This episode is audio from the March-in Rights and § 1498 panel from the Engelberg Center's Hatch-Waxman at 40 and Beyond Symposium. It was recorded on September 27, 2024.
David J. Kappos, Cravath, Swaine, & Moore LLP
Aaron Kesselheim, Brigham and Women’s Hospital/Harvard Medical School
Rochelle Dreyfuss, Engelberg Center on Innovation Law & Policy, NYU School of Law (moderator)
Announcer 0:00
Welcome to engelberg center live, a collection of audio from events held by the engelberg center on innovation Law and Policy at NYU Law. This episode is audio from the march in rights and section 1498 panel from the engelberg Center's hatch Waxman 40 and beyond symposium. It was recorded on September 27 2024
Rochelle Dreyfuss 0:25
Rochelle, it's all yours. Okay? So this panel could be called more things that Richard Epstein doesn't like. Yeah, we know. So these are two ideas that have been kicking around for a long time. I've been on three committees of the National Academies of Science, all of which discussed these for a long period of time. They went nowhere then, but they've come up again. So one idea is greater reliance on the government's authority to make unauthorized use of patented inventions by or for the United States. And this goes to the comment that was made at the end about the question of, if prices are too high, can the government just step in. The other idea is that the government's already spending a lot of money. So Richard talked about, well, the government's going to have to pay at the end, actually, for a lot of inventions. The government pays at the beginning and subsidizes inventions. And so the question is whether, if they are not properly exploited, whether the government could march in this time under 35 USC, section 203, so these are two statutes. Part of the question is a kind of statutory question about what the government's authority is. For that reason, we put the materials, excerpts of these statutes into the materials, so you can look at them if you want to. But these are very controversial, and we have two people on opposite sides of this controversy to talk to us. One is Aaron kesselheim, Professor of Medicine at Harvard Medical School and its Center for Bioethics. And the other is David capos, now a partner of Cravath Swain and Moore, formerly Undersecretary of Commerce and the director of the PTO. So each is going to present their side of the argument for a few minutes, and then we'll talk about it in some more detail, and, of course, open it up to questions. So Aaron, you were gonna start All right,
Aaron Kesselheim 2:25
great. Well, thank you, Rochelle, and thanks to everybody for organizing this really interesting conference on being a very stimulating last day and a half. And I'm pleased to be able to be here to talk a bit about this. I think the connection here to the hatch Waxman at 40 topic is the fact that what we're talking about here are two opportunities. And we've been talking a lot about patents and the role that they play and their you know, the way that the hatch Waxman act tries to balance some of the issues related to patented products and and then competition and what here, what we have for the next 45 minutes is we're going to talk about two opportunities that already exist. That already exist on the books for the government to use patented products as an alternative to the hatch Waxman system. And so I just want to, since I'm the first speaker, let me just try to go through these two the two things we're going to be talking about today, margin rights at 1498 at a very high level. So margin rights are part of the Bayh Dole Act, not the hatch Waxman act. And the Bayh Dole Act is a statute that allows the universities to patent federally funded research and then license the results exclusively for commercialization. And the Bayh Dole Act has a an escape clause, if you will, that the government is allowed to offer a new license if the exclusive licensee has not taken effective steps to achieve practical application of the license of license material, or to alleviate the health and safety needs that are not reasonably being satisfied by the by the licensee. And this phrase practical application is defined in the statute as an invention that is being used such that its benefits are available to the public on reasonable terms. And so that's the nature of the question here, is, are the are the the is the patented invention that has been licensed to the public being a bit being made available on reasonable terms? And there is a process that is involved in the statute that involves notice and fact finding and a substantial system of appeals that the contractor can provide to the federal court in the case that march in rights are invoked. The other one is this, another statute, Section 1498 which is the government's right to use patented inventions. And it was actually added as a protection for the patent holder, because what 1498 does is it gives the patent holder the ability to sue the government in the case where the government is using a patented statute in order to receive reasonable entire compensation. Now the patent the important thing is that the contractor can. Demand royalties, but it can't stop the government from producing the medication or allowing others to import or use it, and then court set what the fair royalty will be. So those are the two things. Those are the two sort of main statutes that we're going to talk about today. And so I want to go through a couple main principles to think about. So the first is that the government that