiations took place (including a non-exclusive license), the 0.5% royalty fee was the best rate that the NIH was going to acquire from BMS. Furthermore, the NIH states that its analysis led it to conclude that Taxol was ‘reasonably priced.’ However, as Senator Wyden notes: Moms with ovarian cancer and AIDS patients with skin cancer, paying $1,000 a dose for Taxol, needed NIH to negotiate for them. Having the drug on the shelf doesn’t mean anything if you can’t pay for it. But this report shows NIH did not do all it could to advocate for patients [2]. NIH did cite as evidence of Taxol’s reasonable pricing—the discount federal government programs would receive through the Federal Supply Schedule (FSS) for pharmaceuticals. However, NIH failed to take into account that Medicare, which would become the primary government purchaser of Taxol, does not participate in the FSS. This was an expensive oversight by the NIH. Financial estimates completed in 2001 by the Center for the Study of Drug Development at Tufts University and based on data supplied by the pharmaceutical industry indicate, that on average, it costs $802 million (in 2000) dollars to bring a new drug to market [13]. Ten years earlier, Tufts researchers also estimated that the cost of bringing a new drug to market averaged $470 million (1991 dollars). In 1993, the Office of Technology Assessment, U.S. Congress, concluded that the methods used by the Tufts researchers in the 1991 study are correct in calculating such an average cost, assuming the underlying data provided by the industry are correct [14]. In line with these cost estimates, BMS calculated that the company spent $1 billion to research, develop and commercialize Taxol.6 It should not be overlooked that pharmaceutical firms need to recoup investment costs in successful drugs as well as unsuccessful R&D efforts (which far exceed in number the commercial successes). What does NIH need to do to enhance its financial considerations in future CRADA negotiations? The following four policy recommendations could provide initial guidance for NIH:
Recognize reasonable pricing as good corporate citizenship. If Congress is concerned with the lack of emphasis on financial considerations, it should formally charge the NIH with this responsibility. The NIH dropped the reasonable pricing clause in 1995 after the pharmaceutical industry claimed it was a form of price control (although, at the time, reasonable pricing was defined by the agency as ‘a price within the range of existing therapies’), and many companies withdrew from further interaction with NIH. In fact, this clause was modified in 13 of the 61 CRADAs established at NIH between 1990 and 1992. According to NIH, this clause ultimately created a barrier to expand research 6
There is some question about the accuracy of this expenditure figure. According to data from a study conducted at the National Cancer Institute on cooperative group treatment trials between FY93 and FY99, the annual cost of the trials was $169,789 to $310,563 per year per trial [15]. Moreover, the cost per patient was (per year) between $3861 and $6202. James Love, Director, Consumer Project on Technology, has calculated that for BMS to have spent $1 billion on clinical trials, it would have to have enrolled 166,000 patients in trials, at $6000 per patient [15].
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relationships, and thus meet its primary responsibility of disseminating this new technology into the marketplace and the consumer. Congress should be aware that reinstituting this clause may seriously impede the NIH’s CRADA program (perhaps to the benefit of federal biomedical programs in other agencies operating without this clause in their CRADAs). For example, NIH data indicates that between 1997 and 2000 (after the reasonable pricing clause had been eliminated) there were a total of 190 CRADAs initiated; in contrast, between 1992 and 1995 (when it was in effect), there were only 136 CRADAs formed, approximately one-third fewer than in the later time period. Industry representatives, Congressional officials, academics, and NIH officials all agree that NIH is not equipped to implement a policy for the pricing of CRADA products. Furthermore, the agency does not have the legislative authority to obtain the necessary cost data from its industry CRADA partner nor has it the expertise in-house to analyze the data. An alternative approach would be to challenge the pharmaceutical industry to voluntarily (and transparently) offer their economic rationale for pricing federally subsidized drugs. Does the industry have a policy of ‘unreasonable pricing’ (and thus, limiting consumer access) on products that have received significant taxpayer subsidy in the crucial Phase 1 and 2 of product development, and which pharmaceutical companies will have an opportunity to reap the financial benefits once commercialized? In its 2001 report, NIH has indicated that it would convene a new group of relevant experts ‘to establish a thoughtful dialogue on the appropriate returns to the public’ for products developed with taxpayers’ support [7]. If ‘reasonable pricing’ is to be at least a recognized, voluntary initiative of good corporate citizenship in the pharmaceutical industry, then provide NIH with the economic analysis to verify the company data. For example, make available the antitrust expertise at the Federal Trade Commission’s Bureau of Competition (on an interagency contractual basis) or contract the analysis out to academic industrial organization economists whose research interests rest in the pharmaceutical industry. The complexity of determining what reasonable pricing entails can be appreciated by the wide range of variables that need to be taken into the pricing consideration, including calculating the value of the federal contribution, determining the cost of government-sponsored research in relation to the total costs incurred by the company (including research, development, clinical trials, FDA approval, production, distribution, and marketing), and identifying what costs were incurred in related work that did not result in a marketable product or process, to name just a few. Encourage multiple partner CRADA applications. Where there are limited qualified bidders, encourage the use of a multiple partner CRADA application. This approach may alter a bidding situation where there may be only one company with the resources to develop and commercialize an invention. The multiple partner application could offset individual firm weaknesses, enhance bidding competition, and offer NIH greater leverage in negotiating royalties. Require lowest federal fee schedule price for all government purchases. When the federal government will be a likely major purchaser of a commercialized drug, require that the winning bidder provide the drug to the federal government utilizing the lowest government fee schedule in effect at the time. Presently the Department of Veterans Affairs, the Department of Defense, the Public Health Service, and the Coast Guard are sold brand name drugs listed on the FSS at a price 24% lower than the
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non-federal average manufacturer price, a ceiling price that is lower than the FSS for many drugs. Calculate a royalty payback fee that covers NIH investment. Establish a royalty fee for inventions that, dependent on the negotiating positions of NIH and the company, attempts to incorporate at least a payback for NIH financial investment in Phase 1 and 2 clinical R&D during the duration of the CRADA. This will only generate a small recovery of overall taxpayer funding of NIH R&D; yet, this is a reasonable request of successful, commercialized drugs.
