Comments on the Need for Better Federal Government
Oversight of Taxpayer Supported Research and Development

before the

Subcommittee on Regulation, Business Opportunities and Technology
of the Committee on Small Business, U.S. House of Representatives

James P. Love
Director, Economic Studies
Director, Taxpayer Assets Project
Center for Study of Responsive Law

July 11, 1994

Center for Study of Responsive Law
P.O. Box 19367; Washington, D.C. 20036;
voice: 202/387-8030;fax: 202/234-5176;

Table of Contents

I.   Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . .  1

II.  Brief Summary of TAP Research into the government's role in
     funding pharmaceutical R&D. . . . . . . . . . . . . . . . . . . . .  1

III. Difficulties in obtaining information about the government's role
     in drug development.. . . . . . . . . . . . . . . . . . . . . . . .  3

IV.  The June 1994 Inspector General Report on the Scripps Research
     Institute.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .  5

V.   NIH Role in Protecting the Public Interest. . . . . . . . . . . . .  7

VI.  Suggestions for Remedial Action.. . . . . . . . . . . . . . . . . . 10

I. Introduction

Thank you for the opportunity to appear today to discuss the need for better federal government oversight of taxpayer supported research and development. My name is James P. Love. I work for the Center for Study of Responsive Law, where I am the Director of Economic Research, and also the Director of its Taxpayer Assets Project (TAP).

The Center for Study of Responsive Law is a non-profit organization which was created in 1968 by Ralph Nader to conduct research on a wide range of public policy issues. TAP is a project of the Center, which investigates the management and sale of government property, including intellectual property rights from government funded R&D. Our mailing address is P.O. Box 19367, Washington, DC 20036. I can be reached by telephone at 202/387-8030 and via the Internet at

My testimony today will:

II.Brief Summary of TAP Research into the government's role in funding pharmaceutical R&D.

In June 1991, this subcommittee asked TAP to provide testimony on a Cooperative Research and Development Agreement (CRADA) between Bristol-Myers Squibb (BMS) and the National Cancer Institution (NCI), regarding the development of taxol.(1) Our review of

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the NCI/BMS taxol CRADA was followed by a much broader review of the government's role in the development of new drugs.

For example, in a study presented in February 1993, TAP examined the federal government's role in the development of all FDA approved cancer drugs that were discovered since 1955, and found that 34 of the 37 cancer drugs were developed with significant federal support.(2)

Earlier this year TAP presented a study of all "priority" drugs approved by the FDA from 1987 to 1991. During this 5 year period the FDA issued 2,270 drug approvals, but most were for generic drugs or new combinations of existing compounds. Only 117 of the new drug approvals involved so called "New Molecular Entities" (NMEs), which is the name given to drugs which are distinctly different in composition from drugs already on the market. Of these 117 NMEs, only 30 were judged by the FDA to be drugs that were used in the treatment of severe illnesses (FDA class E or AA drugs) or to represent a substantial gain in therapeutic value (FDA efficacy rating of A).(3)

Of these 30 "important" new drugs approved by the FDA, 15 benefited from significant funding by the U.S. government. When one considers the country where the drug was first discovered the government's role is even more important. 17 of the "important" new drugs were discovered in the U.S. Of these drugs, 12 were developed with significant government funding - that is, 71 percent were developed with significant government funding.

The U.S. government spends an enormous amount of money on health care research, and this investment has been very productive. On the basis of our research, we have concluded that while the private sector's R&D investments are also large, they tend to be directed at the lower risk ventures, and often are directed at the development of so called "me too" drugs, which do not represent significant improvements in therapy, but rather are marginally different methods of treating illnesses which represent large markets, measured by the companies in the number of dollars they will receive from consumers.

One of the more interesting findings of our research was the fact that the drugs developed with

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government funds were much more expensive than the drugs developed with only private funding. For the 30 drugs in our study, the median cost of the NMEs developed with government funding was $4,854, while those drugs developed without government funding cost $1,626.(4) That is to say, the drugs developed with government funding were about 3 times more expensive than the drugs developed with private funding. Clearly the drug companies were not "passing" on the benefits of government funding to the U.S. consumers, who pay for the research.

We have found that the federal government's role in the development of new drugs is much larger than is generally recognized, particularly for the most important new drugs.