government funding plays a substantial role in bringing new drugs to market. There has been some research that you can showing that you can trace over 99% of new drugs back to government funding, and that the government spends about $1.4 billion per approval. Now, again, you can trace back a lot of things to government funding if you go back far enough. And in the for example, we just talked about the last panel about hepatitis C medications. In the case of hepatitis C medications, we found that the government spent about $60 million in grants to Emory and the VA in the early stages of these products. De risking a lot of the earliest, most complicated, least, you know, least formed research on this area before a startup company synthesized the product that ended up becoming that product. But the government also provides a lot of funding later in development as well, and we've done some research at my research group looking at like if you look at the last 10 years of drug approvals, you can link about 25% of them to patents or spin offs from from government laboratories or other late stage government investments. And actually 42% of biologic drugs can be linked in this way to a patent or some other, some other spin off. And this is more these. These drugs are not a majority, but it is much more likely that they are the most transformative, most important drugs, the first in class drugs, the drugs that get priority review of the FDA. The government, for example, invested $143 million in pre exposure prophylaxis of HIV medications, buprenorphine, another $40 million the covid vaccine, $32 billion of government investment and guaranteed market and so and basically, every single gene therapy that's currently on the market can be traced back, actually, to relatively late stages of development before larger drug companies came in. And I don't want to diminish too much, the amount of money and research and expertise that then is brought by the pharmaceutical companies at those later stages. There is a lot of money that goes in, and there's a lot of important expertise that drug companies have in designing trials and getting the drugs through FDA approval and setting up manufacturing processes. So every new drug, and we've been talking a lot this last day and a half about innovation, and mostly in the context of, well, the drug company comes up with this drug and is going to sell it. Drug and is going to sell it. But in actuality, every a lot of new drugs, and particularly most important drugs, are a combination of a lot of public funding as well as as well as the private funding as well. A second principle is that this public funding is sometimes reflected in the pattern, right? So, for example, you know, I told you about these, these various drugs, but, but if you look at all the orange book patents, only about two to 3% of Orange Book patents can be linked to government funding. So we're and that translates to about 120 130 drugs out of the 1000s of drugs that are listed in the orange book. So we are not talking about a lot of drugs that can be actually linked to the patent record, where there's where there's public funding of a patent, but where those drugs do are, you know, of those drugs, again, those are a lot of very important new drugs. And in a lot of cases, the drug patent being linked is one of the primary patents on the underlying active ingredient, as opposed to some of these secondary patents, it's about a third of the patents overall are some of these primary patents, as opposed to the secondary patents, but there are some secondary patents as well that can be linked to government funding. So a third principle is that is that applying margin rights and 1498 in a lot of these cases, is generally unfavored by the government and is very hard for the government to do, and is very challenging to do, but it can be done in a principled way in certain limited cases. So for example, you could, you could try to decide, what are we going to try to exercise margin rights on by looking, for example, at the overall revenue that a drug has received. In the case of extanti, which is a cancer drug for which all of the Orange Book patents were discovered and originally licensed to UCLA, which made made about $32 billion or since it was approved by the FDA, since it was approved by the FDA 10 years ago, it could be produced generically at a much at a much lower price. You could look at comparative prices of other of how the drug is priced in other markets, either a lot of drugs like are priced two to four times or more higher in other markets outside the US. And those are, those are markets in which the drug companies are making profits as well. They're not making as much profits as they are in the US, but they are making profits. You can look at the consequences. Expenses of these higher prices, in the case of prep, for example, higher prices have made it harder for more patients to get access to this really important new drug. We heard from Steve at the last panel about hepatitis C drugs, the fact that we have a cure for hepatitis C, and now we've had it on the market for over 10 years. And despite the fact that, fact we still have two or 3 million people in the United States with hepatitis C because of the high prices of the drug that make it hard to get to the people who who need it, and those prices have come down impressively, but they are still, you know, $25,000 for a course of therapy, which is still an incredible burden on Medicaid programs, especially given how much was was invested over initially.
