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ROYALTIES TO NIH WILL NOT SATISFY CONGRESSIONAL CONCERNS ABOUT CRADAs, SEN. PRYOR SAYS; REP. WYDEN URGES PRICE NEGOTIATIONS UP FRONT AND MULTIPLE LICENSING

Executive Summary

Sen. Pryor (D-Ark.) is not ready to endorse increased government royalties from CRADA contracts or research licenses as a way to protect the government's investment in drug development projects. Increased royalties have been proposed by both the Pharmaceutical Manufacturers Association and the Industrial Biotechnology Association as a solution to the recent discussion of products commercialized from government-funded research. At a Feb. 24 hearing before the Senate Special Committee on Aging, Pryor maintained that calling for the National Institutes of Health to collect higher royalties from CRADAs (Cooperative Research & Development Agreements) creates the "inherent problems" of forcing up the eventual price of the commercial products and creating a conflict-of-interest situation in which the government benefits from higher commercial prices. Pryor acknowledged that the royalty suggestion had initial appeal to him. Prefacing his view of the idea by stating that he is "a layman" on the subject, Pryor said: "When I first thought about the concept of royalties, I said, 'That is it; that is our answer; let's get royalties from the companies, give it back to the government and plow it back into more research.'" On further reflection, Pryor said, the cross purposes of generating higher income for NIH and keeping consumer prices low became evident. "I think we might be in a situation where we have a conflict of interest," Pryor said. "We may be saying [to the commercial sponsors]: 'Look, you go ahead and charge those high prices that bring back more money to NIH or the federal government.'" While rejecting royalties as a stand-alone solution to returns from CRADAs, Pryor ended his comments by noting "they may be a part of the answer." NIH already collects royalties in the range of 5% on licenses from most projects begun in its intramural labs and licensed to outside companies for commercial development, outgoing NIH Director Bernadine Healy reported at the Feb. 24 hearing. PMA President Gerald Mossinghoff defended the royalty proposal as a workable extension of existing commercial practices. "It seems to me," Mossinghoff said during a question-and-answer session, that royalty agreements "follow the commercial, established practices. Patent lawyers know how to negotiate these royalty provisions. There are royalty standards across the industry." Rep. Wyden (D-Ore.) urged a change in NIH's licensing procedures for CRADA projects to require commercial prices to be negotiated up front at the license signing and to set up competing sponsors for the same projects. As the lead-off witness at the Senate hearing, Wyden declared that he is preparing legislation to specify the procedures for NIH licensing deals. Wyden said his proposed bill will "direct the National Institutes of Health (NIH) to co-license multiple companies as R&D partners -- an arrangement that should also produce more real price competition in the marketplace." Wyden is also preparing to propose that price be a specific factor in CRADA bidding by commercial sponsors. "The companies that bid for the right to obtain this R&D subsidy would have to compete on the basis of the price to be charged for the drug therapies produced by the partnership" with the government. If NIH selects only one company for a CRADA, Wyden would require that sponsor to bring the product to market at a price below existing marketed therapies. Wyden said that "government negotiators" and the chosen sponsor would have to agree in advance of closing the deal on a specific price discount that considered existing drug therapies for the same purpose." In response to a question on NIH's ability to negotiate licenses with specified prices, Wyden told Senate Aging Committee Ranking Republican Cohen (Maine) that "if this becomes a priority function to address these price questions at the outset, we can do it." National Cancer Institute Cancer Treatment Division Director Bruce Chabner, MD, questioned whether negotiation of prices at the front end of CRADAs would make sense for all development agreements. From his experience as a major figure in NCI's discussions with Bristol-Myers Squibb over the pricing of Taxol, Chabner noted that early price negotiations will not always be feasible. Early negotiations regarding price "will work where we know the indications for a drug and whether it will reach the market very soon," Chabner testified. In general, however, he suggested that "it would really be much more effective to get the price at the time of marketing of some drugs. You have to be flexible about that." While suggesting the legislative rules for licensing agreements, Wyden said, "Congress [should] not micromanage the formula." He suggested "looking for a flexible pricing formula that looks at risk and the time it takes to get drugs approved -- these kinds of considerations...that ought to be done at the outset" of the joint development project. Cohen asked Wyden if he supported a board to determine prices for CRADA products. "Senator, you have the wrong witness," Wyden responded. "I have not been one who has been calling for price review boards." He noted that "a number of our other colleagues" are supporting price boards. Freshman Sen. Feingold (D-Wisc.), for example, asked during the Feb. 24 hearing: "Couldn't [a pricing board] apply to drugs in general, [not] just NIH-developed drugs?" "What I am calling for," Wyden explained, "is change with respect to these CRADAs and cooperative biomedical partnerships: first, where there is a pricing strategy agreement upfront, and second, where the government looks to get more bidders involved." NIH is already attempting to stimulate price competition in the commercial market by supporting