In its future CRADA partnerships, NIH must not simply meet its short-term goal of focusing on public health considerations. The longer-term financial ramifications of commercialization must acquire a renewed emphasis in the NIH negotiating strategy. Only by implementing all its organizational charges will NIH continue to successfully transfer its technology to the ultimate consumer—the patient. References [1] United States General Accounting Office. Technology transfer: NIH-private sector partnership in the development of Taxol (GAO-03-829). Report to the Honorable Ron Wyden, U.S. Senate; June 2003. [2] Wyden R Sen. Wyden’s prepared statement for Taxol news conference. Washington, DC: Press release Office of U.S. Senator Ron Wyden; June 6, 2003. [3] Schacht WH. Patent ownership and federal research and development (R&D): a discussion on the Bayh-Dole act and the Stevenson-Wydler act. The Library of Congress. Report for Congress (RL 30320);December 11, 2000. [4] National Institute of Mental Health. Cooperative research & development agreement (CRADAs). Available from http://intramural.nimh.nih.gov/technicalcrada.htm. [5] Department of Health and Human Services, Office of Inspector General. Technology transfer and the public interest: cooperative research and development agreements at NIH (OEI-01-92-01100); November 1993. [6] Guston DH. Technology transfer and the use of CRADAs at the national institutes of health. In: Branscomb LM, Keller JH, editors. Investing in innovation. Cambridge: MIT Press; 1998. [7] National Institutes of Health. A plan to ensure taxpayer interests are protected. NIH responses to the conference report request for a plan to ensure taxpayers’ interests are protected; July 2001 Available from: http://www.mih.gov/news/070101wyden.htm. [8] American Association of Universities. NIH funding in FY2004. Available from: http://www.aau.edu/budget/ 04NIHFund.pdf. [9] President’s Council of Advisors on Science and Technology. Achieving the promise of the bioscience revolution: The role of the federal government; December 1992. [10] Ferguson SM. Products, partners & public health: transfer of biomedical technologies from the U.S. government. J Biolaw Bus 2002;5(2):35–9. [11] Schacht WH. Federal R&D, drug discovery, and pricing: insights from the NIH-university-industry relationship. Congressional research service: the library of congress. Report for congress (RL30585); June 19, 2000. [12] Hemphill TA, Vonortas NV. Strategic research partnerships: a managerial perspective. Technol Anal Strategic Manage 2003;15(2):255–71. [13] Gluck ME. Federal policies affecting the cost and availability of new pharmaceuticals, July.: The Kaiser Family Foundation; 2002. [14] U.S. Congress, Office of Technology Assessment. Pharmaceutical R&D: costs, risks, and rewards (OTA-H522); February 1993. [15] Love J. DCP cooperative group treatment trials and funding, 1993–1999; August 10, 2000 Available from: http://lists.essential.org/pipeemail/pharmpolicy/2000-August/000306.html and http://www.cptech.org/ip/ health/taxol/.
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Thomas A. Hemphill recently graduated (2005) with a Ph.D. in Business Administration at The George Washington University, School of Business, Washington, D.C. with a primary field in Strategic Management and Public Policy and secondary field in Technology and Innovation Policy. He is presently an assistant professor in the School of Management, University of Michigan-Flint. His publications have appeared in Business Economics, Business Horizons, Innovation: Management, Policy & Practice, Knowledge, Technology & Policy, Regulation: The Cato Review of Business and Government, Science and Public Policy, Technology Analysis & Strategic Management, and Technology in Society, among others.