So the use of these tools can lead to some access to medications, if they if they could be used properly, and they could even, they could even lead to negotiation if the drug, if the you know, drug companies, is faced with the possibility of of a marching rights or 1498 action. We have seen that in the past, for example, in the case of Ciprofloxacin and the wake of the 911 attacks, March 1498 was suggested to be used because the drug company was not giving a fair price to the government that was trying to stockpile it for potential anthrax attacks. In the face of this threat, the company ended up coming up with a better price that was more fair for the government to pay. So and I guess, as a final note, before I stop with my initial comments, you know, I'm sure one thing that's going to come up is this question of innovation, but what we're talking about here are reasonable terms for for the availability of margin rights, or for the payment back on Section 1498 we are not talking about rock bottom prices. The government is the courts are supposed to provide reasonable entire compensation. Marching rights are only supposed to be invoked when a product is not reasonably available. It's these are really only intended for the most problematic cases of excessive pricing, where that excessive pricing then makes it more challenging for patients to get involved. So my recommendations are that, first off, given the fact that the government is a major source of pharmaceutical innovation, that the availability of margin rights in 1498 when they are available, should be considered as a viable fallback option right now, there is really very little consideration of either of these mechanisms as a possibility, but they should be considered as viable fallback options when when an unreasonably priced product causes harm to the public health. There are. We can talk about these further, but there are policy changes that need to be made sure to make sure that these safety net options are available. In no way do Are any of these options preferable to a better form of upfront price negotiation to make sure that the price is reasonable to begin with. These are not a silver bullet for all drugs. They're not even applicable in the case of margin rights, not even applicable to a large number of drugs. But I don't think that a limited exercise of these pathways would stifle innovation for to a substantial degree. And if we do think about that, we also have to think about the welfare gains that we would get from additional access to medications, and if there's a problem that we can deal with that through more policy. Dave,
David J. Kappos 13:28
well, great to be here. Rochelle, nice to you, and be here at NYU for another super challenging conference here. And Michael, also, thanks for inviting me to come and spend some time today, this panel, like the previous one, presents us with the hard choice, right, it seems, between patient access and and and the creation of and having a vibrant pipeline for new treatments in the first place. And I just start there to say that I think if I can speak for everyone in the room, but I probably can speak for most of us to say we all want our moms and dads and spouses and significant others to have access to the best care possible. So that's not really the issue. The issue, of course, is on the one hand, how to do it in the constraints of our health care system, and on the other hand, how to make sure that new treatments actually exist, actually come into being, because the highest price treatment is the one that's priced at an infinite price, because it's not available yet, right? Because the incentives weren't there for those who actually do invest in research and development and bringing products to market, the incentives were just not there in enough of an extent to cause that drug to be created and then brought to market in the first place. So let's turn and focus a bit on the Bayh Dole Act and on. 1498, and I just want to start with a little sort of history and how we got here and and a little bit of a focus on on the law. Most of us in this room are lawyers, so hopefully we actually care about laws and following them and having some fidelity to them. And that's a significant component of my concern for 1498 and especially for Bayh Dole, in addition to the policy side that I'll mention so Bayh Dole, of course, came around in 1980 and and then, of course, it has been applied through every administration since then, and there have been march in petitions, and there's even been efforts to modify Bayh Dole, and there's been folks who've come in and tried to put new spin on it, and even buy and dole made their own statements about The law after it was created. So there's a fair amount of history here. Before Bayh Dole, of course, for the entire history of our country, we had system in which the government owned inventions that were created with government funding, and we learned that the problem with that was that less than 5% of federal patents were licensed for commercialization, so essentially, almost nil. Why? Because nobody wanted to invest their time, right or effort or financial compensation in trying to commercialize an invention, a patent that was owned by the government and could be then non exclusively licensed to any other party. So along comes the Bayh Dole Act in 1980 and creates this bright new incentive to actually letting the party that created the invention, usually universities and federally funded labs own those patents and go off and commercialize them, and it's been a runaway success, right? This law, for those of you who have not heard you should know, this law has been heralded as perhaps the most important piece of commercial legislation of the entire 20th century, right? Not kidding, so important that it's been emulated by many countries, many other countries. And I had the pleasure when I was stationed in Asia to advocate help the government of Japan to create what became known as the Japanese by golak. Many other countries have it as well. And of course, imitation is the greatest form of flattery. The law works and works because it recognizes that the private sector drives innovation. The government does not drive innovation. The