United States: What You Need To Know About Retained Rights In Federally Funded Patented Drugs

The issue of drug pricing is top of mind

More than 50 members of Congress, led by Rep. Lloyd Doggett (D-TX), sent a letter to Secretary of Health and Human Services Sylvia Matthews Burwell and to National Institutes of Health (NIH) Director Francis Collins on January 11, 2016, urging the agencies "to utilize your existing statutory authority to respond to the soaring cost of pharmaceuticals" to address "price gouging" by pharmaceutical manufacturers. In particular, the members of Congress requested that NIH reverse its longstanding interpretation of the Bayh-Dole Act of 1980 and to now exercise statutory "march-in" rights to effectuate price controls on patented drugs developed in whole or in part with federal funds.

Secretary Burwell, testifying before the House Ways and Means Committee on February 10, 2016, was asked whether the letter was being given "thorough consideration." In response, Secretary Burwell stated: "Your letter we have received, thank you, and we are continuing to try and pursue every administrative option. We've proposed legislative and statutory changes as a part of the budget, but are looking at a wide array, of which we welcome your letter and your suggestions."

Although this congressional request has been resolved favorably to the licensees of patented drugs developed in whole or in part with federal funds (as we describe below), the issue of price substantiation and of balancing a drug's price with its impact on patient outcomes is very much top of mind for payers, including the federal government. This is the first in a series of alerts focused on little-known retained rights and what pharmaceutical manufacturers should be doing to support the price being charged for drugs.

The federal government's rights

The goals and objectives of the Bayh-Dole Act of 1980 are: "to use the patent system to promote the utilization of inventions arising from federally supported research or development; to encourage maximum participation of small business firms in federally supported research and development efforts; to promote collaboration between commercial concerns and nonprofit organizations, including universities; to ensure that inventions made by nonprofit organizations and small business firms are used in a manner to promote free competition and enterprise without unduly encumbering future research and discovery; to promote the commercialization and public availability of inventions made in the United States by United States industry and labor; to ensure that the Government obtains sufficient rights in federally supported inventions to meet the needs of the Government and protect the public against nonuse or unreasonable use of inventions; and to minimize the costs of administering policies in this area." 35 U.S.C. §200.

To effectuate these goals and objectives, the act articulates rules governing the licensing of federal-government-owned inventions. In addition, in a significant change from the prior scheme of the government generally owning patentable inventions developed by contractors with the support of federal funds, the act grants rights to government contractors to elect title to inventions developed with federal funding. (These rights to retain ownership were expanded beyond small businesses and nonprofits by Executive Order 12591 in 1983.) The contractor then could advance and commercialize the inventions by licensing to third parties.

Safeguarding against the lack of use or misuse of retained ownership rights, the act also retains certain rights in the federal government. First, the federal funding agency retains "a nonexclusive, nontransferrable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States any subject invention throughout the world." 35 U.S.C. §202(c)(4). Second, the federal funding agency retains the right to request "the contractor, an assignee or exclusive licensee of a subject invention to grant a nonexclusive, partially exclusive, or exclusive license in any field of use to a responsible applicant or applicants, upon terms that are reasonable under the circumstances." 35 U.S.C. §203(a).

In the event the contractor, assignee or licensee refuses the request from the federal funding agency, under certain limited circumstances, the federal funding agency has the power to require the contractor, assignee or licensee to grant the license. This power, known as the "march-in" right, is available only in one of the following circumstances:

  • Because the contractor, assignee or licensee has not taken, or is not expected to take within a reasonable time, effective steps to achieve practical application of the subject invention in such field of use
  • To alleviate health or safety needs which are not reasonably satisfied by the contractor, assignee or licensees
  • To meet requirements for public use specified by federal regulation, when such requirements are not reasonably satisfied by the contractor, assignee or licensees
  • Because the required agreement to manufacture the products substantially in the United States has not be obtained or waived, or because the licensee breaches the agreement. 35 U.S.C. §(a)(1-4)

Thus, while the contractor obtains title to the invention, that title is not absolute. The federal funding agency may either: (a) exercise its royalty-free rights in the invention for or on behalf of the federal government, or (b) assert its march-in rights to require the grant of a license to a third party. These federally retained rights are what are at issue both in the requests of the members of Congress to Secretary Burwell and Director Collins, and in a petition relating to the federally funded patented drug enzalutamide discussed below.

NIH's pronouncements on march-in rights with respect to drug pricing

Importantly to the bio-pharma industry—which often relies on the government for funding of novel technologies, or for collaborations to address emerging threats such as Zika and Ebola viruses—at no time since the enactment of the Bayh-Dole Act has NIH exercised its march-in rights. On five occasions, in response to requests that it exercise those rights, the NIH has issued determinations explaining its rationale for declining to exercise march-in rights. In three of those determinations, the requesters cited pricing as the basis for requesting the exercise of march-in rights.