Technology in Society 28 (2006) 321–331 www.elsevier.com/locate/techsoc
Economic considerations in cooperative research and development agreements (CRADA): The case of Taxol, NIH, and technology transfer Thomas A. Hemphill School of Management, University of Michigan-Flint, 4169 William S. White Building, Flint, Michigan 48502– 1950, USA
Abstract The General Accounting Office (GAO) of the U.S. Congress released a 2003 report examining the legal and financial issues by the National Institutes of Health (NIH) in the technology transfer of Taxol, a cancer treatment drug, which was commercialized quickly by Bristol-Myers Squibb (BMS). The GAO concludes that the 1991 cooperative research and development agreement (CRADA) transferring Taxol to the private sector met an NIH primary goal of facilitating the transferring of discoveries to the patients’ bedside: by 2001, Taxol had become the best-selling cancer treatment drug in pharmaceutical history. Nevertheless, criticism of NIH’s concern for economic and financial considerations when the agency negotiates CRADAs has generated the following four policy recommendations: (1) recognize reasonable pricing as good corporate citizenship; (2) encourage multiple partner CRADA applications; (3) require lowest federal fee schedule for all government purchases; and (4) calculate a royalty payback fee that covers NIH investment. r 2005 Elsevier Ltd. All rights reserved. Keywords: Cooperative research and development agreements; General Accounting Office; National Institutes of Health; Strategic options; Taxol; Technology transfer
1. Introduction In June of 2003, the General Accounting Office (GAO) of the U.S. Congress released a report examining the legal and financial issues involved in the National Institutes of Health Tel.: +1 810 762 0017.
E-mail address: thomashe@unflint.edu. 0160-791X/$ - see front matter r 2005 Elsevier Ltd. All rights reserved. doi:10.1016/j.techsoc.2005.08.008
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(NIH) technology transfer of research results enabling Taxol, a cancer treatment drug, to be commercialized quickly by Bristol-Myers Squibb (BMS). Requested by Senator Ron Wyden (D-Ore.), Technology Transfer: NIH-Private Sector Partnership in the Development of Taxol specifically examined (1) how the technology transfer partnership affected the research and development (R&D) of Taxol, (2) what NIH’s financial investment was in Taxol-related research, and what the financial outcomes were of the technology transfer process related to Taxol, and (3) what factors influenced how NIH exercised its authority in Taxol-related technology transfer activities [1]. Senator Wyden’s response to the results of the report was highly critical: It had to be apparent during negotiations that Taxol was going to be a huge seller, yet NIH failed to get an agreement that recognized what a vital investment the taxpayers had made. NIH dropped the ball—or didn’t even realize it had the ball— when it came to protecting the American people [2]. Taxol was developed through a cooperative research and development agreement (CRADA) between NIH and BMS and by 2001 had become the best-selling cancer drug in pharmaceutical history. Moreover, the 1991 NIH-BMS CRADA was one of the first CRADAs to result in a breakthrough drug. But before proceeding to the results of the GAO study, some further explanation of the origin of CRADAs, and the extent of the NIH role in such partnership agreements, is in order. 2. CRADAs and the NIH1 In 1980, in response to public concerns raised regarding the nation’s competitiveness in the global economy, the Bayh–Dole Act and the Stevenson–Wydler Act were passed by the U.S. Congress [3]. Bayh–Dole authorized federal agencies to execute license agreements with commercial entities (e.g. small businesses, universities, and non-profit research institutes) to encourage the commercialization of technologies developed with federal funding, and to collect royalties for such licenses. In 1983, an Executive Office memorandum extended this license agreement to large businesses. The Stevenson–Wydler Act focuses on inventions owned by the federal government; the Bayh–Dole Act focuses on inventions created under federal contracts and grants. In 1986, the Federal Technology Transfer Act amended Stevenson–Wydler and authorized federal agencies to enter into CRADAs with non-federal entities. CRADAs are formal R&D agreements of specified duration and scope between federal government investigators and non-federal partners (e.g. industry, academia or non-profits) [4]. The purpose of a CRADA is to make available federal government facilities, intellectual property, and expertise for institutional partnerships leading to useful, marketable products that benefit public health. The collaborating non-federal partner agrees to provide funds, personnel, services, facilities, equipment or other resources needed to conduct a specific research or development effort, while the federal government agrees to provide similar resources (but not funds) directly to the partner. For the non-federal partner, the major benefit is that it may acquire a first option for licensing patents resulting from the CRADA. By entering into this standard transfer agreement (STA) CRADA, the federal government and non-federal partners can optimize their resources and 1
Unless otherwise specified, this section draws heavily from [1].