private sector drives innovation. And while, sure, the government invests and does invest a lot in R and D. The truth of the matter is that the private sector invests orders of magnitude, right, orders of magnitude, more than the government does in R and D, and importantly, moving basic head end research of the government into treatments that can help patients. So so we need to bear in mind the government's investment is small change compared to the private sector investment, and there's absolutely no way the government could step in and substitute for private sector investment. So we either have private sector investment in R and D and commercialization, or we don't have commercialization again. We need to just be clear about some of these things. So the margin part of the Bayh Dole Act was crafted for these very, very narrow circumstances that you already, already heard about. You should also know that those circumstances are so narrow, they've never yet been exercised, and they have been petitioned in every single administration, Republican and Democrat. When I was in the administration, we dealt with Bayh Dole petitions, we looked at them, we had an interview, we put them through the interagency process, and not one was ever found to require the government to march in. So why? Because the law works, because universities have been very smart and have every incentive to cause commercialization to occur. And something you should know where the rubber hits the road and where I work is on those University agreements. They're exquisitely crafted to hold the commercialization parties accountable and to permit the universities to themselves, march in, take away the exclusive licenses that go to commercialization parties like Big Pharma. A and and re license to other parties, and the universities police those agreements, and that's why they all work so along cut so the system's working great for 40 years. Along comes the draft guidelines from the administration that were dropped on us, not quite a year ago, but now nearly a year ago, that for the first time, introduced price as a trigger for Bayh Dole margin, right price of a product. This turns the I mean, we just need to be again. Maybe it's the right thing. Maybe it's the wrong thing. I want to be sure everyone is aware. This turns the Bayh Dole Act on its head. It actually amounted to a sub silento, or administrative level repeal of the Bayh Dole Act. I predict there, and I'm quite confident there will be no use of the Bayh Dole Act, or very little use that leads to commercialization, with these administration guidelines going into effect by for the first time, making price a very central criterion for margin under the Bayh doh act under all previous interpretations of the Bayh Dole Act. Legislative effort to create a fifth criterion for margin that would would trigger on price attempts by many parties over many administrations, trying to count up the ways I've seen this come up, academics and advocates suggesting using price for March and purposes. All of that has been rejected over a long period of time. Now we're going to have the administration come in and for the first time, make price of criteria again, maybe, maybe that's the right thing. I'm not necessarily here to say that. I think it's the wrong thing, as you've already heard, but, but you know, if I'm wrong on policy, that's fine, but it's the law, right? The law needs to be changed. Congress needs to do that, not the administration stepping in. The authors of the bill confirmed, as I mentioned before, but just to come back to that, after advocates suggested that price should be a criterion and connected into some of the language of the Bayh Dole Act making drugs available or making products available under reasonable terms and conditions. The authors of the Act actually confirmed in 2002 saying, You know what, we didn't mention price in the Bayh Dole Act for a good reason, because it's not a criterion under the Bayh Dole Act that's for the private sector, for commercialization to sort out, and not for not for government agencies. So I would tell you, it's clear that what the administration is doing is amending the law through administrative action, and I think that is inappropriate.
I would also say that the federal agencies that will be tasked with policing the Bayh Dole Act new guidelines if they were to go into effect, have no depth, have no capacity, have no ability to manage, essentially marching petitions from companies based on price. And you could just imagine how this is going to play out right as soon as the active pharmaceutical ingredient is completed and FDA approval is available, you're of course, going to see a big, capable company right coming in and saying, Well, we can make that drug cheaper than the party that just invested two to $3 billion and, oh, by the way, had nine other drugs that failed to get through the FDA approval process and has to somehow figure out how to make back the losses on those drugs so they can stay in business and create the next treatment for us. Of course, you're going to have companies come in and say, we didn't have to suffer any of that expense. We can get on the marketplace, in the marketplace, much less expensively. And we're going to have federal agencies, right government employees trying to police this. I don't see how that's going to work at all. Just a couple of other comments. Rochelle, and I'll stop so we can have a discussion. We we should talk a little bit about 1498 so 1498 is a is an eminent domain statute. It's about the situation where, as a paradigm during. Wartime, there's some war material or something else that's not available from the private sector, or some rights holder isn't making it fast enough or in great enough quantities and to permit the government to exercise its power of eminent domain. 1498 is, again, not at all about a compulsory licensing or a price setting strategy for the government for private purposes, right for commercial purposes, to to come in and dictate prices. 1498 again, is supposed to be a backstop when eminent domain gets exercised. So this whole notion of using 1498 defies all the case law. And in the case of 1498 there's a tremendous bevy of case law, since it is an old statute under eminent domain, going back where parties have come in and sought the government to invoke its 1498 jurisdiction, and in every single past case, they've been rejected. So again, I bring that up to say, you know, if you think 1498 is the right policy, you need to go to Congress to get the law changed. The right way to invoke 1498 is not by having the administration, frankly, just flatly break the law. That's not okay by me and I hope by most of the other people in this room. We need to follow the law if we're going to take action that's illegal. We need to get the law changed. And that's my problem with both 1498 and the interpretation that's given to Bayh Dole here,
