Bayh-Dole Act: The Law of Unintended Consequences – Fortune
Sun, 25 Sep 2005
The author of this Infomail is Dianne N. Irving, M.A., Ph.D.
Revisiting the Bayh-Dole Act (1980): Spawned Big Biotech, Now Has Opposite Debilitating Effects
Today’s specter of harmful and inordinately priced drugs pressed on legislators and the public alike by highly organized and competitive lobbyists (now international), multiple layers of conflicts of interest, back-room industry secrets and subterfuge, falsification of scientific data, ultra-expensive complex law suits over “intellectual property” rights and patents lasting decades how did we ever get here?
Finally, the article copied below, “The Law of Unintended Consequences” (Clinton Leaf, Fortune 75, September 19, 2005, at: http://www.fortune.com/fortune/fortune75/articles/0,15114,1101810,00.html ) provides an important historical insight into one of the major recent causes of the massive problems and conflicts surrounding the biomedical industry today: the rarely discussed and generally unknown Bayh-Dole Act of 1980.
The Bayh-Dole Act (1980) was an innovative powerful incentive for so-called “technology transfer” offices. Soon even Congress itself created its own Office of Technology Assessment (OTA), interestingly staffed by many of the big names rising in bioethics then also a newly spawned “innovation” by Congress. In essence the Bayh-Dole Act created an economic partnership triangle among the federal government, universities and private industry, encouraging the commercialization and utilization of therapeutic applications that arise from research in universities and similar institutions funded by the federal government. It sounded like a good idea at first.
But instead of fostering better industry, public health and job opportunities, the movement has imploded inward, leaving extensive economic and healthcare damage in its wake. It has turned universities into “companies” vying with industry and individual scientists for “intellectual property” rights and patents, resulting in contentious, lengthy and costly litigation, in turn resulting in the forced silencing of university scientists and inordinate pressures to falsify their data. In addition to taxpayers toting the bills for this, the expected boost in health care for the public has instead turned into drug company “busts”, requiring the public to pay even more exorbitant prices for dangerous or useless “expedited” drugs and ever-higher health care costs.
Even industry itself, especially the biotech industry — is in jeopardy (and hence the sudden “concern” in this article in Fortune Magazine). As Leaf explains in this article:
“What the law didn’t do was give the companies something worthwhile to sell. Only 36 of the 157 companies on the index are profitable. And judging by the cold, hard measure of revenues, it’s clear that few have produced drugs that doctors view worthy enough to prescribe. Forty percent of Nasdaq’s bio-wonders had sales under $20 million in the past 12 months; 22% had less than $5 million. For every Genentech success story, there are dozens of teetering failures, with laser-fast burn rates and very little to show the buy-and-hold believers who purchased shares on the open market. Indeed, the industry as a whole has lost more than $45 billion since birth. .. Bayh-Dole has served mostly as a nervous mother for a science that never needed one. New biomedical discoveries are now coddled and kept out of the rain – and it’s hurting progress.”
For whichever reason, it is long past time to rethink the provisions of the Bayh-Dole Act before further damage is done. Hopefully such an effort will proceed and succeed without the similarly debilitating and compromised “expertise” of federal bioethics and the OTA, just as many parts of the economy did quite well before the enactment of the Bayh-Dole Act, as this article demonstrates.
Copyright September 22, 2005 http://www.lifeissues.net/writers/irv/irv_104bayh_dole.html
Contact: Vera Hassner Sharav
Fortune Magazine Fortune 75
Sept. 19, 2005
The Law of Unintended Consequences
Twenty-five years ago a law known as Bayh-Dole spawned the biotech industry. It made lots of university scientists fabulously rich. It was also supposed to usher in a new era of innovation. So why are medical miracles in such short supply?
