Senate Armed Services Committee directive on use of Bayh-Dole rights for DoD funded drugs

The report of the Senate Armed Services Committee on the National Defense Authorization Act of 2018, S. 1519, published July 10, 2017, includes a directive that links exclusive patent rights to the prices of drugs, vaccines and other medical technologies that are based upon DoD-funded inventions.

The text of the directive, approved unanimously by the full Senate Armed Services Committee, is as follows:

115TH Congress, 1st Session, 2017, Senate Report 115–125. National Defense Authorization Act for Fiscal Year 2018. Report to accompany S. 1519, page 173.

Licensing of federally owned medical inventions
The committee directs the Department of Defense (DOD) to exercise its rights under sections 209(d)(1) or 203 of title 35, United States Code, to authorize third parties to use inventions that benefited from DOD funding whenever the price of a drug, vaccine, or other medical technology is higher in the United States than the median price charged in the seven largest economies that have a per capita income at least half the per capita income of the United States.

The language in Senate Report 115-125 was originally proposed by Senator Angus King (I-ME), who serves on the Committee on Armed Services. The Committee on Armed Services is empowered with legislative oversight over the Department of Defense and military research. The text in the committee’s report explains the legislative intent and carries weight as a directive to the Department of Defense. The Committee on Armed Services report creates an affirmative obligation to use the aforementioned rights in the case of a violation.

The two rights cited in the report both fall under the Bayh-Dole Act. The first is 35 U.S.C. § 209(d)(1), which specifies that in any license of a federally-owned invention, the license must retain a provision “retaining a nontransferable, irrevocable, paid-up license for any Federal agency to practice the invention or have the invention practiced throughout the world by or on behalf of the Government of the United States.”

The second refers to 35 U.S.C. § 203 “march-in” rights, which allows the government to force the rights holder of a federally-funded invention “to grant a nonexclusive, partially exclusive, or exclusive license in any field of use to a responsible applicant or applicants, upon terms that are reasonable under the circumstances,” or, if the rights holder refuses, the government may itself grant the license. Utilizing these march-in rights requires a determination that at least one of four conditions (section 203(a)(1-4)) are met, but most relevant to the amendment is the requirement for “practical application” of the invention, which is defined in 35 U.S.C. § 201(f) as making benefits of the invention “available to the public on reasonable terms.”

The royalty-free right can be used by the government or on behalf of itself at any time, without payment of royalty.

Using existing statutory authority in the Bayh-Dole Act, DoD is directed to ensure that DoD-funded inventions on drugs, vaccines or medical devices are not more expensive in the United States than the median price charged residents in the seven countries with the largest economies that also have a GNI per capita of at least 50 percent of the U.S.

Because the reference countries are large economies, it will be difficult for companies to game the system. By limiting the group to countries with relatively high per capita incomes, the policy does not penalize efforts to lower prices where incomes are lower. For example, a country like India, which had a GDP in 2016 of more than $2.2 trillion, but a per capita income of just $1,680 — less than 3 percent of the US — is excluded from the reference pricing formula.

Table 1 illustrates which countries would have been included as a reference for pricing in 2016.

The prostate cancer medication Xtandi (enzalutamide) and the Zika vaccine currently in development and the subject of a proposed exclusive license to Sanofi were both developed by the Department of Defense using U.S. taxpayer funds. Both have been the subject of controversy in the United States over pricing concerns.

In the case of the prostate cancer drug, enzalutamide was originally created at the University of California Los Angeles Medical Center through a DoD grant, and is marketed by Astellas, a Japanese pharmaceutical corporation, and is priced 2-4 times higher in the U.S. than in thirteen other high-income countries. With a cost of $130,000 per patient per year as of 2015, insurers have restricted access to this medicine, an important medication for late stage prostate cancer patients. Medicare expenditures have also increased dramatically, up from $447 million in 2014 to approximately $791 million in 2015. (See /xtandi).

Had DoD enforced this mandate earlier, Medicare would have saved considerable money. In 2015, the average medicare price was $73.94 per pill (4 per day are required). In 2016, the median price for the seven reference prices* was the Japan price of $26.37 per pill, a discount of 64.3 percent of the 2015 Medicare price. Based upon this calculation, the 2015 savings to Medicare would have been $791m x .643 = $508m.

* 2016 reference prices for Xtandi were $20.12 CA, $23.45 AU, $26.01 IT, $26.37 JP, $26.73 FR, $35.65 UK, $36.93 DE.

With regard to the Zika vaccine, the taxpayers (through a combination of in-house conducted research and grants and contracts from the Army, the NIH and BARDA) have already funded the pre-clinical research and the Phase 1 trial, and BARDA is paying Sanofi $43 million to conduct phase II trials, with an option for an additional $130 million for phase III trials as needed. If Sanofi registered the vaccine for sale, it will likely be awarded an FDA priority review voucher (PRV), valued at between $100 and $200 million at recent prices.

Sanofi has reportedly opposed any provision in the license that would address the pricing of the vaccine to the public, although in the past week, Sanofi has sent a letter to members of Congress claiming the company was not presented with a “specific” requirement on pricing by the Army. (See report in FiercePharma).

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