Rochelle Dreyfuss 26:47
Aaron, you want to respond. You've been writing furiously. Respond. How
Aaron Kesselheim 26:51
much time do you have? Okay, so I guess a couple, a couple things to respond to. I mean,
just again, I'm really interested in what a lot of the people in the people in the room have to say and questions from the audience, but so I don't want to take up too much time just at the dais here, but so I'm only respond to a limited number of the comments that Commissioner Campos made. First off, you know, on the on the issue that by and dole, you know, 20 years later, said that the Bayh Dole Act shouldn't cover or that margin rights shouldn't cover pricing. Both of those people at that time were working in in lobbying firms that had a where they had a substantial interest in in sort of reflecting back, and that's not really the way that we do statutory interpretation, necessarily. But if you look at the statute itself, it says that the product should be made available on reasonable terms. And there's no way in my mind, that the phrase reasonable terms can't be interpreted to include price and that if indeed that price is so excessive that it makes it impossible for for people to get access to it. And I think that the government has numerous resources at its available, at its at its you know, at hand, in order to try to manage questions, to try to understand what is or isn't part of that? And I think that it is also, again, while we're just kind of focusing on the Bayh Dole Act, I think it is, it is hard. It is in my position in a research university, my perception is, is that the research universities are not very close stewards of the patents and the licenses that they provide out there, they have very limited resources, in particular, as compared to the companies that they're licensing those products to. And they also try to get out of the of the of the royalty business. If there is a positive product, they get out of the royalty business relatively quickly after that happens. So I don't think that we can rely on universities to be the ones that are policing this agreement. So I also don't so anyway, I don't think that these are concerns that are that should limit the sort of reasonable application of marching rights to try to address real public health issues that come from products that for which the government has invested substantial amounts of upfront funding in. And again, you know, oftentimes at the earliest, most you know, the stages where drug companies just aren't investing in in research that the earliest stages where there is the most amount of failure, that's where the government funding comes in, and it might be smaller in number than the subsequent funding. And we don't know, because we don't have a lot of insight into where all that, where all that money goes, that the drug companies claim to be investing in, in a, you know, phase three trial, or in. Cost of production, but, but it is, it is, and it is much lower than that, but it is still at a at a very critical stage that helps products move through and helps de risk them before they are then taken up in the private sector. With respect to 1498 I don't, I don't know that the sort of idea that 1498 only applies in war. Is part of the statute. But it is the case that the that the government has used 1498, to make antibiotics of products available to to patients in the army. But there are a lot of people, if we if we are going to just focus on just wartime, I mean, there are a lot of people in the in the army, in the military at the who are taking care of by the VA are veterans who could use lower cost access to hepatitis C drugs or buprenorphine or other essential medications that that could be, that could be made available. And so, you know, the the possibility exists to try to use 1498 and of course, when we talk about 1498 remember 1498 the the court can set royalties, and we can account for cost of failure. We can account for the reasonable average profits that a company makes and and, you know, we can even, you know, set that number quite high. It's probably going to be a lot less than the monopoly profits that companies are currently making, but we can try to figure out what the right number is to try to adequately incentivize innovation and ensure that there's still private investment. So again, I don't think that that a reasonable, thoughtful, measured invocation of some of these powers in limited circumstances will mean that all of a sudden no universities are ever going to use by dole again to license out their products to to commercialize again. There are people that are scientists and universities who want their products to be made and to be sold and to make people better.
Rochelle Dreyfuss 31:56
The question is whether people will take it out. Sure. Well again,
Aaron Kesselheim 31:59
if we, if we have a problem with that. And if we have a problem with with really important new investments in or discoveries in universities that are not being commercialized, then we we can invest further in, in actually funding the pivotal clinical trials. And we can, you know, license with the government can, can execute licenses with manufacturers to to make products and and to go through that process. It's, you know, the process is available. And there, there have been, again, times when the government has taken those steps and has moved products very close to the point of approval. And you know, if we are noticing that, that is a problem that we could just, you know, try to rectify that problem.