By Clifton Leaf
Even in the mute efficiency of international wire transfers, $540 million makes a noise when it lands in your bank account. To Kent Alexander, that sound was a thud – and in this case “not one single thud, but a lot of different thuds.” All afternoon on July 21, 2005, Alexander, who is Emory University’s general counsel, president Jim Wagner, and other senior members of the school’s administration were receiving e-mailed reports from the finance department: “121 million just hit!” And then, 50 minutes later, “183 million just hit!” Half an hour after that, an even richer stash arrived. Thud. “It was an out-of-body experience,” says Alexander, 46. “By any definition, it’s a huge deal. As one of our trustees was saying, ‘It doesn’t get any bigger than this on Wall Street.’ ”
The deal in question had closed only days earlier, when a pair of biotech companies, Gilead Sciences of Foster City, Calif., and Royalty Pharma of New York City, outbid several other parties for Emory’s roughly 20% stake in the powerful anti-retroviral drug Emtriva, which is used to treat HIV. The drug was developed more than 15 years ago by three of the university’s scientists, working on federal research grants, but received FDA approval only in July 2003. Now, however, Emtriva (a modest seller in its own right) was being married to another antiviral in a single pill. The combination drug, called Truvada, was expected to have a worldwide market of nearly $1 billion in 2006. Emtriva was becoming a blockbuster. Citigroup set up the auction and hammered out the terms with bankers from Lazard. A white-shoe law firm, Covington & Burling, calculated the drug’s projected royalty streams through the year 2021, when the patent life was scheduled to end.
The hard work was over, and now it was time for a champagne toast and a brief “end-zone dance,” as president Wagner described it. In a short while they could start thinking about how to reinvest their windfall – around $320 million after fees and the 40% cut that belonged to the three Emory inventors. The cash would enhance Emory’s leadership in AIDS-vaccine research – and help Wagner’s plan to turn the university into a top-tier “destination” school. “This is just such a win-win-win story,” Wagner says jubilantly. “We have an invention here that addresses a real international scourge, and we are now taking these resources and reinvesting them in American research and education. It’s a pretty happy story.”
Well, not entirely.
The Emtriva case may sound like yet another innovation in an unending stream of medical miracles, from “smart drugs” to gene therapy. But believe it or not, it’s an example of a profound system failure. For a century or more, the white-hot core of American innovation has been basic science. And the foundation of basic science has been the fluid exchange of ideas at the nation’s research universities. It has always been a surprisingly simple equation: Let scientists do their thing and share their work – and industry picks up the spoils. Academics win awards, companies make products, Americans benefit from an ever-rising standard of living.
That equation still holds, with the conspicuous exception of medical research. In this one area, something alarming has been happening over the past 25 years: Universities have evolved from public trusts into something closer to venture capital firms. What used to be a scientific community of free and open debate now often seems like a litigious scrum of data-hoarding and suspicion. And what’s more, Americans are paying for it through the nose. Let’s go back to Emtriva for a moment. Raymond Schinazi, a virus specialist at Emory, got the idea for the drug after hearing a lecture by a Canadian researcher, Bernard Belleau, at a 1989 AIDS conference in Montreal. Belleau had discovered a compound that helped shut down the virus’s genetic machinery, and Schinazi soon realized that with some chemical wizardry, the substance could be transformed into something far more potent. Thanks to a bit of “serendipity,” Schinazi says, he and two Emory colleagues were able to do just that: create a compound that may be orders of magnitude more active than Belleau’s. In the end, the difference between the two substances came down to one atom of fluorine. It’s a perfect example of how one inspiration can build on another.
This combination of open exchange and fervent competition between great researchers helps bring about scientific advances. And when the system works, the sum of each contribution is greater than the whole. But what happened next in the Emtriva saga was a race to the patent office. Emory got there – a week.
That filing in 1990 triggered a morass of lawsuits over Emtriva and a related compound. Belleau’s biotech employer sued; so did pharmaceutical giant Glaxo Wellcome (now GlaxoSmithKline), which had licensed what it thought was Belleau’s discovery. Emory found itself embroiled in litigation that a veteran patent attorney called the most complex he’d ever seen. (One federal case had 36 individual “lead attorneys.”) Emory’s squadron of lawyers not only had to fight through those cases but also skirmish through four long challenges at the U.S. Patent & Trademark Office (USPTO) and repeat those battles in Europe, Australia, Japan, South Korea, and Canada. All told, the disputants wrangled on for nearly a decade and a half and consumed millions of dollars in attorney’s fees.
And that’s just for one dispute. >From 1992 to September 2003, pharmaceutical companies tied up the federal courts with 494 patent suits. That’s more than the number filed in the computer hardware, aerospace, defense, and chemical industries combined. Those legal expenses are part of a giant, hidden “drug tax” – a tax that has to be paid by someone. And that someone, as you’ll see below, is you. You don’t get the tab all at once, of course. It shows up in higher drug costs, higher tuition bills, higher taxes – and tragically, fewer medical miracles.
