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Q1. What does HR 626 do?

A1. This legislation sets out a general requirement that persons who obtain exclusive rights to commercialize federal research for drugs or other health care technologies first enter into a reasonable pricing agreement with the Secretary of the Department of Health and Human Services (DHHS). This requirement can be waived by the Secretary of DHHS, but only if the public is given notice and an opportunity to comment, and if the Secretary determines that the waiver of the reasonable pricing agreement is in the public interest.

Q2. What is the history of the reasonable pricing clause?

A2. In 1989, the Bush Administration adopted a policy that products developed in part through research at intramural NIH laboratories should reflect a "reasonable relationship between the pricing of the licensed product, the public investment in the product, and the health and safety needs of the public." The statement also said "exclusive commercialization licenses granted for . . . intellectual property rights may require that this relationship be supported by reasonable evidence."

Several NIH licenses and Cooperative Research and Development Agreements (CRADAs) contained contractual clauses on this point.

Beginning in early 1993, the National Institutes of Health (NIH) and Bristol-Myers Squibb were widely criticized when Bristol-Myers Squibb announced a wholesale price of $4.87 per milligram for Taxol, an important cancer drug that BMS acquired in bulk from a contractor for $.25 per milligram. The retail price of a single injection of Taxol could run in excess of $2,200, and needed to be repeated about once a month. There was also concern over BMS's pricing of ddI, an HIV drug that was also priced far above BMS's costs.

In 1994 NIH sponsored two panels to examine the reasonable pricing clause. The first panel in July 1994 had no consumer representatives, but did include panel members and invited speakers from Pfizer, Genetic Therapy, Bristol-Myers Squibb, Upjohn, Eli Lilly, Mitoix, Genzyme, and General Biometrics. This panel found that "the inclusion of the so-called "reasonable pricing" clause . . . has generated growing criticism from NIH's industrial collaborators."

The first panel was criticized for a lack of balance, and a second panel was convened in September 1994. The second panel included industry and consumer representatives. Some NIH researchers and patient expressed concern that the reasonable pricing clause would discourage some useful industry/government research collaborations. Groups such as the Consumer Federation of America and the Center for Study of Responsive Law (Taxpayer Assets Project) said the NIH should adopt procedures to waive or modify the reasonable pricing clause in cases where it is inappropriate, while restoring and strengthening the mechanism where it clearly is warranted, such as in cases like ddI and Taxol, for example, where the government was the inventor and controlled intellectual property rights.

The report of the second panel said "while there is as yet no proof, there is at least a perception that the reasonable pricing clause is an impediment to achieving NIH's mission ...namely, promoting cooperative research and facilitating the transfer of technology to the private sector." The panel considered nine possible courses of action, from revising the reasonable pricing clause or applying it selectively, to total repeal, but could not reach a consensus.

On April 11, 1995, the Clinton Administration repealed the reasonable pricing clause entirely. NIH Director Harold Varmous said "NIH's primary programmatic mission, legislative mission, and expertise is in biomedical research . . . and not in product pricing." (Jenks, S. Varmus strikes "reasonable pricing" clause in CRADAs. JNCI 87(9), 642 (1995)).

In the 104^th congress, Representative Bernard Sanders (I-VT) twice offered amendments from the floor of the House of representatives, seeking to restore a modified form of the reasonable pricing clause. Representative Sander's amendment permitted the government to waive the reasonable pricing clause in cases where the government gave notice, accepted public comments and made a finding that the waiver was in the public interest. The Sanders amendment failed, but support was growing. In the second debate, Representative Rohrabacher, a conservative republican from California, offered these words of support:

Mr. ROHRABACHER. Mr. Chairman, I rise in strong support of the Sanders amendment to restore a reasonable pricing clause for drugs that are developed at taxpayer expense. Let me make it clear, this affects, this amendment only affects those drugs that are developed at taxpayers' expense. It does not affect any drugs that are developed solely by the private sector and by the pharmaceutical companies themselves.