Rochelle Dreyfuss 32:40
Yeah, so a lot of countries do have compulsory license provisions that they can take up to make sure that access is adequate. They almost never issue those compulsory licenses, and that's because the compulsory licenses themselves serve as kind of leverage to make sure that companies stay honest. So do you not agree with that kind of idea? I mean, that's the way I would think that 1498 and marching rights would be used as as a way to say to companies, if you don't provide access, then we can do it. We don't have that in our law right now. I mean, except if we use these. And so I'm wondering, Dave, is that so terrible to say to companies? We have some power here behave.
David J. Kappos 33:35
Well, we're seeing already what the effects of it are. So in the case of the changes to the Bayh Dole Act, we're already having commercial parties asking their advisors questions about whether they should continue to take licenses under patents from universities and research institutions in cases where there's a by goal, funding disclosure, and the answer from advisors. And I know personally, because I'm one of the people who gives this advice, and I quite sure that I'm not the only person who's noticed what's going on. The advice is you ought to be really careful about investing in setting up an R and D operation around a government funded patent, because if you're unsuccessful in your business tanks, it'll all be just fine. But if you are successful, you can count on there being a march in request, in demand, and now the government looking at it seriously. So what I'm telling clients, and what I'm quite sure others are is, if you can avoid government funding, sorry, avoid licensing a head end patent the. That is, and the word, and I want to just remind people of the word that was used before by goal, contaminated, right? If you could avoid research and development instantiated in a head end patent that's been contaminated by government funding, you absolutely should. I expect advisors globally are giving that very same advice. Or Rachel, I would tell you that we are already in a chill room. One other thing I should mention too is that we've already got federal agencies that have anticipatorily put in place new policies of their own that implement what the NIST guidelines on Bayh Dole and clients are asking, What should we do with these? And the answer is, you should walk away if you can. Didn't have that
Rochelle Dreyfuss 35:52
option. I mean, yesterday, Bob said something about what 90% of pharmaceuticals have at least some government support. You say something the NIH was somebody said something about the NIH. You said that Al said it is overwhelmingly responsible for human drugs to come to market, and a government contribution in terms of risk,
Bob Armitage 36:22
for of risk way over that's just based on
Unknown Speaker 36:29
data. Al, did you say something like that?
Aaron Kesselheim 36:37
Yeah, so, I mean, again, you know, again, if you just, if you just look at this, at the at the histories of the of drugs when they come to market, and we have a, I can send around people articles like, if you look at the histories of the dozen or the 12 or 13 gene therapies that have come to market, you see their development in the in academic settings, their development in academic spin offs, and their development in in private companies, and then Their FDA approval. And that's that's kind of the process. That a lot of these gene I'm just talking gene therapies right now, and so I agree that, like, it would be very hard for given the fact that a lot of large companies these days don't have primary research and development sites. They are, they are acquisition, they acquire intellectual property when it is, when it is, you know, sufficiently de risk such that they feel like they can take, they can take a risk on it, on buying the company, then that that's what they do. So I think that that it does seem a little bit far fetched to imagine that the all of the essential information that is coming out of government funded laboratories would be avoided. And so I have a feeling that if you that, and that if people are giving that advice to some companies, then there are, if there is a truly revolutionary, important new product, then there will be another company that will be happy to jump in and take that product through to commercialization. And again, I think the risk on the back end of the of March and rights being activated, first of all, is extremely low because the challenging process it takes to move through it, and then also because it's it's only it is, it is when a product is not being made available on reasonable terms. And so the advice that I would suggest, if I could offer a slight, only a slight tweak to your advice, which I thought otherwise was pretty good, which is just to, you know, be careful, sounds like good advice, you know, you know, I would say the Tweak is like, don't charge, you know, excessive prices for your product. Charge reasonable prices that help make the product available. And yeah, you might get, you might get, but you won't have a successful margin rights campaign against you, because, again, a product needs to be made available on reasonable terms. And so I think that you know if that so I think that we need to do a better job of trying to figure out what that is and where those standards are and but for right now, what we're doing is we're saying we're not even touching it at all. And that seems to me to be a a letting down of a of a power that we have to try to ensure that there are, that there are fair prices. We have
Rochelle Dreyfuss 39:15
extra time to just do a few questions. So already,
David J. Kappos 39:20
hang on already just before.
Arti Rai 39:24
He's my former boss, so he can do this.