So how did we get to this sorry place? It was one piece of federal legislation that you’ve probably never heard of – a 1980 tweak to the U.S. patent and trademark law known as the Bayh-Dole Act. That single law, named for its sponsors, Senators Birch Bayh and Bob Dole, in essence transferred the title of all discoveries made with the help of federal research grants to the universities and small businesses where they were made.
Prior to the law’s enactment, inventors could always petition the government for the patent rights to their own work, though the rules were different at each federal agency; some 20 different statutes governed patent policy. The law simplified the “technology transfer” process and, more important, changed the legal presumption about who ought to own and develop new ideas – private enterprise as opposed to Uncle Sam. The new provisions encouraged academic institutions to seek out the clever ideas hiding in the backs of their research cupboards and to pursue licenses with business. And it told them to share some of the take with the actual inventors.
On the face of it, Bayh-Dole makes sense. Indeed, supporters say the law helped create the $43-billion-a-year biotech industry and has brought valuable drugs to market that otherwise would never have seen the light of day. What’s more, say many scholars, the law has created megaclusters of entrepreneurial companies – each an engine for high-paying, high-skilled jobs – all across the land.
That all sounds wonderful. Except that Bayh-Dole’s impact wasn’t so much in the industry it helped create, but rather in its unintended consequence – a legal frenzy that’s diverting scientists from doing science.
Birch Bayh is likable – eminently so. He has a kind face, easy laugh, and enough self-deprecating charm to get a proud liberal Democrat elected (and reelected twice) in Indiana – a state as Republican red as Birch Bayh is, well, likable. That was a wonderful gift to have in the U.S. Senate, and it no doubt partly accounted for the fact that his patent bill overcame tremendous suspicion (as being “anti small business”), opposition by President Carter, and the Reagan Revolution, which cost Bayh his Senate seat in 1980.
At the time, the gospel of the U.S. government, or at least of the longtime Democratic majority in Congress, was that if the government paid for it, the taxpayers owned it. That was the thinking that drove some of the nation’s proudest achievements – the splitting of the atom, the development of antibiotics, the moon shot, and the nuclear Navy.
Bayh sought to turn that policy on its head, essentially giving away all this taxpayer property for free – and, some worried, creating potentially thousands of new private monopolies in the process. It was a heretical view (for a liberal, no less), but Bayh was convinced that government ownership was squashing innovation and the nation’s productivity. The stagflation of the 1970s was already clouding the new decade of the ’80s; America’s economic engine seemed to be choking; and the domestic automobile, steel, and electronics industries were fast losing their global dominance. There seemed to be a productivity malaise descending on the homeland – and some kind of catalyst for change was needed.
It was a report by the Comptroller General of the U.S. that offered, if not the remedy, one culprit for the national gloom: unlicensed patents. A 1979 audit of government-held patents showed that fewer than 5% of some 28,000 discoveries – all of them made with the help of taxpayer money – had been developed, because no company was willing to risk the capital to commercialize them without owning title. “Discoveries were lying there, gathering dust,” says Bayh today, from his office at the Washington law firm Venable LLP. “So the taxpayers weren’t being protected. We’d spent $30 billion in research for ideas that weren’t helping anybody.”
When the bill was finally passed, against all odds, on the last possible day of a lame-duck session of Congress, it didn’t make a whiff of news beyond the Beltway. Even Bayh had no clue what effect the new amendments would have. “I don’t think anybody could have reasonably anticipated the enormity of the chain reaction that followed,” says Bayh today.
A dozen schools – notably MIT, Stanford, the University of California, Johns Hopkins, and the University of Wisconsin – already had campus offices to work out licensing arrangements with government agencies and industry. But within a few years Technology Licensing Offices (or TLOs) were sprouting up everywhere. In 1979, American universities received 264 patents. By 1991, when a new organization, the Association of University Technology Managers, began compiling data, North American institutions (including colleges, research institutes, and hospitals) had filed 1,584 new U.S. patent applications and negotiated 1,229 licenses with industry – netting $218 million in royalties. By 2003 such institutions had filed five times as many new patent applications; they’d done 4,516 licensing deals and raked in over $1.3 billion in income. And on top of all that, 374 brand-new companies had sprouted from the wells of university research. That meant jobs pouring back into the community.
