The Misguided Attempt to Use the Bayh-Dole Act’s March-In Right to Lower Drug Prices

Access to affordable drugs is a real problem. We need to make drugs more affordable.

But, using march-In rights to control drug prices is the wrong solution and would be catastrophic public policy.

NIST’s[1] Proposed Rule Change (Clarification)

In early January 2021, while most of us were still dealing with the pandemic, trying to get vaccinated, and wishfully thinking about returning to “normal” life, a notice of proposed rulemaking was published by NIST that would change the current regulations implementing the Bayh-Dole Act.  One rule change is important to me and should, I believe, be of concern to us all.  NIST’s proposed rule change would strengthen Bayh-Dole and clarify the government’s reason for exercising march-in rights and, thereby, prevent cost concerns — principally, the high cost of innovative new biopharmaceuticals — from providing the sole basis to exercise march-in rights.  This rule change clarification is in response to current active efforts to demand march-in rights solely to reduce prices of products covered by exclusive licenses granted by public sector research institutions.[2]  (While those seeking to use march-in rights are currently directed toward the high cost of innovative new biopharmaceuticals, the rule change would apply to all products – life science [healthcare] and high technology.)

If adopted, NIST’s rule change would provide greater certainty to ownership of patent rights and exclusive licenses and consequently, increase their value and attractiveness to entrepreneurs and investors.  It is my fear that without adoption of NIST’s proposed rule change, the transfer of academic research discoveries now being licensed and developed by both startups and established companies would be inhibited and possibly even curtailed.  All those involved in technology transfer – entrepreneurs managing and venture capitalists financing academic startups developing discovery stage technologies – should support the proposed rule change.

Bayh-Dole WORKS! Don’t Strangle the Goose that Lays Golden Eggs

Over the past 40 years, PSRIs have become increasingly effective and successful in facilitating the transfer of academic discoveries to the private sector.  Increasingly, PSRIs exclusively license the most innovative and interesting embryonic discoveries to startups.  If the integrity of exclusive licenses were breached by march-ins solely to reduce the price of the products in which these companies have invested tens and hundreds of millions to develop, trust in the sanctity of the exclusive rights granted would be lost and we and other venture investors would be reluctant to make future investments.  Allowing march-ins solely to reduce prices would create increased uncertainty to investment decisions making these risky investments potentially untenable.

Don’t take my word for the devastating effect “price controls’ would have on technology transfer.  The NIH did the experiment with its “Reasonable Pricing” clause in CRADA’s from 1988-1995.  The result — the number of companies willing to collaborate with NIH dropped drastically and then rebounded when the “Reasonable Pricing” clause was removed.

 Importantly, the Bayh-Dole Act permits our most creative, innovative scientists and engineers to remain in academia teaching and creating new knowledge and knowledge leaders and workers AND — through licensing of their patented discoveries – institutions facilitate progressing inventors’ discoveries from paper inventions to product innovations, which may change the way people live, work and play.

Again, Bayh-Dole works!

• Over the past 40 years, universities, on average, have filed patents on over 50% of invention report discoveries.
• But, even the most efficient universities license only about half of their patented discoveries and fewer than 20% of PSRIs are cash flow positive in their technology transfer activities.
• Over the past two decades, PSRIs have launched about 13,000 startups.
• And, startups in capital-intensive industries – like biopharmaceuticals – on average raise between $150-300M[3] to develop these discoveries.

 Our experience at OUP confirms these industry averages.  Since 2010, OUP has invested in 110 startups based on discoveries from 49 different institutions.

Securing venture financing for an academic startup is very difficult, and the triage and due diligence is severe.  According to a Harvard Business Review study[4], the average VC firm annually screens 200 companies but only invests in about four – 1%. Table 1 below illustrates how the process plays out in both the Harvard study and in OUP’s experience.

Table 1

Investing in academic startups is very challenging and highly risky primarily due to management considerations and the risks associated with the successful development of discovery stage technologies.  That said, in my opinion, the greatest challenge for launching investable academic startups is and has been identifying and recruiting industry-experienced CEOs.  These highly qualified CEOs are rational actors.  It is irrational to think these individuals — who often have multiple career opportunities — would join a nascent university startup and take on all the known and unknown risks of financing and managing a new venture if after years of work and many millions invested the government could simply “march in” and seize patent licenses simply because someone feels the products are overpriced.

Venture investors are willing to assume the many risks of launching and financing university startups, in part, because the companies in which we invest have exclusive rights to develop and commercialize products covered by the university’s licensed patent rights.  And, in some cases, if the development effort is unsuccessful, the exclusively licensed patents may be the only assets of value to salvage some investors’ capital.

Based on decades of experience, we now know which factors have been shown to contribute to success and failure of new ventures.  Across all technology sectors – life and physical sciences — management is the factor most responsible for success by a wide margin (over 50%).  In life science/healthcare companies, success is driven primarily by the efficacy of the technology (42%) followed by the management team (31%).  Interestingly, the factors contributing to failure are almost identical to those contributing to success.  Across all sectors, it’s the management team by a wide margin (56%).  In life science/healthcare companies, failure is driven almost equally by the technology (36%) and the management team (34%).[6]

We also now know that 45% of venture capital financed companies FAIL with investors losing all or most of their money, 43% are merged and/or acquired (although many for less than the invested capital, and 11% go public and produce a substantial return to investors.[7]

Conclusion

Given the many varied asset classes available to qualified private equity investors, it would be irrational for venture capital investors and industry experienced investable CEOs to take on the many risks of a startup if the government could be forced to “march in,” seize patents and acquire licenses covering products licensees have invested millions in simply because someone feels the products are overpriced.

I don’t question the motives of those seeking to use Bayh-Dole march-in rights to make innovative drugs more affordable.  But easing the rules to allow march-in solely on the basis of price would backfire horribly, have a chilling effect on startup entrepreneurs and investors, and inhibit the flow of PSRI discoveries now being licensed and developed into product innovations that change the way people live, work, and play.

ACKNOWLEDGEMENTS

My thanks to friends and colleagues who helped me better understand this issue:

• Kirsten Leute and Natasha Azar from Osage University Partners
• Orin Herskowitz from Columbia University and
• Ashley Stevens from Focus IP Group

REFERENCES

[1] NIST is the National Institution of Standards and Technology, which oversees implementation of the Bayh-Dole Act.

[2] PSRIs – public sector research institutions — include public and private academic teaching and research institutions, medical schools, teaching hospitals, federal government laboratories and the like.

[3] Life Science companies raise approximately $150-300M on the path to IPO (including IPO). This estimate is based on data OUP collected and analyzed on life science IPOs

[4] How Do Venture Capitalists Make Decisions by Gompers P., Gornall W., Kaplan S. & Strebulaev (2016) – Chicago Booth

[5] Approximate numbers based on 2019 OUP deal funnel

[6] How Do Venture Capitalists Make Decisions by Gompers P., Gornall W., Kaplan S. & Strebulaev (2016) – Chicago Booth

[7] How Do Venture Capitalists Make Decisions by Gompers P., Gornall W., Kaplan S. & Strebulaev (2016) – Chicago Booth