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Table 1 NIH executed CRADAs CRADAs
Standard Materials
Fiscal years
Total
95
96
97
98
99
00
01
02
03
32 NA
44 43
32 121
43 106
48 78
34 75
44 76
34 87
30 67
341 653
(Source: Office of Technology Transfer, National Institutes of Health, Department of Health and Human Services, November 2003.)
cost-effectively perform research by sharing costs. It should be noted, however, that CRADAs are only one form of cooperative activity: others 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 spin-off of new firms. Both government and industry participants in NIH CRADAs report that they can facilitate the pooling of NIH and private-sector intellectual and financial resources, equipment, facilities, and research materials; protect the intellectual property rights of the government in inventions that result from collaborative efforts; and facilitate the transfer of technology from NIH laboratories to the private sector for development and commercialization [5]. NIH employs both the STA and materials transfer agreement (MTA) CRADA. The MTA CRADA may be necessary where a company is providing an otherwise non-available research material and it requests an option to exclusively license intellectual property arising from the research. As can be seen from NIH data in Table 1, MTA CRADAs have been utilized over an eight-year period (FY95-03) at a ratio of over 2-to-1 (566:279) over STA CRADAs. One goal of CRADAs is to speed the transition from laboratory ‘bench’ to the consumer’s medicine cabinets [6]. To that end, NIH has credited CRADAs with promoting the exchange and use of experimental compounds, scientific advice and discussion, and spurring increased government and industry funding for biomedical and clinical research. The agency recently determined that most CRADAs have resulted in new scientific knowledge in pharmaceutical and non-pharmaceutical applications and not new products that can be patented or licensed for commercial profit (75% of licensed NIH inventions amounted only to proofs of a concept, such as basic research that confirmed that HIV is the cause of AIDS) [7]. NIH, comprising 27 separate institutes and centers, is one of eight health agencies of the U.S. Public Health Service which, in turn, is part of the U.S. Department of Health and Human Services and is the principal federal agency that conducts and funds biomedical research, including research on drugs. In FY2004, NIH received $27.8 billion to fund biomedical research [8] and is directly responsible for 2% of new medicines (with private industry developing more than 90% of all Food and Drug Administration (FDA) approved new medicines and universities contributing to the remaining 7%). Approximately 10% of NIH funding is spent on internal R&D projects (intramural research), while the other 90% is utilized to support the efforts of non-governmental investigations (extramural research).
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The agency’s overall goals are two-fold: (1) promoting the health of the American people and all mankind through research in the biosciences, and (2) fostering a vigorous domestic biotechnology industry [9]. Specifically, NIH’s stated pharmaceutical technology transfer goals are, in order of priority, to foster scientific discoveries, to facilitate the rapid transfer of discoveries, to make resulting products accessible to patients, and to earn income. The agency’s approach to CRADAs differs from that of other federal laboratories. For example, NIH declines to protect the results of CRADA research as trade secrets for collaborators. Open dissemination of research data is promoted with the agency reserving the right to publish information on R&D generated by NIH—even under a CRADA. Furthermore, the policy of the Public Health Service (the parent agency of NIH) is to obtain ownership of inventions arising from agency funded R&D within the provisions of the law and to transfer the technology through the use of licensing whenever possible (instead of assignment of patent title). Although NIH has a strong policy preference for non-exclusive licensing of its technologies, the agency does allow them for patents requiring significant private risk and investment, including those that grow out of CRADAs. Over the past ten years, NIH executed more than 1800 licenses to inventions made by its intramural research program resulting in more than $350 million in royalties [10]. Despite its preference for non-exclusive licensing agreements, royalty payments and license agreements for NIH have continued to rise annually, reaching $52 million in FY2001. Furthermore, according to U.S. Department of Commerce data, approximately 70% of the total federal government invention royalties are captured by NIH. More importantly though, these efforts have resulted in the development, by its commercial partners, of more than 20 life-saving drugs, vaccines, and diagnostics and more than 100 other biomedical products. Most of these new drugs, vaccines, diagnostics and biomedical products are the result of NIH licensing inventions directly to pharmaceutical companies; only three have involved a CRADA. In a 2001 report to Congress, NIH concluded that none of the topselling prescription drugs were developed entirely by the agency, and only four of 47 drugs with U.S. sales of $500 million a year had been developed in part with technologies created with NIH funding [7]. Generally speaking, NIH conducts preclinical and clinical testing of drugs (Phase 1and 2 trials), while the pharmaceutical industry conducts more extensive clinical trials (Phase 3) and markets the drugs, although there is some overlap between Phase 1 and 2 responsibilities. 3. GAO results2 According to the GAO analysis, prior to the CRADA and during the first two years of the agreement, NIH conducted most of the clinical trials associated with Taxol. Specifically, five of the six studies submitted to the FDA by BMS in support of its marketing applications (Phase 2 trials), were conducted by NIH, while one study was conducted by BMS. The results of these trials were critical for BMS to secure FDA approval in 1992 to market Taxol for the treatment of advanced ovarian cancer. Under the terms of the CRADA, BMS supplied hundreds of thousands of vials of paclitaxel (the generic term for Taxol) so NIH researchers could overcome previous shortages. The additional supplies of paclitaxel from BMS allowed NIH to increase the number of 2
Unless otherwise specified, this section draws heavily from [1].