III. Difficulties in obtaining information about the government's role in drug development.

Our own research into the government's role in the development of new drugs has been difficult and time consuming, due to the lack of federal agency information regarding the government's role in the development of new drugs, failures to report government funding of research on patent applications, and a lack of candor by pharmaceutical companies regarding the government's role in the development of new drugs.

As noted in the June 15, 1994, report by the Office of the Inspector General (OIG), which is discussed in more detail below, there is shocking failure to identify federal funding in patent applications. We have found this to be a common problem, not limited to Scripps. Indeed, we never rely upon the information in patent applications when trying to ascertain the government's role in funding new inventions.

Neither NIH, PHS nor HHS compile information on the amount of federal involvement in individual pharmaceutical drugs on a regular basis, except for AIDS drugs, where patient groups and journalists have been particularly interested following the dispute over the pricing of AZT. This is surprising, since one might expect federal agencies to call attention to the successful outputs from their research budgets. In fact, it is nearly impossible to find anyone at most federal agencies who can even speculate what the public has done to support the development of a particular drug.

Every year there are important new drugs entering the market with brand new pricing controversies. Now that the pharmaceutical companies have broken the $100,000 price barrier, we expect these pricing controversies to escalate, particularly in light of the Clinton health care plan's combination of mandatory drug coverage with no price controls. Because we have done a great deal of research on government funded drugs, we are often

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asked if we know what the government has done for new drugs entering the market. That information is usually difficult to track down. The FDA doesn't collect or disseminate information on the government's role in funding the R&D, and the agencies which may have funded the research rarely yield any useful information without very persistent digging by the researcher. Even when it is widely acknowledged that the government funded much of the research, it typically takes a letter from a member of congress just to get an accounting of the total amount of dollars involved.

When we ask research staff from NIH, a university or a company, whether or not federal funds were used in the development of a drug, the most common response is "I don't know." Sometimes we receive piece-meal information about a grant or two that they know about. In other cases, we are given misleading information. For example, when Michael Ward from our office was doing research on Roberts Pharmaceutical's drug Supprelin (histreline acetate), one university researcher who received industry research support told him that the research on the use of histreline acetate for precocious puberty was entirely private. But two days later Mr. Ward was able to talk with Dr. William Krawley of Massachusetts General Hospital, who told him that during about ten years of NIH funded research on gondatropin releasing hormones, the doctor had used histreline acetate in the treatment of precocious puberty, and that this research was the source of the largest group of data used in the NDA. Had Mr. Ward believed the first researcher, who seemed to be in position to know, we would have incorrectly concluded that Supprelin was developed entirely with private funds. This type of gum shoe activity is really quite time consuming, and creates a barrier for public policy researchers who want to learn more about this role of the federal government in drug development.

While we encourage much better reporting on patent applications, this will only solve some of the problems. As the subcommittee knows, many important new drugs are not patented, but may exercise considerable monopoly pricing power. Examples of this include drugs such as Ceredase, which has market exclusivity under the Orphan Drug Act, or Taxol, whereby BMS benefits from a CRADA which gives the company the exclusive rights to use federal research data for purposes of obtaining FDA marketing approval.

There are also a number of cases where the patent application may pre- date crucial government funded research. For example, consider the case of levamisole, a drug used to treat colon cancer. Tetramisole and its close cousin levamisole were discovered to be effective worm remedies for a broad range of nematodal infections in humans, cattle, pigs, sheep, and poultry. Beginning in the 1960's, a series of independent observations led to the conclusion that tetramisole and levamisole "did more than merely kill nematodes." For example, when tetramisole was used to deworm beagles, the pre-weaning mortality rate changed from 1 out of 4 to 1 out of 10. Cattle in Chad treated with tetramisole benefited from an increased resistance to a contagious pneumonia, and levamisole was an apparent

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cure for a herpes-like viral infection in monkeys in an Antwerp Zoo.(5)

In 1971 a large scale clinical research program was started to empirically test the effect of levamisole in human diseases possibly caused by impaired cellular immune mechanisms, but the scientific community remained skeptical of the drug's usefulness. In 1986 Janssen Pharmaceutica, a subsidiary of Johnson and Johnson, received a use patent for the idea of using levamisole for "Aiding the Regression of Neoplastic (tumorous) Disease." But the most important clinical work occurred after the J&J patent was obtained. In 1989 the North Central Cancer Treatment Group (NCCTG) issued a report on the benefits from the use of levamisole for the treatment of colorectal cancer, based upon a federally funded research project. In 1990 a more comprehensive study was funded by PHS, which included contributions by the Eastern Cooperative Oncology Group, the Southwestern Oncology Group and the Mayo Clinic. Both of these studies were crucial in the development of levamisole as a treatment for colon cancer. However, neither of these studies could have appeared on the patent, which was issued in 1986.

