Issue No. 55: ‘March-In’ to Nowhere

In recent months, an idea called “march-in rights” has gathered momentum among prominent politicians and some journalists as a panacea to what they see as high pharmaceutical prices. As an article in The Hill described it last month, “Democratic presidential candidates are threatening to take a drastic step that even the Obama Administration rejected to lower drug prices without congressional approval.”

The Hill piece cited support for march-in rights from Sens. Elizabeth Warren (D-Mass), Bernie Sanders (I-Vt), and Kamala Harris (D-Calif), and from South Bend, Ind., Mayor Pete Buttigieg. Rep. Lloyd Doggett (D-Texas), the chairman of the Ways and Means subcommittee on health, has long been a fan, and in 2017, he led 50 House members in writing a letter to President Trump, urging him to make march-in rights easier to implement. And Washington Post business reporter Christopher Rowland began his article on the resurgent interest in march-in rights this way: “As drug prices have soared, lawmakers and patient advocates have pushed the federal government to deploy for the first time a powerful deterrent.”

Drug prices actually haven’t soared, but we’ll get to that later. For now, understand that the interest in march-in rights isn’t new. It began in 2002 but soon fizzled. Now, it’s being resurrected – though the idea faces the same obstacles. First, the right to march-in because of the price of a drug does not appear to exist in the law, and, second, if the law were changed, marching-in because of price would, according to a report in March by the Information Technology & Innovation Foundation (ITIF), “negatively impact U.S. life-sciences innovation and result in fewer new drugs.”

What Are March-in Rights?

Some 39 years ago, President Carter signed The Patent and Trademark Law Amendments Act, called colloquially “Bayh-Dole” for its two most prominent sponsors, Sen. Bob Dole (R-Kan) and the late Sen. Birch Bayh (D-Ind). The law addressed what both Democrats and Republicans saw as a major problem: The federal government was spending billions of dollars on research, but the fruits of that investment were not reaching the public because the researchers that did the work were obligated to assign rights to the government. Very few federally funded research projects were being commercialized.

Bayh-Dole clarified that, even if the government provided funding, universities and other institutions could own their inventions and assign them to others, including pharmaceutical manufacturers, which would then invest the hundreds of millions or billions of dollars necessary to develop an actual drug and bring it to market.

A report in April by the National Institute of Standards and Technology (NIST), a U.S. Commerce Department agency, explained that the “foundation” of Bayh-Dole is…

…the principle that inventions resulting from federally funded research should benefit the American people by the development of the inventions into commercially available products and services by achieving practical application of the invention that benefits the public.

Bayh-Dole recognized that federally funded research could create a virtuous cycle of innovation, which was described last year in an article in the Proceedings of the National Academy of Sciences by Ekaterina Galkina Cleary and colleagues:

Basic research provides a scientific foundation for drug discovery by elucidating mechanisms of disease and strategies for therapy, validating drug targets, and, sometimes, identifying prototype compounds. This research is funded largely by the public sector, primarily by government and is performed principally in academic institutions or government laboratories. The insights and intellectual property arising from this basic research are then transferred to the private sector for development.

Biopharmaceutical companies are responsible for conducting applied preclinical research and clinical research, obtaining regulatory approval, and establishing the manufacturing, control, distribution, and marketing required to commercialize a new molecular entity (NME). This development is funded primarily from the profits generated by earlier products as well as by capital investments.

The problem, before Bayh-Dole, was that there was a disruption in the cycle between government-funded basic research and the application of that research into commercialize products. The legislation was meant to patch the cycle.

The authors of Bayh-Dole wanted to be sure that they achieved their commercialization aims, so the law gave the federal government, as the NIST report states, “the right to ensure that a contractor, an assignee, or exclusive licensee of intellectual property developed with Federal funding is taking effective steps to further develop the invention so that it is available to the public.” The government, in limited circumstances, was allowed to “march in” and require contractors and assignees to, in the words of the law, “grant a nonexclusive, partially, or exclusive license in any field of use to a responsible applicant or applicant.” Or the government could grant such a license itself.

The justification for marching in was that steps were not taken by the licensee to achieve a “practical application” (that is, commercialize) of the invention.

As Bayh himself explained in 2004, he wanted to assuage the fear of some members of Congress that “companies might want to license university technologies to suppress them because they could threaten existing products…. The clear intent of these provisions is to insure that every effort is made to bring a product to market.”

The provisions were meant for extreme occasions, and none, apparently, has arisen. Since the law was signed in 1980, there has been no case of march-in rights being exercised.