Mr. Chairman, I am a strong supporter of taxpayer accountability. Taxpayers who fund this biomedical research to the tune of billions of dollars should not be forced to pay excessive prices for the drugs that they themselves have helped develop, but that is exactly what is happening.

Mr. Chairman, the drug companies are now free, after getting taxpayers' money to develop their product, to gouge those very same people 10, 20 times the cost of their own product. They charge that to the American people who are paying for their research. The American people end up paying twice. Now, is that not nice? This is a corporate form of welfare, and it has got to stop. Drug companies are making fortunes off the backs of working people. If they developed the product themselves at their own expense, the Government should not step in. But we have continually said in this Congress that we want to cut down the expenses of Government, cut down welfare. This is welfare for the rich, for the corporations. The American people should not be insulted by being forced to pay for the research of a company who then turns around and gouges them for the price of the product that has been developed.

After the second vote, Republican members of Congress offered to work together with Representative Sanders. In 1997, Representative Sanders offered a new version of his amendment as a bill, this time co-sponsored by republicans Cambell (R-CA) and Rohrabacher (R-CA) and seventeen other members of Congress. The new bill added a requirement that the government consider the use of competitive bidding (to determine either the term of exclusivity or the price of the product before issuing a license). In the 105^th Congress, the House leadership did not permit this bill to be offered as an amendment to any appropriation bill.

Q3. Which funding sources would be covered?

A3. The original 1989 reasonable pricing statement only applied to NIH, and only to those funds used in intramural research - about 20 percent of the NIH budget. The new legislation covers "any Federal agency or any non-profit entity." This includes health care research funded by the NIH, the Department of Energy, the National Science Foundation,the Department of Defense and any other agency. The requirements for the reasonable pricing clause also apply whether the research is conducted by the government itself, or by researchers affiliated with Universities or other non-profit entities.

Q4. Why does the bill permit a waiver of the reasonable pricing clause.

A4. In debates over the reasonable pricing clause the National Institutes of Health (NHI) claimed that in some cases, industry partners would avoid collaboration if it would saddle the company with a reasonable pricing requirement. Consumer groups recommended that it was better to provide a mechanism to waive the clause in these cases than to eliminate the clause for all collaborations. Before the reasonable pricing clause can be waived, the Secretary has to publish a public notice and accept public comments, and issue a finding that the waiver is in the public interest.

Q5. How would reasonable prices be determined?

A5. The Secretary of HHS has broad discretion in choosing a methodology for a reasonable pricing agreement. However, in Sec. 2(b), the Secretary is required to give consideration to mechanisms based upon competitive bidding, including specific alternatives, or other competitive bidding methods systems selected by the Secretary. The specific competitive bidding methods would award the exclusive license to the firm that charged the lowest price, agreed to the shortest term of exclusivity, or agreed to a reasonable pricing formula after the shortest time or least amount of sales revenue. The secretary could also adopt other methods, and could also set conditions on the license such as required expenditures on research and development.

Q6. How extensive is the role of the government in funding health care research?

A6. According to the NIH, the private sector funds about 52 percent of all health care research, the federal government funds about 38 percent, and remaining 10 percent is funded by other government agencies and by non profit institutions, such as foundations.

Table 1

Estimates of National Support for Health Care R&D by Source of Funds: Fiscal Year 1995

(millions of dollars)

  Government 

    Federal                 $13.4           37.5%

    NIH              (10.7)         (29.8%)

   State and Local           2.4            6.8%

Private Non-Profit           1.3            3.7%

Private Industry            18.7           52.1%


        Total               35.8           100.0%

Source: NIH Extramural Data and Trends, FY 1986-FY 1995

Q7. How does the federal government research funding compare to the private sector?

A7. The federal government and the private sector both make important contributions to medical research, but there are some differences in focus. The federal government is more likely to spend its research dollars on severe illnesses, vaccines, basic research and innovative therapies. The private sector is more likely to invest in "me too" drugs that compete with similar drugs in a therapeutic class, drugs for non essential medicines, like baldness remedies, chronic illnesses, and marketing related research. Of course, these are relative differences, and one observes R&D investments from both the public and the private sector in many important areas, such as cancer and AIDS research.