David J. Kappos 39:26
You need to come back to the issue of reasonable pricing and be a bit more precise about how that's actually treated in the Bible act. So there's four for folks who aren't super familiar, right? There's four margin triggers, right? The first one is the one that mentions reasonable pricing. It's in the context of and it's the only one of the four triggers that refers to the contractor or the applicant. I think the words are, if I remember, right, those are reference. Is in the act to the university that received the original funding. That's the party that filed for and probably owns the patent, and the investigator, the employee or the scientist at the University. So the reason that's important is because that's the provision right, that has a trigger against reasonable, reasonable availability. And the reference to the university or the or the investigator was to ensure that those parties, of course, are not setting prices. The parties that are setting prices are usually at least one, if not two or three levels further down in the value chain, because the head end patent gets licensed to a research institution, it might be usually private in nature, meaning it's it's profit making. It does some R and D work, and then further licenses the innovation to a pharmaceutical company that's got the scope, scale and reach to to go through clinical trials. So you've got a value chain here. The party that's setting the price is, you know, much lower in the value chain. I say all this to say the first criterion, the first factor of Bayh Dole that is the one that mentions, you know, available on reasonable terms and conditions is with reference to the university or the investigator for whom reasonable terms are. Reasonable terms and conditions are the terms, not including price that, such as, you know, term exclusivity, termination, rights, reporting, auditing, all the things that go into the contracts that are formed between the universities and and the company next in the value chain, so that that reference to reasonable terms and conditions demonstrably has nothing to do with price. Look,
Aaron Kesselheim 42:04
if, if there is a product that was based on a publicly funded on a publicly funded patent, and was licensed to a company, and that company took that product to market and made that product available for a billion dollars, like we should be able to use marching rights to say, actually, we're going to relicense that, you know, like that, that property so that another company can make so if it's not a billion dollars like that, if that seems unreasonable, like, what is the right number and how, like, how much lower than a billion dollars is it for us to get there? And I think that right now, if we completely give up on margin rights as being related to price and we say that we're never going to use it in that case, that seems like we are letting go of something that is like in the statute for us to use in that kind of a circumstance,
Rochelle Dreyfuss 42:51
zillion people.
Arti Rai 42:52
So since I have on my party speak now, so I do think that the Bayh Dole is a little bit of a kind of red herring in this context, because I don't think that any agency is actually going to use it, regardless of the guidance, particularly because where the Supreme Court is on agency discretion, agency action of any sort. And Dave, you made my point for me, like the statute can be read in so many ways to say that basically, reasonable terms don't include price. So I actually am a little surprised that you're advising your clients to stay away, because my view, it's in terms of all the risks your clients face. This is probably fairly way down on the list, maybe 1498 but not by dole.
Alfred B. Engelberg 43:42
I comment on 1498 and then, and then a question, really? I litigated 1498 cases for about four years in the 60s, and also instigated the Cipro controversy. And it's very, very clear there's a long chain of rulings by the GAO that the government is supposed to disregard patents and procurement, and it truly is a compulsory licensing statute, whether anybody intended it that way or not, and, and, and that's, that's the way it works. And indeed, I litigated a case involving the government purchasing tranquilizers from Scandinavia back in the days when, when medicine patents weren't available in Europe. Shows how old I am, but so I don't, I don't think there's, there's any doubt about about its broad applicability, the problem that I see, and the reason it hasn't been used in the last 40 years is that the hatch Waxman act created an act of infringement under Title 35 and patent certification, and the government can't buy drugs that aren't approved and. So you have a you have a legal issue, I may maybe it's resolvable at some point, because the government has an immunity from cases for patent infringement, but the government would actually have to get involved with a contractor be a sponsor. And it's it's a complicated process probably be litigated for years. My question for you, Aaron, is that every, every situation in which there is a march in potential is also a situation in which the government has a royalty free license. So why bother with marching after the fact, rather than then, then up front, having the government be involved and say, We own a license here, it's plain from the approval process and the and the patents listed in the orange book or asserted in on the biologic side, why go through this March and possibility when the when the government, again, according to the GAO, has a right to use its license to manufacture generic drugs for government programs, they've flat out said that in a report issued about 10 years ago. Yeah,
Aaron Kesselheim 46:15