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patients enrolled in NIH clinical trials from fewer than 500 patients (pre-CRADA) by 1989 to a final population of 28,882 patients. NIH made substantial investments in research related to Taxol, but its financial benefits from the collaboration with BMS have not been significant in comparison to BMS’s revenue from the drug. The agency estimates that it spent $183 million on all Taxol-related research from 1977 through the end of the CRADA’s term in 1997, although not all of this was for research supporting the 1991 CRADA. For one portion of its expenditures, NIH estimates that it spent $96 million to conduct clinical trials supporting the CRADA; this was offset by a $16 million payment from BMS. In addition, BMS supplied paclitaxel to NIH, the value of which GAO estimates to be $92 million. The agency spent an additional $301 million on Taxol-related research from 1998 through 2002, some of which was for cancer research, making NIH’s total Taxol-related spending $484 million through 2002. Overall, BMS calculated that the company spent $1 billion to research, develop and commercialize Taxol.3 BMS agreed to pay NIH royalties at a rate equal to 0.5% of worldwide sales of Taxol as part of a 1996 agreement to license three NIH Taxol-related inventions developed during the CRADA. Royalty payments to NIH have totaled $35.3 million, with 10 individual inventors receiving $7.7 million, while NIH kept the remaining $27.6 million. While the 1991 CRADA required that Taxol be reasonably priced given the public investment in the drug’s R&D and the health needs of the public, NIH did not require that reasonable evidence be presented.4 However, the National Cancer Institute collected this evidence and, through a detailed comparison with similar products (including those marketed in Canada, where Taxol is higher-priced), concluded that the pricing strategy of BMS for Taxol in the U.S. met the requirements of the CRADA. The federal government has been a major customer for Taxol, primarily through Medicare (Medicare payments for Taxol totaled $687 million from 1994 through 1999). The GAO found that Medicare’s payments reflect, in part, the price it pays for Taxol. Compared to other federal programs, Medicare pays relatively more for Taxol than it does for other widely used cancer drugs. However, Medicare does not purchase drugs directly, but instead pays providers for cancer drugs. Medicare payments are determined by the average wholesale price (AWP), a number reported by manufacturers. The AWP often considerably exceeds the price a manufacturer actually receives for a drug. In the fourth quarter of 2002, the GAO calculated Medicare paid 6.6 times the price other federal programs paid for Taxol, while it paid an average of 3.0 times the price other federal programs paid for other widely-used cancer drugs. Several factors affected NIH’s exercise of its broad authority in negotiating its Taxolrelated technology transfer activities. First, even though its research findings could be valuable in securing FDA approval for marketing the drug, NIH did not have a patent on paclitaxel (since it was already in the public domain) and thus could not grant an exclusive patent license to a CRADA partner. Second, in NIH’s evaluation it was limited by a shortage of available, qualified alternative CRADA partners; only four companies, including BMS, decided to apply for the CRADA opportunity. Moreover, NIH reviewers scored the BMS CRADA application substantially higher than the other three companies. 3
Studies show that research alone accounts for approximately 25% of expenditures associated with bringing a new product or process to market [11]. 4 The U.S. Public Health Service and the Bureau of Mines were the only federal agencies requiring a ‘reasonable pricing’ clause in their CRADAs [1].