The NIH has consistently determined that cost or pricing of inventions is not appropriately addressed through a march-in proceeding. In the first of the determinations, "In the Case of Novir® Manufactured by Abbott Laboratories, Inc. (2004)," the NIH stated:

Finally, the issue of the cost or pricing of drugs that include inventive technologies made using Federal Funds is one which has attracted the attention of Congress in several contexts that are much broader than the one at hand. In addition, because the market dynamics for all products developed pursuant to licensing rights under the Bayh-Dole Act could be altered if prices on such products were directed in any way by NIH, the NIH agrees with the public testimony that suggested that the extraordinary remedy of march-in is not an appropriate means of controlling prices. The issue of drug pricing has global implications and, thus, is appropriately left for Congress to address legislatively. [Italics added]

The second determination, "In the Case of Xalatan® Manufactured by Pfizer, Inc. (2004)," resulted in a very similar statement:

Finally, the issue of the cost or pricing of drugs that include inventive technologies made using Federal Funds is one which has attracted the attention of Congress in several contexts that are much broader than the one at hand. In addition, because the market dynamics for all products developed pursuant to licensing rights under the Bayh-Dole Act could be altered if prices on such products were directed in any way by NIH, the NIH agrees with the public testimony that suggested that the extraordinary remedy of march-in is not an appropriate means of controlling prices. The issue of whether drugs should be sold in the United States for the same price as they are sold in Canada and Europe has global implications and, thus, is appropriately left for Congress to address legislatively. [Italics added]

More recently, in 2013, Novir® again was at issue in the determination "In the Case of Novir® Manufactured by AbbVie (2013)." Several public interest groups requested the NIH exercise march-in rights with respect to Novir primarily because of the drug's pricing. The requestors proposed two rules relating to price: (1) establishing a rebuttable presumption that the price for a drug in the US is not reasonable if it is greater than the price in seven of the 10 largest countries; and (2) requiring the secretary of HHS to grant licenses to third parties to use NIH funded inventions subject to the payment of a reasonable royalty and appropriate field of use. The NIH, in a determination signed by Director Collins, reached the following conclusion:

We do not think that the AbbVie pricing policies and pricing disparities between the United States and other countries trigger any of the four Bayh-Dole march-in criteria...

The NIH is sensitive to the impact of the pricing of drugs and their availability to patients. As in 2004, when similar pricing and availability issues were raised and discussed at public hearings, the NIH's role in the present case is limited to compliance with the Bayh-Dole Act, including its march-in criteria...

Drug pricing and patient access are broad and challenging issues in the United States. The NIH continues to agree with the public testimony in 2004 that the extraordinary remedy of march-in is not an appropriate means of controlling prices of drugs broadly available to physicians and patients. [Italics added]

Secretary Burwell recognized these prior precedents in her March 2, 2016, response to Rep. Doggett. In her response letter, Secretary Burwell stated:

The NIH considered using its march-in authority to address drug pricing concerns in 2004 for Novir® (ritonavir) and Xalatan® (latanoprost), and in 2013 for the pricing of Novir® a second time... In each review, the NIH considered whether the marketed drug met the statutory requirements to justify use of the march-in authority and determined that it did not." [footnotes omitted]

As the conclusion to her response, Secretary Burwell did note the following:

NIH considers the application of the march-in statute on a case-by-case basis, and is prepared to use its authority if presented with a case where the statutory criteria are met regarding the commercialization and use of an NIH-funded, patented invention, and where march-in could in fact alleviate health or safety needs, or address a situation where effective steps are not being taken to achieve practical application of the inventions. After consulting with the NIH, we believe the statutory criteria are sufficiently clear and additional guidance is not needed.

The issue is not closed, but the recent response is positive

In the meantime, the opportunity for NIH to change its long-held positon on the impropriety of exercising march-in rights to effectuate price controls on patented drugs developed with federal funds was put before the NIH. On January 14, 2016, Knowledge Ecology International and the Union for Affordable Cancer Treatment submitted a request to Secretary Burwell, Director Collins and Defense Secretary Ashton Carter. They requested that the federal government "use its rights in patents for the prostate cancer drug (enzalutamide), marketed under the brand name Xtandi by Japan-based Astellas Pharma... Specifically, we ask the Department of Health and Human Services (DHHS), National Institutes of Health (NIH), and/or the Department of Defense (DoD) to use its royalty-free rights in the relevant patents, or to grant this request for march-in rights." The basis for this request is that: "This is a product that has an average wholesale price (AWP) of $129,269 per year, and which is far more expensive in the United States than in other countries."

The requestors also make a broader request: "More generally, we ask the U.S. federal government to adopt the policy that the federal government will use its royalty free rights, or grant licenses under federal march-in rights, when prices in the United States are excessive, and/or higher than they are in high income foreign countries, and to apply that policy in this case for patents on enzalutamide."

With respect to this request relating to Xtandi, and in response to Secretary Burwell's March 2, 2016, letter, Rep. Doggett issued the following statement:

When Americans pay for research that results in a pharmaceutical, that drug should be available at a reasonable price. While establishing guidance to discourage widespread price gouging is clearly justified, I am pleased that the Administration is prepared to use existing authority on a case-by-case basis to address this problem.

It should do so immediately by responding favorably to the pending petition for Xtandi, a prostate cancer drug, which taxpayers funded through U.S. Army and NIH grants. A Japanese licensee, Astellas, is charging Americans $129,000 for this drug, which sells in Japan and Sweden for $39,000, and in Canada for $30,000. Nowhere in the world is it remotely as expensive in the United States. Licensing patents to competitors would mean lower drug prices through competition.

An unaffordable drug is 100% ineffective. Americans shouldn't have to choose between their lives and their livelihoods on this and many other outrageously priced pharmaceuticals.

Rep. Doggett's statement, however, fails to take into account the more than 10 years of consistent and repeated NIH determinations, as recited in Secretary Burwell's reply, that NIH does not have the authority to exercise its retained rights on the basis of pricing or cost. Secretary Burwell's reaffirmation of this position in her reply to Rep. Doggett should give some level of comfort to pharmaceutical manufacturers that are subject to federal retained rights.

However, the focus and attention on drug pricing is not likely to go away. In our next bulletin, we will address the key aspects of price substantiation that all pharmaceutical manufacturers should focus on, and for which they are developing their strategy and position.

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