In general, the government's contribution to the research may occur before or after the patent is obtained, or there may be no patent at all, if the research has entered the public domain.

IV. The June 1994 Inspector General Report on the Scripps Research Institute.

The June 15, 1994, report by the Office of the Inspector General (OIG) of the Department of Health and Human Services (HHS), entitled Under Reporting Federal Involvement in New Technologies Developed at the Scripps Research Institute(6), provides a shocking illustration of the under reporting of the federal government's role by non-federal recipients of federal funding for pharmaceutical research, and the lack of oversight by the National Institutes of Health.

As a result of this subcommittee's excellent work, we now know that the Scripps Research Institute (SRI) has been engaged in a bewildering array of contracts between SRI research scientists and administrators and private pharmaceutical companies, including side deals that involve stock options and consulting payments for the personal benefit of these individuals. The OIG reported that SRI failed to disclose at least 43 out of 94 patented inventions that benefited from NIH's $70 million per year in grant and contract funding, is a matter of illegal activity that deserves immediate action, including such sanctions as federal taking of patent rights, which is provided for under 35 USC Section 202.

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As Representative Wyden has pointed out in his June 13, 1994, letter to NIH Director Dr. Harold Varmus, the under reporting of federal involvement in new technology development is closely related to the ability of the federal government to exercise a number of important property rights. As noted by the OIG report, the Bayh-Dole Act (7) gives broad property rights to non-profit and small business recipients of federal research grants, including the rights to receive titles to patents and to license inventions for development on an exclusive basis, without payment of royalties to the government, which funded the research. These rights are not unlimited, however, as the law reserves important rights for the government, in order to achieve public interest objectives, such as requiring local manufacturing, providing the government with a royalty free license to the patent, and providing "march-in" rights which give the government the right to provide compulsory licensing of the invention in order to achieve a number of public interest objectives.

The under reporting of federal involvement should be considered a deliberate act by the grant recipient, since it allows the grant recipient to overstate the degree of risk associated with the development of the technology, and it reduces the likelihood that the government will exercise its rights as a funder of the R&D. The omission of information about the government's role in the development of the invention on a patent application is a particularly serious matter, since the patent applications are prepared by lawyers, who are reasonably presumed to know the law.

According to 35 USC Section 200, it is the policy and objective of Congress to:

. . . ensure that the Government obtains sufficient rights in federally supported inventions to meet the needs of the Government and protect the public against non-use or unreasonable use of inventions;(8)

The mechanisms to accomplish these public purposes include unambiguous requirements regarding disclosure and Government rights to the patent. Under 35 USC Section 202, each funding agency must provide requirements in contracts that require that:

. . . the contractor disclose each subject invention to the Federal agency within a reasonable time after it is made and that the Federal Government may receive title to any subject invention not reported to it within such time.(9)

. . . With respect to any invention in which the contractor elects rights, the Federal agency shall have a nonexclusive, nontransferable, irrevocable, paid-up

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license to practice or have practices for or on behalf of the United States or any subject invention throughout the world,(10)

. . . An obligation on the part of the contractor, in the event a United States patent application is filed by or on its behalf or by any assignee of the contractor, to include within the specification of such application and any patent issuing thereon, a statement specifying that the invention was made with Government support and that the Government has certain rights in the invention.(11)

The government's "march-in" rights, as defined in 35 USC Section 203, are appropriately broad, and highly relevant to pharmaceutical inventions developed with government support. The federal agency has the right to require the contractor or its assignee or licensee to grant non-exclusive, partly exclusive, or exclusive licenses to the patent to a third party or parties, if the agency determines that:

. . . action is necessary because the contractor or assignee has not taken, or is not expected to take within a reasonable time, effective steps to achieve practical application of the subject invention . . .(12)

action is necessary to alleviate health or safety needs which are not reasonably satisfied by the contractor, assignee, or their licensees;(13)

or that action is required in order to meet public use requirements or to enforce preferences for U.S. industry.