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For example, the applicant that received the second highest score was cited as having no experience in the U.S. involving natural products and in developing pharmaceutical agents and as providing incomplete responses, especially on how it would make Taxol available and how much it could supply annually. In 2000, NIH’s director of the Office of Technology Transfer (OTT) testified that the vast majority of NIH inventions require active marketing and more often than not only one firm is generally interested in licensing any particular type of technology. Furthermore, NIH’s OTT had approximately 2000 technologies available for licensing and 30% had been available for more than five years. This is actually a better situation than most federal agencies are faced with since research studies indicate that, due to a lack of commercial applications and deficiencies in marketing these technologies, only 10% of federally owned patents are ever used. Third, when NIH and BMS entered into the license agreement five years after the 1991 CRADA took effect, the royalty rate negotiations were likely affected by how the parties viewed the benefits of an agreement.5 NIH officials acknowledge that they generally balance eight factors in negotiating royalty rates. These include the stage of product development, the type of product, the uniqueness of the materials, the scope of the patent coverage, the market timing, NIH’s contribution to the product, and the public health benefit, which receives the highest consideration among all factors. In contrast, BMS officials report that the company considers three factors when negotiating royalty rates: scientific risk, coverage, and exclusivity. In the case of Taxol, it was reported that the company determined it had high scientific risk (i.e. it did not know if the inventions would be successful), narrow coverage (i.e. the license was for very specific ways of treating a tumor), and a lack of exclusivity (i.e. the treatment regimens BMS licensed would not prevent other firms from marketing generic paclitaxel after BMS’s period of marketing exclusivity expired), all making the inventions less valuable. In general, NIH’s leverage in negotiating royalty rates is affected by the amount of competition for a license. In the case of Taxol, it is unclear whether other companies would have been interested in the inventions developed out of the CRADA, as BMS had exclusive rights to market paclitaxel at that time. 4. Strategic options and research alliances In its report, the GAO concludes that the 1991 CRADA between NIH and BMS is an example of a successful collaboration between the public and private sectors in pharmaceutical technology transfer [1]. Senator Wyden comes to a somewhat different conclusion: he criticizes NIH for ‘failing to insist on affordability or to negotiate adequate returns on a $183 million taxpayer investment in the blockbuster cancer drug Taxol [2].’ Yet, as the GAO notes, ‘NIH’s goals in the technology transfer process emphasizes public health benefits over financial considerations [1].’ As mentioned earlier, the agency’s stated goals with regard to the pharmaceutical technology transfer process are, in order of priority, to foster scientific discoveries, to facilitate the rapid transfer of discoveries to the bedside, to make resulting products accessible to patients, and to earn income. For BMI, one would reverse these priorities in order of importance: to earn income, to create 5
At the time of the Taxol CRADA negotiations with BMS, the suggested CRADA royalty ceiling was in the 5–8% range [1].
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products accessible to consumers, to transfer discoveries to the marketplace, and to foster scientific discoveries. From an R&D strategy perspective, a firm such as BMS would want to optimize its limited financial resources. One approach to attaining this goal is for management to choose strategic investment options that best match the firm’s dynamic capabilities with environmental opportunities [12]. In the strategic options approach, collaborative partnerships are real options for a firm, allowing management the choice of exercising its option (and buying time before making a significant investment) to participate based on technological and market developments. When applied to technology research partnerships, the strategic option approach to a firm’s technology strategy offers many benefits. For example, a firm may decide to enter into a research partnership that has significant technological and/or market uncertainties attached to it, yet very high upside benefits if a product or process is successfully developed. The entry cost into the alliance (i.e. price to participate), however, may only require a minimal expenditure of firm resources. The shared nature of this technology alliance will allow the firm a certain level of access to new technology-based products and/or processes that are developed. If the research partnership is producing valuable information or a potentially marketable product, the firm can exercise its option to invest further resources into the venture; if not, management can exercise its option to exit the partnership. Under the strategic options approach to R&D firm strategy, BMS evaluated the ‘option’ of buying into a CRADA with NIH and commercializing paclitaxel. This technology alliance offered promising data covering clinical trials through Phase 1 and 2 of FDA approval. The investment in the early phases, clinical portion of the alliance by NIH totaled $96 million (47%); for BMS, its later phase, clinical investment was $108 million (53%). As the results of Phase 3 trials continued to verify the cancer treating attributes of paclitaxel, BMS chose to exercise its option and invest upwards of $1 billion to fully commercialize Taxol. This initial limited financial investment in R&D has generated $9.0 billion in global sales through 2002 for BMS. Most importantly, however, by the time NIH entered into licensing and royalty agreements in 1996, more than $1 billion of Taxol had been sold within three years. 5. Reinvigorating NIH financial priorities While NIH’s goals in technology transfer are heavily weighted toward public health, (i.e. commercializing a promising drug as quickly as possible) BMS concentrates on minimizing R&D expenditures in new product development and maximizing firm net profits on breakthrough drugs. Despite Senator Wyden’s harsh criticism, the results of this CRADA partnership successfully met both partners’ expectations. In less than two years, BMS had obtained U.S. FDA clearance for marketing, resolved the production and purity problems, developed alternative sources of supply, and begun rapid expansion of clinical trials. By 1998, annual worldwide sales of Taxol to consumers exceeded $1 billion. The Taxol CRADA partnership is a commercial success; less than a handful of other NIH CRADAs have resulted in anything approaching the drug sales of Taxol. Yet, given the positive NIH clinical results on paclitaxel and the latitude that the agency had in negotiating, the less important (to NIH) financial objective initially appeared as if it had been inadequately addressed. Considering the R&D clinical investment of $96 million in paciltaxel (Taxol), a royalty rate of 0.5% would not approach NIH expenditures.