so I agree, and I think that that is another part of the Bayh Dole Act that the government chooses to ignore use of and again, I think that your first point about 1498 is a really important one that, again, you know, I think that that the issue here is that is that it is very challenging to apply and will not apply in a lot of cases. For, you know, the hatch Waxman protections on the FDA being able to accept even a anda application for a new drug for five to seven years after approval means that, you know, even if it had fortune 98 it was not clear that there would be a supply for it that would be able to be FDA approved, to be able to be sold. But there are cases, as in the mentioned extending, I mentioned extending. I mentioned extending earlier, but the extended case, there's a there's a generic manufacturer that's got tentative approval for the FDA and is ready to sell its product it but for the intellectual property that is around it, and if that product is being sold at too high of a price for people to get access to who need it to treat their prostate cancer, then, you know, this should be one option that the government should consider as a possible way of trying to address that issue. I'm not saying it's the should be the first option, and I'm not saying that this option would apply in the vast majority of cases, but to preemptively say that we're never going to use it, that it can apply, and that margin rights don't apply and never like that seems like it's just kind of like throwing down our swords before we even enter the ring. So
David J. Kappos 47:46
hang on, Rochelle, before we go on, I need to come back and address this point about court decisions. So I don't I wasn't alive probably at the time that you're talking about, but I actually will cite some cases that I'm depending on here that stand for the proposition that the courts have routinely and without exception, dismissed efforts to misinterpret 1498 to apply in the very situation that we're talking about here. And I'll start with the case Larson versus United States, where a patent owner sued a medical device company for patent infringement. The defendant argued that, since the government reimbursed the cost of infringing medical devices through Medicare or other programs the patent owner must proceed against the government in the Court of Federal Claims under 1498 the Larson court flatly rejected that argument right. The Larson court said the government reimbursement of medical care expenses did not constitute use of a medical patent for government purposes as required by the text of 1498 went on to explain that 1498 is just not applicable. I won't go through other cases, but I've got artebus, biopharma Corp versus moderna here also obviously a more recent case that stands for exactly the same proposition, and the list goes on. So I just, I reject the notion that 1498 has been applied by the courts in the way that it's being advocated here. And I think the law is actually pretty clear on that.
Aaron Kesselheim 49:35
I mean, I'd like to go back and check out Larson isn't, doesn't, doesn't that case. Just show that the that what they found was that the poor company doesn't deserve money, not that, not that, not that. 1488 wasn't. It's just that, in this case, 1498 wasn't applicable. Not that it shouldn't. It doesn't exist, right?
Rochelle Dreyfuss 49:53
Yeah, so, yeah, okay,
Bob Armitage 49:57
just maybe a short comment, then a question. Question, I may be the only person who ever worked in house at a pharmaceutical industry, and I'm going to go back to my employer, ex employer,
Rochelle Dreyfuss 50:08
I worked in house, but not as a lawyer. All right.
Bob Armitage 50:12
Lily's been in business 150 years, and the first 135 years of their medicines are now open to generic competition and presumably sold at bargain prices. So we're really talking about the Lilly medicines put on the market since 2010 and for those medicines, I'm going to ask the company to cut the prices across the board 50% now, and do that for future medicines that might come to the market. And I know the prices will be high, still high, still. Most people will need insurance, but at least they'll be cut 50% now, the only thing that does internally is raise their internal cost of r&d to well over 50% of the revenues that they make on every dollar they sell. In other words, the company will no longer be able to operate a profitable business. So my question to you is, if we do actually significantly reduce prices, and the simple way to do it is just go across the board, is the future of the innovative industry hopeless?
David J. Kappos 51:16
I would say, Bob, it's in desperate condition. Absolutely, that's absolutely what's going to happen, right? My day job is advising the executive teams, including the boards of companies, just like Lily and I have a seat at the table for those discussions. And as you well know, they start with finance people running models, and then coming into executive leadership, and executive leadership then making judgments about what programs the company can afford to fund and which ones it can and what you're absolutely going to see with this regime, and we're already seeing under the legislation that was discussed before the inflation Reduction Act, is a different model being run and a different calculus being made, and so drugs at the margin are being dropped out of out of development programs. And it might seem academic to people in this room, but if it's someone you love who doesn't get cured because the drug that they need isn't available because prices were slashed, you're going to have a different view.
Aaron Kesselheim 52:31
In 1906 when the Pure Food and Drug Act was passed, it said that the industry was never going to survive. In 1938 the industry was never going to survive the kefir Harris amendments, the industry was never going to survive. The hatch Waxman Act, the industry was never going to survive. And Eli Lilly has survived all of those times, and Eli Lilly will continue to survive. I have no worries about Eli Lilly continuing to have a profit. Well,
Rochelle Dreyfuss 52:54
I am not going to survive, because originally, the only panel that went over, and I'm sure I'm going to hear about it later, and it's lunchtime, so please join me in thanking
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