The Specter of ‘Reasonable’ Prices

In 2001, Peter Arno, then a health economist at the Albert Einstein School of Medicine, and Michael Davis, a law professor at Cleveland State University, wrote an article in the Tulane Law Review claiming to have found a way to “enforce existing price controls.” They wrote, “The solution to high drug prices does not involve new legislation but already exists in the unused, unenforced march-in provision of the Bayh-Dole Act,” which was then 21 years old.

In an op-ed for the Washington Post the next year, Arno and Davis wrote that Bayh-Dole…

…states that practically any new drug invented wholly or in part with federal funds will be made available to the public at a reasonable price. If it is not, then the government can insist that the drug be licensed to more reasonable manufacturers, and, if refused, license it to third parties that will make the drug available at a reasonable cost.

In fact, Bayh-Dole makes no explicit reference at all to any “reasonable price.” The word “price” – reasonable or not -- never appears in the law, and the word “cost” is only used in reference to patent fees. Undaunted, Arno, Davis and other advocates of march-in rights point to the term “practical application,” which is defined in the law this way:

The term ‘practical application’ means to manufacture…under such conditions to establish that the invention is being utilized and that its benefits are to the extent permitted by law or Government regulations available to the public on reasonable terms.

The phrase, “reasonable terms,” has been interpreted by advocates of march-in rights to be a reference to consumer prices. The government, however, has interpreted the phrase to mean “reasonable licensing terms,” says the NIST report.

In a piece for IP Watchdog, Joseph Allen, who worked for Bayh as a professional staffer on the Senate Judiciary Committee during the debate over Bayh-Dole, explained that the clause with the phrase “reasonable terms”…

…is limited to the patent owner, which will normally be an academic institution. As academic institutions are not commercializing their discoveries, the language applies to the terms of the patent license, not to how a product is priced in the market. That distinction is ignored by the critics.

For further elucidation, we can turn to the authors of the law itself. A few weeks after the Arno-Davis piece, Bayh (who had left office the year before) and Dole (the Senate Republican Leader) wrote in a letter to the Washington Post that their law…

…did not intend that government set prices on resulting products. The law makes no reference to a reasonable price that should be dictated by the government….

The ability of the government to revoke a license granted under the Act is not contingent on the pricing of the resulting product or tied to the profitability of a company that has commercialized a product that results in part from [federally] funded research. The law instructs the government to revoke such licenses only when the private industry collaborator has not successfully commercialized the invention as a product.

The NIST report points out that since 1980, the National Institutes of Health has received 12 requests to initiate march-in proceedings, and, “in each case, NIH determined that the criteria to exercise march-in rights were not met.” Ten of the 12 cases involved what the petitioners believed were high drug prices. “Ultimately, for each of these requests,” said the NIST report, “NIH determined that the use of march-in to control drug prices was not within the scope and intent of its authority.”

The NIST report acknowledged that there was “market uncertainty” created by the controversy over march-in rights, but the way to resolve any confusion about the “exceptional circumstances” under which such rights apply was sticking to the statute rather than creating a “regulatory mechanism for the Federal Government to control the market price of goods and services.” In other words, NIST, as the government’s top innovation agency, is not buying the argument of the marchers-in.

The Federal Government’s Share

In 2004, Bayh was asked to address NIH on the subject. He began with a reminder of why his legislation of a quarter-century earlier has been necessary:

By the late '70s, America had lost its technological advantage…. The number of patents issued each year had declined steadily since 1971. Investment in research and development over the previous 10 years was static. American productivity was growing at a much slower rate than that of our free world competitors. The number of patentable inventions made under federally supported research had been in a steady decline.

What had happened to American innovation, which had sparked generation after generation of international economic success? Our investigation at the Patent and Trademark Office [PTO] disclosed that the U.S. government owned 28,000 patents, only 4 percent of which had been developed as a product for use by the consumer.

Bayh admitted that there were critics of his bill, who argued, “If the taxpayer funds the research, the taxpayer should own the ideas produced.” But the vast majority of “patents procured as a result of government research grants, particularly those developed in university laboratories, resulted from basic research,” said Bayh to NIH. He added:

The ideas patented were in the embryonic stages of development. Often millions of dollars were required to produce the sophisticated products necessary for marketability. Since the government refused to permit ownership of the patents, private industry and business refused to invest the resources necessary to bring the products to consumers.

Bayh then quoted Thomas Edison as saying that “invention is 1% inspiration and 99% perspiration." And, said Bayh, “With regard to publicly funded research, government typically funds the inspiration and industry the perspiration.” The result of a policy of government ownership was that “billions of taxpayer dollars spent on thousands of ideas and patents which were collecting dust at the PTO. The taxpayers were getting no benefit whatsoever.”