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However, BMS supplied $92 million in paclitaxel to NIH and made a $16 million payment to NIH for initial total investment of $108 million, more than offsetting the NIH R&D investment. Nevertheless, given the factors present when negotiations took place (including a non-exclusive license), the 0.5% royalty fee was the best rate that the NIH was going to acquire from BMS. Furthermore, the NIH states that its analysis led it to conclude that Taxol was ‘reasonably priced.’ However, as Senator Wyden notes: Moms with ovarian cancer and AIDS patients with skin cancer, paying $1,000 a dose for Taxol, needed NIH to negotiate for them. Having the drug on the shelf doesn’t mean anything if you can’t pay for it. But this report shows NIH did not do all it could to advocate for patients [2]. NIH did cite as evidence of Taxol’s reasonable pricing—the discount federal government programs would receive through the Federal Supply Schedule (FSS) for pharmaceuticals. However, NIH failed to take into account that Medicare, which would become the primary government purchaser of Taxol, does not participate in the FSS. This was an expensive oversight by the NIH. Financial estimates completed in 2001 by the Center for the Study of Drug Development at Tufts University and based on data supplied by the pharmaceutical industry indicate, that on average, it costs $802 million (in 2000) dollars to bring a new drug to market [13]. Ten years earlier, Tufts researchers also estimated that the cost of bringing a new drug to market averaged $470 million (1991 dollars). In 1993, the Office of Technology Assessment, U.S. Congress, concluded that the methods used by the Tufts researchers in the 1991 study are correct in calculating such an average cost, assuming the underlying data provided by the industry are correct [14]. In line with these cost estimates, BMS calculated that the company spent $1 billion to research, develop and commercialize Taxol.6 It should not be overlooked that pharmaceutical firms need to recoup investment costs in successful drugs as well as unsuccessful R&D efforts (which far exceed in number the commercial successes). What does NIH need to do to enhance its financial considerations in future CRADA negotiations? The following four policy recommendations could provide initial guidance for NIH:
Recognize reasonable pricing as good corporate citizenship. If Congress is concerned with the lack of emphasis on financial considerations, it should formally charge the NIH with this responsibility. The NIH dropped the reasonable pricing clause in 1995 after the pharmaceutical industry claimed it was a form of price control (although, at the time, reasonable pricing was defined by the agency as ‘a price within the range of existing therapies’), and many companies withdrew from further interaction with NIH. In fact, this clause was modified in 13 of the 61 CRADAs established at NIH between 1990 and 1992. According to NIH, this clause ultimately created a barrier to expand research 6
There is some question about the accuracy of this expenditure figure. According to data from a study conducted at the National Cancer Institute on cooperative group treatment trials between FY93 and FY99, the annual cost of the trials was $169,789 to $310,563 per year per trial [15]. Moreover, the cost per patient was (per year) between $3861 and $6202. James Love, Director, Consumer Project on Technology, has calculated that for BMS to have spent $1 billion on clinical trials, it would have to have enrolled 166,000 patients in trials, at $6000 per patient [15].
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relationships, and thus meet its primary responsibility of disseminating this new technology into the marketplace and the consumer. Congress should be aware that reinstituting this clause may seriously impede the NIH’s CRADA program (perhaps to the benefit of federal biomedical programs in other agencies operating without this clause in their CRADAs). For example, NIH data indicates that between 1997 and 2000 (after the reasonable pricing clause had been eliminated) there were a total of 190 CRADAs initiated; in contrast, between 1992 and 1995 (when it was in effect), there were only 136 CRADAs formed, approximately one-third fewer than in the later time period. Industry representatives, Congressional officials, academics, and NIH officials all agree that NIH is not equipped to implement a policy for the pricing of CRADA products. Furthermore, the agency does not have the legislative authority to obtain the necessary cost data from its industry CRADA partner nor has it the expertise in-house to analyze the data. An alternative approach would be to challenge the pharmaceutical industry to voluntarily (and transparently) offer their economic rationale for pricing federally subsidized drugs. Does the industry have a policy of ‘unreasonable pricing’ (and thus, limiting consumer access) on products that have received significant taxpayer subsidy in the crucial Phase 1 and 2 of product development, and which pharmaceutical companies will have an opportunity to reap the financial benefits once commercialized? In its 2001 report, NIH has indicated that it would convene a new group of relevant experts ‘to establish a thoughtful dialogue on the appropriate returns to the public’ for products developed with taxpayers’ support [7]. If ‘reasonable pricing’ is to be at least a recognized, voluntary initiative of good corporate citizenship in the pharmaceutical industry, then provide NIH with the economic analysis to verify the company data. For example, make available the antitrust expertise at the Federal Trade Commission’s Bureau of Competition (on an interagency contractual basis) or contract the analysis out to academic industrial organization economists whose research interests rest in the pharmaceutical industry. The complexity of determining what reasonable pricing entails can be appreciated by the wide range of variables that need to be taken into the pricing consideration, including calculating the value of the federal contribution, determining the cost of government-sponsored research in relation to the total costs incurred by the company (including research, development, clinical trials, FDA approval, production, distribution, and marketing), and identifying what costs were incurred in related work that did not result in a marketable product or process, to name just a few. Encourage multiple partner CRADA applications. Where there are limited qualified bidders, encourage the use of a multiple partner CRADA application. This approach may alter a bidding situation where there may be only one company with the resources to develop and commercialize an invention. The multiple partner application could offset individual firm weaknesses, enhance bidding competition, and offer NIH greater leverage in negotiating royalties. Require lowest federal fee schedule price for all government purchases. When the federal government will be a likely major purchaser of a commercialized drug, require that the winning bidder provide the drug to the federal government utilizing the lowest government fee schedule in effect at the time. Presently the Department of Veterans Affairs, the Department of Defense, the Public Health Service, and the Coast Guard are sold brand name drugs listed on the FSS at a price 24% lower than the
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non-federal average manufacturer price, a ceiling price that is lower than the FSS for many drugs. Calculate a royalty payback fee that covers NIH investment. Establish a royalty fee for inventions that, dependent on the negotiating positions of NIH and the company, attempts to incorporate at least a payback for NIH financial investment in Phase 1 and 2 clinical R&D during the duration of the CRADA. This will only generate a small recovery of overall taxpayer funding of NIH R&D; yet, this is a reasonable request of successful, commercialized drugs.