simultaneous development agreements with similar types of treatments (e.g. Taxol and Taxotere). Healy stated firmly that NIH does not want a more explicit role in pricing than it already has assumed under the "reasonable price" language in two of its CRADA agreements. Declining a lead role in direct drug price decisions, Healy told the committee in her prepared remarks that "the NIH is simply not a regulatory agency." She declared that if the NIH undertook "price regulation," that role "would radically change [NIH's] fundamental nature, potentially undermine its research mission and place it squarely in conflict with its technology transfer responsibilities." She noted that opposition to a formal NIH role in price issues was the general consensus of the Director's Advisory Committee meeting on Dec. 2 ("The Pink Sheet" Dec. 7, 1992, p. 7). NIH could, however, provide support to other government agencies charged with determining the reasonableness of commercial prices on projects from federal funding. "NIH can contribute," Healy said, "to assessments of pricing by providing expert technical advice on the relative merits of various products, the difficulty in their discovery, and by informing policy makers and potential regulators on NIH's role in the co-development of such products." Healy noted that NIH has played similar roles in the past, advising FDA on regulatory mandates and advising the Health Care Financing Administration. Office of Technology Assessment Senior Associate Judith Wagner suggested that "it may be prudent to consider assigning the ongoing responsibility for negotiating exclusive licenses for NIH- developed drugs to another governmental organization." Wagner said that on the issue of NIH licensing, "we do have a contract relationship, and there is a capability to develop a permanent secretariat with economics, accounting and biomedical expertise to be able to interact on a reasonably competent basis with industry to develop contracts." Einstein Medical College professor Peter Arno reiterated a suggestion expressed at a previous hearing before Rep. Wyden's House Small Business/Regulation Subcommittee on Jan. 25 ("The Pink Sheet" Feb. 1, p. 8). "We have heard over and over again that NIH could assemble that expertise if they so chose," Arno said, adding: "It seems that they are reluctant to do that." Arno suggested that the pricing issue should be moved "to a different part of the federal government." To arguments that drug pricing is too complicated for the government to undertake, Arno said: "We should not think that pricing drugs is such a black box and so mysterious and so difficult and complex that it cannot be done. The Health Care Financing Administration regulates prices for hospitals which are not simple institutions in our society." He said the "next logical step" for HCFA "is to do the same for pharmaceuticals." Cohen responded: "Mr. Arno, you had me with you until you said let's turn it over to HCFA. This committee has spent much of its time overseeing the inadequacies of HCFA.... I'm not sure that's the right solution." OTA's Wagner pointed out: "It is important to keep in mind the distinction between the contract nego-tiations for NIH-developed drugs and the larger issue of whether or not price regulation for drugs as a whole is a reasonable way to go." Consumer advocate Ralph Nader urged that exclusive marketing rights be tailored to reflect the government's investment. "Another way to look at it," Nader said, "is by shortening the patent term and developing compulsory licensing so that the company will recover whatever costs but it won't develop windfalls from 10 to 15 years of monopoly patent protection." He noted that compulsory licensing may be prohibited in the future by the North American Free Trade Agreement (NAFTA). NIH appears to be more concerned about its lack of authority over products and patents developed outside NIH labs with NIH funding. Healy pointed out problems from the Bayh-Dole Act of 1980, which gave universities and research organizations the right to own products developed with government funding. "The bigger issue" to NIH is not the pricing of CRADA products but the restrictions on NIH's input into commercialization of extramural projects. Healy noted that NIH has a say in only "11% of our research portfolio" -- the part stemming from intramural research. "More than 80% of the research that NIH does," Healy explained, "is assigned to the institution [doing the work under an NIH grant]. They deal with the patents; they get the royalties on any licensing arrangements." She pointed out that "under the Bayh-Dole Act of 1980, the Congress granted the right to those inventions to the grantee institutions. NIH is out of the loop." Without directly asking for the oversight authority to be returned to NIH, Healy said that "prior to the Bayh-Dole Act, the NIH had to be consulted and had to approve when a university or research institution funded by NIH would enter into any kind of patenting or licensing agreement or even apply for a patent." Healy's comments on the Bayh-Dole Act appeared to be aimed at diverting criticism from Rep. Wyden on NIH's role in the establishment of funding deals between commercial partners and NIH grantees. Wyden is particularly concerned about foreign firms riding NIH investments. He has been pressing NIH to look into the Sandoz investment in the Scripps Clinic. Wyden is planning a March 11 hearing on the subject. During his testimony to Pryor's committee, Wyden charged: "We have been told that Scripps is not cooperating in terms of furnishing this information [to NIH]." Wyden maintained that Scripps should be cut off from federal funding until the documentation on the Sandoz investment is provided to NIH. Scripps is understood to be discussing providing the documents to NIH. The confidentiality of the documents has been the major tie-up.
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