Patents and university-industry interactions in pharmaceuticals before 1962: an investigation of some historical justifications for Bayh-Dole

1
Patents and university-industry interactions in
pharmaceuticals before 1962 an investigation of
some historical justifications for Bayh-Dole

• Roberto Mazzoleni
• Department of Economics
• Hofstra University

2
Introduction

• Motivation for research
• Overview of Public Health Services patent policy
• Patents and publications from PHS extramural
  research
• Role of patents in the evolving structure of
  pharmaceutical industry
• Conclusions

3
Bayh-Dole Act promoting the public interest

• Promoting the public interest in the diffusion of
  public research results two views
• Title policy Government ought to leave title to
  contractor subject to retaining a royalty-free
  license
• License policy Government ought to retain title
  and grant non-exclusive royalty-free license to
  contractor
• Bayh-Dole Act title policy won the battle

4
A golden age of university-industry interactions?

• Prior to 1962, pharmaceutical firms had
  routinely screened compounds developed by
  NIH-funded investigators for biological activity,
  at no charge, without signing any agreements with
  either the investigator or NIH regarding rights
  to inventions discovered in the course of
  screening.
• Rebecca Eisenberg, Public Research and Private
  Development Patents and Technology Transfer in
  Government-Sponsored Research, 82 Virginia Law
  Review 1663, 1682 (1996)

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Key areas of ignorance

• How extensively did pharmaceutical firms
  collaborate with NIH grantees before 1962, and
  what motivated them to do so?
• Why did reactions to the 1962 patent agreement
  emphasize the pharmaceutical industrys need for
  the prospect of an exclusive license as a quid
  pro quo for collaborating with NIH grantees?

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Three dimensions of PHS patent policy

• Grantees ownership rights to government-funded
  inventions
• Admissibility of exclusive licensing of patents
  on government-funded inventions
• Formal requirements for collaboration between
  grantees and third parties

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Three phases in PHS patent policy

• Pre-1962
• Grantees patent rights subject to HEWs consent
  (waivers, IPAs)
• Exclusive licenses possible on grantees patents
  upon request indicating exceptional circumstances
• No formal requirements for collaboration with PHS
  grantees
• 1962-1967
• Formal patent agreement required for
  collaboration with PHS grantees
• IPAs and waivers fall into disuse
• 1968-1980 (Bayh-Dole)
• Adoption of revised and standardized IPAs
• Revised patent agreement for collaboration with
  PHS grantees
• Broad acceptance of exclusive licensing

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Terms of the 1962 patent agreement

• Grantee and pharmaceutical company agreed that
• the pharmaceutical company will not disclose the
  results of testing for twelve months unless the
  grantee agreed to an earlier term
• the pharmaceutical company will provide all
  information about utilities and new uses of the
  compound to the grantee for use by the PHS in
  connection with patent applications that PHS
  might choose to file
• the pharmaceutical company will have rights to
  patent new uses of the compounds when these were
  developed at the companys own expense, without
  any form of assistance or contribution from the
  grantee, and when the new use patent did not
  hamper, impede, or infringe upon the intended use
  of the compound, or fall within the field of
  research work supported by the grant
• the pharmaceutical firm will reserve a
  non-exclusive, irrevocable, royalty-free license
  to the government on any new use patent at point
  (c), with power to sublicense for all
  governmental purposes.

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Patenting of inventions by PHS grantees
Inventions reported by NIH grantees between 1946
and 1966 1,173
Patents issued on inventions by NIH grantees
between 1946 and 1966 46
Patents issued on inventions by NIH grantees
between 1946 and 1963 29
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Incentives for industry collaboration an
unresolved puzzle

• Small number of patented inventions
• Small number of licenses
• Even fewer requests for approval of exclusive
  licensing
• what incentive motivated pharmaceutical firms to
  collaborate with NIH grantees?