In its future CRADA partnerships, NIH must not simply meet its short-term goal of focusing on public health considerations. The longer-term financial ramifications of commercialization must acquire a renewed emphasis in the NIH negotiating strategy. Only by implementing all its organizational charges will NIH continue to successfully transfer its technology to the ultimate consumer—the patient. References [1] United States General Accounting Office. Technology transfer: NIH-private sector partnership in the development of Taxol (GAO-03-829). Report to the Honorable Ron Wyden, U.S. Senate; June 2003. [2] Wyden R Sen. Wyden’s prepared statement for Taxol news conference. Washington, DC: Press release Office of U.S. Senator Ron Wyden; June 6, 2003. [3] Schacht WH. Patent ownership and federal research and development (R&D): a discussion on the Bayh-Dole act and the Stevenson-Wydler act. The Library of Congress. Report for Congress (RL 30320);December 11, 2000. [4] National Institute of Mental Health. Cooperative research & development agreement (CRADAs). Available from http://intramural.nimh.nih.gov/technicalcrada.htm. [5] Department of Health and Human Services, Office of Inspector General. Technology transfer and the public interest: cooperative research and development agreements at NIH (OEI-01-92-01100); November 1993. [6] Guston DH. Technology transfer and the use of CRADAs at the national institutes of health. In: Branscomb LM, Keller JH, editors. Investing in innovation. Cambridge: MIT Press; 1998. [7] National Institutes of Health. A plan to ensure taxpayer interests are protected. NIH responses to the conference report request for a plan to ensure taxpayers’ interests are protected; July 2001 Available from: http://www.mih.gov/news/070101wyden.htm. [8] American Association of Universities. NIH funding in FY2004. Available from: http://www.aau.edu/budget/ 04NIHFund.pdf. [9] President’s Council of Advisors on Science and Technology. Achieving the promise of the bioscience revolution: The role of the federal government; December 1992. [10] Ferguson SM. Products, partners & public health: transfer of biomedical technologies from the U.S. government. J Biolaw Bus 2002;5(2):35–9. [11] Schacht WH. Federal R&D, drug discovery, and pricing: insights from the NIH-university-industry relationship. Congressional research service: the library of congress. Report for congress (RL30585); June 19, 2000. [12] Hemphill TA, Vonortas NV. Strategic research partnerships: a managerial perspective. Technol Anal Strategic Manage 2003;15(2):255–71. [13] Gluck ME. Federal policies affecting the cost and availability of new pharmaceuticals, July.: The Kaiser Family Foundation; 2002. [14] U.S. Congress, Office of Technology Assessment. Pharmaceutical R&D: costs, risks, and rewards (OTA-H522); February 1993. [15] Love J. DCP cooperative group treatment trials and funding, 1993–1999; August 10, 2000 Available from: http://lists.essential.org/pipeemail/pharmpolicy/2000-August/000306.html and http://www.cptech.org/ip/ health/taxol/.
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Thomas A. Hemphill recently graduated (2005) with a Ph.D. in Business Administration at The George Washington University, School of Business, Washington, D.C. with a primary field in Strategic Management and Public Policy and secondary field in Technology and Innovation Policy. He is presently an assistant professor in the School of Management, University of Michigan-Flint. His publications have appeared in Business Economics, Business Horizons, Innovation: Management, Policy & Practice, Knowledge, Technology & Policy, Regulation: The Cato Review of Business and Government, Science and Public Policy, Technology Analysis & Strategic Management, and Technology in Society, among others.