The general argument that the government should reap the dollar benefits of its research is often repeated – lately by Rep. Alexandra Ocasio-Cortez (D-NY). But nearly all NIH funds go to basic research, which, because of the nature of markets, carries positive economic externalities that make it, throughout the world, an essential government-supported, rather than private-sector, function.

The study by Cleary, et al., in the Proceedings of the National Academy of Sciences found that federally funded studies contributed to the science underlying every one of the 210 new drugs approved between 2010 and 2016. But, as an article in STAT pointed out, “More than 90 percent of the [research] publications [deriving from the government-funded research] were related to the biological targets of the drugs, not the drugs themselves.” The authors of the research “say that the NIH funding for basic science complements industry research and drug development, which is mainly focused on applied science.”

The entire NIH budget for all activities – not just drug research -- in fiscal 2017 was $33 billion while R&D spending by U.S. drug companies was $71 billion. “Measured by R&D expenditure per employee, the U.S. biopharmaceutical sector leads all other U.S. manufacturing sectors, investing more than 10 times the amount of R&D per employee than the average U.S. manufacturing sector,” said the ITIF study.

Eyes on the Prize

It’s important to remember why Bayh-Dole was enacted in the first place. The goal of what is now called “the lab-to-market cross-agency priority,” the NIST report points out, is to “improve the transfer of technology from federally funded R&D to the private sector to promote U.S. economic growth and national security.” The idea is to “enable the United States to adapt to a rapidly changing global innovation landscape.” It’s not to try to extract extra rents from drug companies and other manufacturers.

Bayh-Dole has been a huge success. The Economist magazine called it “possibly the most inspired piece of legislation to be enacted in America over the past half-century.” It is no accident, as the ITIF report points out, that the U.S. now leads the world in the introduction of new drugs, with a 60% market share, compared with 10% in the 1980s – an acceleration that coincides with the enactment of the law.

“Over the last decade, biopharmaceutical companies have invested over half a trillion dollars in R&D,” says the report, “while more than 350 new medicines, many firsts of their kind, have been approved by the U.S. Food and Drug Administration.”

But like most legislation, Bayh-Dole is a delicate instrument. Changing the interpretation of march-in rights from what the authors of the law intended, says the ITIF report, would…

… jeopardize America’s successful life-sciences innovation system, as companies would be highly reticent to license IP [intellectual property] that could be connected to federal research and subsequently invest the additional billions required to develop a drug if they knew the government could come in as long as two decades later and seize or compulsorily license companies’ IP whenever it deemed a drug’s price too high.

How to Constrain Drug Prices

When he was asked about march-in rights at a hearing in August, NIH Director Francis S. Collins responded, “I’m not sure you want to mess with that. I don’t think, for the most part, the solution to drug prices is going to fall upon changes of a dramatic sort and how patenting is done for our funded efforts.”

Fifteen years ago, Bayh told NIH, “One is entitled to second-guess us and say that we should have allowed the government to have a say in the prices of products arising from federal R&D. However, if changes are believed warranted, we have a process to do so. That is to amend the law. You simply cannot invent new interpretations a quarter of a century later.”

Amending the law, however, would put at risk a system that is improving America’s economy and America’s health. As the NIST study put it:

U.S. economic competitiveness is strengthened by the ability of private sector companies to advance the new technologies resulting from basic R&D, and to deliver the products and services that drive the Nation’s economy forward. This ecosystem has allowed the U.S. to enjoy the economic benefits of advancing science and technology and has kept the Nation prosperous and strong. The partnership between Federal R&D and the private sector has proven to be an effective model.

The Trump Administration is already holding down drug prices through market mechanisms – mainly easing the path for generic medicines to compete when brand patents expire. In 2018, pharmaceuticals were one of only eight categories that saw an annual price declined among the 31 categories tracked by the Bureau of Labor Statistics.

While consumer drug prices dropped 0.6%, medical care prices rose 2% and hospital services rose 3.7% – the number-two categories for increases. The decline in drug prices has continued through 2019, falling in the last four consecutive months and in nine of the last twelve.

Currently, specialty drugs, many of them biological products (biologics) are the main driver of higher drug prices, accounting for 93% of spending growth since 2014. That’s no surprise. Biologics are exceedingly complicated to develop and produce. But their prices, too, can be constrained through competition, as we discussed in our last newsletter. A far better way to tackle the pricing issue is to focus on safe ways to speed biosimilars, which have no clinically meaningful differences from reference biologics, to market after patents expire.

This would seem to be a far more productive strategy than messing – as Collins put it – with the enormously effective technology-transfer law called Bayh-Dole.