In our view, under Sections 200, 202 and 203, the government has the authority to systematically review the prices for drugs developed with government grants, and to order compulsory licensing of technologies in order to "alleviate" the "health" needs of the public, when the prices are found to be "unreasonable." Surely there are drug pricing abuses which warrant such action. However, in order for this to occur, it is necessary for the government to be informed that the invention was developed with federal funds, and to systematically organize and manage that information, including routine dissemination of the information to the public.

V. NIH Role in Protecting the Public Interest

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The OIG report raises a number of important issues relative to NIH's potential role in protecting the public interest. According to Dr. Lee's May 24, 1994 memorandum to the OIG, the NIH awards 28,000 research grants and 1,400 contracts to approximately 1,700 entities every year. The OIG report placed fy 1992 NIH grant and contract awards at $6.2 billion, representing a public investment in R&D of about $90 for a four member household.

Not only is NIH woefully understaffed with regarding to the office that receives and manages the disclosure reports, but it does not appear to have any plans, even now, to conduct the types of independent audits and investigations that will increase the rate of truthful reporting.

In this regard, we believe the public interest would be served by a policy of imposing strong sanctions for non-reporting, such as taking patent rights under 35 USC Section 202, in order to send a signal to the grant and contract recipients that such omissions will not be tolerated.

We have good reason to be highly skeptical of NIH as a guardian of the public interest, and it may be necessary to rethink the way that government delegates important public interest oversight responsibilities.

The failure of NIH to routinely collect and disseminate information about the government's role in the development of new drugs does not appear to be an accident. Rather, it is just one more example of NIH's efforts to accommodate the pharmaceutical industry's interest in a wide range of matters. When we began our research into taxol, we were surprised at the hostility of some NCI officials over a number of routine questions we were asking relative to the true extent of the BMS role in the development of taxol, or the government's actual costs of producing taxol. I have testified before this subcommittee on two occasions regarding the NCI/BMS taxol CRADA, and I simply remind this subcommittee of Dr. Bruce Chabner's spirited defense of the BMS pricing of taxol, and his eagerness for NCI to remain as ignorant as possible about any of the facts regarding the investments BMS was required to make during the development of the drug.(14) For example, despite the fact that publicly available SEC documents revealed the fact that BMS was obtaining clinical grade taxol from the Hauser Chemical company, the NCI's former contractor, for less than $.25 per milligram, and reselling the drug to the public for $4.87 per milligram, Dr. Chabner testified that he estimated costs of production for taxol were 25 to 35 percent of its price, which would be $1.22 to $1.70 per milligram. The fact that Dr. Chabner was off by a factor of 5 to 7 times the actual production cost cannot be dismissed as close enough for government work, since NCI itself had used Hauser as a contractor, and NCI officials clearly knew that the unit costs fell with larger production runs.

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As the subcommittee is aware, we have been highly critical of the methodologies used by NIH to address the issue of drug pricing in CRADA and license agreements. We have asked on a number of occasions to work constructively with NIH to modify its model CRADA and license agreements in order to obtain better data about the economics of government funded drugs, and also to address a number of concerns that we have about the NIH fair pricing methodology. To our knowledge, we are the only non-industry affiliated group which has expressed such an interest on a regular basis.

Earlier this year Dr. Harold Varmus announced a NIH CRADA Forum, dealing with "perspectives, outlook and policy development." This forum will be held on July 21, 1994 at the Bethesda Holiday Inn, and will include three "point/counterpoint" panels on CRADA issues. My employer, Mr. Ralph Nader, personally asked Dr. Varmus if I could be included on one of the panels, representing the taxpayer and consumer point of view. Mr. Ward from our office was later asked to provide copies of my vita to Barbara McGarey, the Deputy Director of the NIH Office of Technology Transfer, which he did on June 6. About one and half weeks later, Mr. Ward contacted Barbara McGarey, and was informed that Dr. Varmus denied our request to participate in the CRADA forum, and that Dr. Varmus only wanted industry and government panelists. We were told that we could appear during the public comment period, which takes place after the panel discussions, and just before the dinner and panel writing session.

We don't think that Dr. Varmus is required to include me or any particular person for this or any other panel on this topic, but we were dismayed by the lack of balance in the forum. This, however, is typical of the agency. NIH sees itself as a partner with industry, and it has become highly sympathetic of the industry views on issues such as drug pricing and reporting requirements. Why is it that the U.S. government does not collect data on drug prices, does not routinely collect data on drug development costs, even for drugs developed with government funding, and does not express the slightest interest in these matters? There are undoubtedly several answers.

