CRADA. . .Market Reasonable vs. Politics Reasonable

Like the proverbial “tango”, research university commercialization of basic research “takes two”; university TTOs and private sector investors. To attract such investment its subject matter must promise prudently estimated commercial development returns. Investors also must estimate that such development can be executed and competitively distributed at a price sufficient to provide a reasonable return on their investment. Such “reasonableness” in markets is a function of lost alternative opportunity costs, applied research risk, development and added capital costs, endpoint market demand and sometimes regulatory approvals. Patents may provide protection from competitive duplication for a limited period, but sales at the product’s optimal price point are the ultimate determinant of investor success. Optimal price selection combines experience, economics, art and science in functional complexity not normally housed in government. Bayh Dole’s market-based dynamic does not intrude on the price selection of product developers because in its absence prospective investors cannot prudently estimate their potential return on investment. The wisdom of this approach is not only theoretically obvious, we have seen this movie before with “CRADA”.

Although CRADA sounds like some tropical disease, it is an acronym for a Cooperative Research and Development Agreement between a private company and a federal government lab or agency to share work on a defined project. It may cure a tropical disease! It was created by the Stevenson-Wydler Technology Innovation Act of 1980 as amended by the Federal Technology Transfer Act of 1986. Like Bayh-Dole, it was enacted to help speed the commercialization of promising federally-funded research, but this time conducted in concert with national labs and federal agencies, including NIH.

In I989 the Bush Administration adopted a policy providing that products developed through shared or in-house NIH lab research had to reflect a “reasonable relationship“ between the pricing of the licensed product, public investment in the product and the health and safety needs of the public. In most instances that “reasonable pricing” relationship had to be supported by “reasonable evidence.” CRADA Agreements thereafter included such language. Because it perceived a drop-off in private sector participation in CRADAs, NIH sponsored two separate panels to examine the practical effects and impact of its reasonable pricing policy. The first panel, heavily populated with pharmaceutical panelists and witnesses, found that private sector investment partners were being deterred by the policy. NIH then convened a more balanced panel which failed to reach a consensus viewpoint, but agreed that the reasonable pricing clause was an impediment to the achievement of NIH’s mission to promote cooperative public private research and facilitate technology transfer. NIH Director Varmus was persuaded that product pricing was not a part of NIH’s expertise. The policy was cancelled.

This NYT article tells the story:

The National Institutes of Health today relinquished its right to require “reasonable pricing” on drugs and other products developed in cooperation between the Government and industry. The pricing policy had been opposed by business interests since it was imposed six years ago. Dr. Harold Varmus, director of the institutes, said the research agency would give up the option to review the introductory price of products developed from basic research sponsored by the Government. The policy was adopted in 1989 in response to criticism that drugs developed with substantial Government help were being marketed at excessive prices. Dr. Varmus said reviews of the policy indicated that the pricing clause had driven industry away from many collaborations with N.I.H. scientists that could have benefited the public. “Eliminating the clause will promote research that can enhance the health of the American people,” he said.

The same compulsory licensing arguments waged in 1989 are still made today in the context of government price controls especially for Bayh-Dole price-based march-in. They are made by the same people, including KEI’s Jamie Love and Senator Sanders. NIH has not changed its mind. Its mission still is to encourage public-private partnerships to engage in the development of new products. It is not staffed to independently judge whether product pricing is reasonable. There is no doubt creation abuses in drug pricing have surfaced in recent years. But as we learned yesterday with Epipen, competition soon supplants it.  Government determinations of what is “politically reasonable” is not the same as the “market-based reasonable” Bayh-Dole dynamic that has worked so well. The CRADA episode proved it. The best response to price abuse is bottom-up competition, not top down political intrusion in market processes government is not equipped to address. Governments don’t tango very well.