A modern alchemy was at work: Ivory towers were being turned into gold, and society was benefiting from hundreds of novel treatments introduced for a host of diseases. After years of intense study and living grant to mouth, investigators at the University of California at San Francisco, for example, had come up with a treatment for infants with respiratory distress syndrome, an ailment that affects some 25,000 babies a year. A startup by University of Florida researchers got $15 million from some VCs in Menlo Park last year to develop a gene therapy for a type of emphysema called Alpha-1. Physicists at the University of Wisconsin in Madison figured out a way to turn static MRI views of blood vessels into videocamera-like images.
The anecdotal reports, fun “discovery stories” in alumni magazines, and numbers from the yearly AUTM surveys suggested that the academic productivity marvel had spread far and wide. But that’s hardly the case. Roughly a third of the new discoveries and more than half of all university licensing income in 2003 derived from just ten schools – MIT, Stanford, the usual suspects. They are, for the most part, the institutions that were pursuing “technology transfer” long before Bayh-Dole.
Even so, every school labors under the fantasy that it’s going to find the next Emtriva – or Gatorade, a huge success that came out of the University of Florida. The jackpot is too rich not to go for it.
In 2001, economists Richard Jensen from Notre Dame and Marie Thursby of the Georgia Institute of Technology published a survey of university licensing activity over a five-year period in the 1990s. They asked administrators and faculty researchers at 62 universities, “What’s the most important outcome of technology transfer?” The top answer by far given by university officials was “revenue.” Yes, it was nice to see important discoveries commercialized and the knowledge disseminated as widely as possible. But hey, we’re in this for the money.
That certainly seemed to be the message in a recent court case involving Columbia University. Last year Columbia threatened to revoke the licenses of several leading biotech and pharmaceutical companies for the use of a critically important process in drug discovery and development called co-transformation. (The companies sued, and the cases ended up in a federal court in Massachusetts.) In the late 1970s three Columbia researchers, Richard Axel, Michael Wigler, and Saul Silverstein, all working with funding from the NIH, figured out a way to vastly improve the efficiency of a technique used in genetic engineering. They filed for patents in February 1980 – prior to Bayh-Dole. But the NIH assigned the title to Columbia once the university promised to “use all reasonable effort to bring the [Axel patents ] to the commercial market through licensing on a non-exclusive, royalty-free, or reasonable royalty basis.” The federal agency even admonished Columbia not to engage in “repressive” licensing practices.
The Axel patents were amazingly huge moneymakers for Columbia (and yes, the three inventors got rich too), bringing in a total haul of about $600 million during their 20-year patent life. The university had licensed co-transformation to 11 drugmakers and collected royalties on 19 different drugs for various diseases. Amgen had used the Axel technology while making its bestselling anemia drug, Epogen; Bayer and Wyeth each made hemophilia drugs; Genentech used it in making its blockbuster breast-cancer drug, Herceptin.
But when the patent life ran out, Columbia announced that – surprise – it had secured a new patent, issued in 2002, that won’t expire until 2019. (The patent application was filed in secret in 1995.) And the invention, as it turns out, comes out of the original taxpayer-funded work done by Axel, Wigler, and Silverstein long ago (and somehow not included in the three patents Columbia had already received). University lawyers had pulled off the trick by filing a secret “continuation” application (which keeps an original patent disclosure alive for possible new claims to be added) and then abandoning it – repeating this procedure again and again until the clock was about to run out. So the patent granted in 2002, noted federal district court Judge Mark Wolf, “relates back to its great-great-great-great-great-great-grandparent application” in 1980. The aim of this new “submarine” patent, says Boston attorney Donald Ware, who represented several of the plaintiffs, was to enable Columbia to surface with a claim “covering new advances the biotechnology industry had made during the intervening years.” By delaying their filing as long as possible, they could get many more years of patent protection. And revenue, of course.
U.S. patent laws were amended in 1995 precisely to prevent this method of gaming the system. (Patents now expire 20 years after the original filing, or “priority date,” rather than 17 years after the issue date, as they used to.) But Columbia managed to file two final applications on June 7, 1995 – the day before the new law was to go into effect. When Judge Wolf indicated he was inclined to rule in favor of the plaintiffs, Columbia promised it would no longer attempt to charge the companies a licensing fee. (The case was then dismissed.) ….cut
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