The more benign explanation is that NIH officials believe that the only important public interest concern is the rate of which new drugs are developed, and since, in this view, the costs of drug development to consumers and taxpayers are irrelevant, NIH should avoid raising pricing or reporting issues, since the industry, which remains a key player in drug development, is clearly hostile. There are also less benign reasons. NIH officials often seek employment in the private sector after their government service, or anticipate lucrative consulting arrangements with the private sector if they obtain a university appointment. What's good for the industry may eventually be good for them too. Indeed, as Dr. Robert Wittes has shown in the case of Taxol, one can work on a research project for NIH, then leave the government to help a drug company commercialize the discovery, and then return to the same government agency and begin a new research project.

In our view, the public interest is served by policies that enhance the rate of new drug development, while protecting the consumer and taxpayer interests. There can be no

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doubt but that financial reporting requirements and fair pricing rules are negatives, from the point of view of investors. After all, its always better, from the point of view of the pharmaceutical industry, if one can obtain public funds without any accountability what-so-ever. But there is not necessarily a negative trade-off between greater accountability and the rate of innovation in drug development.

The federal government and consumers have finite resources, and if NIH and other federal agencies would do a better job of protecting consumer and taxpayer interests, the same amount of R&D overall could be undertaken with lower consumer drug prices or taxpayer support, or alternatively, a higher R&D effort could be supported by the same amount of consumer and taxpayer spending. When money doesn't grown on trees, the issue is not whether more money gets a bigger bang, but rather, how does one get the biggest bang for the buck? This question can't be answered without better data.

VI. Suggestions for Remedial Action.

Congress should direct HHS, the U.S. Patent and Trademark Office (USPTO), and the FDA to work together to develop a system to monitor and report on the role of federal support for technologies used for health care. This system should include information on patented and non-patented inventions, as well as on federal support which occurs before and after patents are granted. Every FDA NDA should include a report that would be available to the public which describes the role of the federal government in supporting the research that led to the NDA, including such details as contract and grant numbers and the amount of money involved.

HHS should announce to all the non-federal entities that have received public support from NIH and other research agencies that HHS will give a 120 day grace period, and then begin a random audit of reporting requirements, with a public promise to take no less than 30 percent of all patents for which the entity failed to make a proper disclosure, and to impose other penalties, such as a two year moratorium on future grants and a 50 percent cut in overhead allowances for four years.

Congress should also insist that an office independent of NIH routinely audit the NIH compliance with the reporting and public interest sections of the Bayh-Dole Act.

Thank you for the opportunity to appear today to address this important issue. This concludes my prepared testimony.

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1. Our comments are reported in U.S. House of Representatives, Committee on Small Business, Subcommittee on Regulation, Business Opportunities, and Energy, Exclusive Agreements Between Federal Agencies and Bristol-Myers Squibb Company for Drug Development: is the Public Interest Protected, Serial No. 102-35, U.S. Government Printing Office, Washington, DC, July 29, 1991.

2. Ralph Nader and James Love, "Federally Funded Pharmaceutical Inventions," included in U.S. Senate, Special Committee on Aging, The Federal Government's Investment in New Drug Research and Development: Are We Getting Our Money's Worth, Serial No. 103-1, U.S. Government Printing Office, Washington, DC, February 24, 1993.

3. James Love, "Prescription Drug Benefits and the Clinton Health Care Plan," prepared statement, testimony before U.S. House of Representatives, Committee on Energy and Commerce, Subcommittee on Health adn the Environment, February 8, 1994.

4. The cost of a drug was based upon a completed treatment or one year of treatment, whichever was less. The data are presented in "Prescription Drug Benefits and the Clinton Health Care Plan," Ibid.

5. This account taken from Paul A.J. Jannsen "Levamisole as an Adjuvant in Cancer Treatment," Journal of Clinical Pharmacology 1991;31:396-400 and U.S. Patent No. 4,584,305.

6. CIN: A-15-93-00029.

7. Public Law 96-517, as amended by PL 98-620.

8. 35 USC Section 200.

9. 35 USC Section 202(c)(1).

10. 35 USC Section 202(c)(4).

11. 35 USC Section 202(c)(6).

12. 35 USC Section 203(a).

13. 35 USC Section 203(b).

14. Dr. Chabner's comments are included in the published transcripts of the January 25, 1993, subcommittee hearing, Pricing of Drugs Codeveloped by Federal Laboratories and Private Companies, Serial No. 103-2.