Q8. What evidence is there regarding the government's role in the development of particular drugs?

A8. The federal government does not routinely collect and publish information on the importance of federal research in the development of new drugs. There are, however, a handful of studies that are useful to examine.

April 5, 1998, Alice Dembner and the Boston Globe Spotlight Team, published a report titled "Public handouts enrich drug makers, scientists," which said:

"The Globe looked at 50 top-selling drugs approved by the Food and Drug Administration over the past five years: 35 new drugs, which are bestsellers among those the FDA deemed most important or most unique, and 15 "orphan" drugs targeting rare diseases. Thirty-three of the 35 new drugs and 12 of the 15 orphans received money from the National Institutes of Health or the FDA to help in discovery, development, or testing."

On February 1996, Dr. Robert Wittes told the National Cancer Advisory Board:

Of the 77 drugs approved for the treatment of cancer in the United States by the FDA, NCI data was important for the approval of about 52 of them. ( http://www.nci.nih.gov/extra/deaweb/feb96/ncab23.htm)

On February 24, 1993, Ralph Nader and James Love presented a study to the US Senate Special Committee on the Aging, that showed:

In 1991, 7 of 10 FDA priority drugs (Class A, AA or E New Chemical Entities) were developed with public support.

- Prices for drugs developed with public support were far more expensive than drugs developed without government funding.

- Of the 37 new cancer drugs discovered and approved for marketing since the National Cancer Institute's new drug screening program began in 1955, 34 were developed with US government support. http://www.cptech.org/pharm/pryor.html

Finally, evidence from the Internal Revenue Service suggests private sector investments in Orphan Drug development are less than is commonly thought. From 1983 to 1993, the entire pharmaceutical industry reported expenditures of only $213 million on clinical trials for Orphan Drugs, on company federal income tax returns, during an eleven year period when the Food and Drug Administration (FDA) issued 93 Orphan Drug approvals. James Love, January 13, 1997, "Call for More Reliable Costs Data on Clinical Trials," Markettletter (http://www.cptech.org/pharm/marketletter.html)

Q9. Is it expensive to develop new drugs?

A9. It is expensive to develop new drugs, but there is much misunderstanding about those costs. The most difficult, risky and expensive element of drug development is the pre-clinical stage, where scientists search for medicines that are promising enough to be tested in humans. When a drug enters human use clinical trials, the risks are lower and more predictable. According to studies by the Tufts University Center for the Study of Drug Development, about one in five products that enter Phase I testing eventually receive FDA marketing approval, and roughly 70 percent of drugs that enter Phase III clinical trials are approved for marketing.

According to the most recent project level industry data examined by the Tufts center, the average cost of clinical trials for approved drugs is about $25 million in 1995 dollars. If this is adjusted for the risks of failure, the amount is about $55 million. Some studies add an additional amount for the opportunity cost of capital, to reflect the profits the investor expects to make on the investment. This would raise the number even higher, depending upon the assumptions of the profit rate.

The largest element of the cost is in the pre-clinical stage, which in some studies, accounts about about 70 percent of the total cost of new drug development.

Q10. What about these estimates of $500 million to develop a new drug?

A10. There are no rigorous studies that support the $500 million figure used by the pharmaceutical industry. However, some studies based upon industry data have placed the entire costs of new drug development at $350 to $400 million. Of this total, less than 10 percent represents out-of-pocket costs, about 20 to 25 percent represents adjustments for the risk of failure (mostly in the pre-clinical side), and 65 percent or more represents the profits the company expects to earn from its investments.

Q11. How is this total shared by the private sector and government?

A11. This varies greatly from drug to drug. When the government has already funded the pre-clinical research on a drug, roughly 65 to 70 percent of the cost of drug development has already been paid for by the taxpayers. In those cases where a company licenses a drug from university researchers and then gets the federal government to support the costs of clinical trials, the company's investments can be quite low. Witness, for example, the very low level of private sector outlays for Orphan Drug clinical trials from 1983 to 1993.