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Two hypothetical solutions

• Lax oversight and enforcement of reporting
  requirements allowed government-sponsored
  inventions to be patented and licensed outside of
  PHS regulatory framework
• Pharmaceutical firms benefited from the flow of
  scientific and technological knowledge generated
  by interacting with academic scientists including
  NIH grantees

12
Exclusive licensing before and after 1962

• To the extent that industry collaborated with NIH
  grantees with screening of molecular compounds,
  prospect of exclusive licenses did not motivate
  it
• After the freeze in collaborations following the
  1962 patent agreement, pharmaceutical industry
  people presented exclusive licensing as a
  necessary condition for future collaboration
• What explains the growing demand for exclusivity
  terms?

13
Effectiveness of patent protection during the
postwar period

• Patentability of natural substances (Streptomycin
  patent)
• Non-obviousness requirement and patentability of
  the results of broad screening
• Narrow scope of protection and the proliferation
  of similar drugs
• Patent races and interference proceedings
• Growing delays in processing of patent
  applications

14
Licensing practices and regulatory reform

• Until 1938, firms profited from patented
  innovations through direct sales and
  non-exclusive licensing
• Creation of prescription and proof-of-safety
  requirements in 1938
• Lower price elasticity of demand for prescription
  drugs leads innovative firms to abandon practice
  of non-exclusive licensing, focusing instead on
  exclusive production
• Large firms integrate vertically into RD and
  distribution of dosage forms

15
Emerging patterns of price and non-price
competition

• Potential competition from non-patented and
  patented therapeutically equivalent drugs
• Increase in marketing efforts and expenditure
  (branding, detailing, advertising directed to
  physicians) focuses competitive strategy away
  from prices
• Price competition more common in price-sensitive
  segments of market where small firms with little
  or no RD and marketing expenditures offered
  generics

16
Interferences and cross-licensing agreements

• Patent interferences a relatively common feature
  of pharmaceutical innovation during the 1950s
• Cross-licensing agreements ensure that all
  parties can operate in market after interference
  was closed
• Agreements were restricted to large
  pharmaceutical firms committed to non-price
  competition
• Agreements included restrictions on bulk sales to
  prevent entry into dosage forms market

17
Competitive threats faced by large firms

• Small firms pricing close to marginal production
  costs because of low intensity of RD and
  marketing expenditures
• Growing public funding of biomedical research
• Publicly funded drug development and
  non-exclusive licensing policies of PHS
• Rising development costs for new drugs following
  1962 regulatory reform

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Public and private funding of biomedical research
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The need for exclusive licenses

• First-mover advantages built around brands and
  physicians loyalty raise competitive value of
  exclusivity terms
• Rising drug development costs provide legitimacy
  to the demand for exclusivity (while also raising
  entry barriers)
• Acceptance of exclusive licenses by PHS would
  play into the strategy of marginalizing small
  firms by reducing their access to novel
  non-patented drugs

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Summing up

• How extensively did pharmaceutical firms
  collaborate with NIH grantees before 1962, and
  what motivated them to do so?
• Significance of NIH-funded research for
  development of new drugs probably overstated
• Whatever the extent of collaboration between
  industry and academic scientists, prospect of
  exclusive licenses was not an aspect of the
  incentive structure
• 1962 agreement put a halt to collaborations
  because of excessively broad assertion of
  government rights

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Summing up

• Why did reactions to the 1962 patent agreement
  emphasize the pharmaceutical industrys need for
  the prospect of an exclusive license as a quid
  pro quo for collaborating with NIH grantees?
• Exclusive licenses were never part of basic PHS
  patent policy, or practice
• Need for exclusive licenses before 1962 dampened
  by limited effectiveness of patents vis-à-vis
  other aspects of the appropriability conditions
  in the ethical drugs industry
• Growth of public funding raises the specter of
  publicly-funded drug development supporting small
  firms focused on price competition
• Regulatory reform of 1962 raises cost of new drug
  development and provides apparent legitimacy to
  the desire for exclusivity terms