As part of its "Strike Force on Unfair and Illegal Pricing," the White House just doubled down on a December plan to allow the federal government to tear up exclusive patent agreements between innovative drug companies and research universities.
The White House says such action would reduce drug prices – and claims it has the authority to do this on patented medicines that benefited, at their earliest stages, from federal research grants.
The plan could be finalized any day.
Many legal experts have argued that the "march-in" process the government is citing for this supposed authority is of dubious legality. But ultimately, the policy rests the argument that when the government funds some of the research that underpins a drug, it should receive a rebate, of sorts, on that investment.
The White House defends this proposal by citing the fact that "taxpayers have spent hundreds of billions of dollars on research catalyzing the discovery and development of new prescription drugs."
This ignores how federal research funding works and what it is designed for – and also ignores the fact that the government already reaps benefits, and tax revenue, from the increased public health improvements and economic activity caused by drug innovation. Evidently that's not enough, and the government wants to double-dip.
No other investors, whether public or private, are entitled to such rebates. (Surely the White House wouldn't propose that all investors who have some of their 401(k) plans in Apple receive coupons to use at the local Apple Store.)
But let's assume, for the sake of argument, that the government is entitled to discounts. How large should they be?
We can quantify that by looking at the current drug-development ecosystem.
The primary source of public research funding comes via grants from the National Institutes of Health and National Science Foundation. Such funding, which generally advances early stage, basic science, is socially useful – and best described as laying the groundwork for "scientific infrastructure." Scientists rely on this research to innovate.
Some federally backed research breakthroughs are transformed into patentable inventions. Thanks to the Bayh-Dole Act of 1980, universities can patent their researchers' inventions and license those patents to companies that then endeavor to commercialize them. Prior to Bayh-Dole, the government retained the patent rights on inventions that stemmed from federally funded research – and licensed fewer than 5% of them.
Because university patents generally involve very early-stage research – and because the likelihood of successful commercialization is very rare – the licensing revenue tends to be very modest.
Indeed, the aggregate revenue of all technology transfer offices was around $3 billion in 2018, compared to $100 billion in federal funding across all fields of research, not just biotech, that year. In other words, for every $100 invested in basic research, there's typically just $3 of potentially marketable discoveries. Public funding for basic research is important, but very few products come out of that funding.
Companies, by contrast, spent around $83 billion on pharmaceutical R&D in 2019 – and took in hundreds of billions in revenue.
We can conservatively assume that half of all university licensing revenue comes from deals inked between universities and biotech companies. That equates to $1.5 billion in annual licensing fees from early-stage medical research.
So even if we assume the government "deserves" all $1.5 billion, that's still just 1.8% of total private-sector, life-science R&D spending – and a fraction of 1% of drug industry revenues.
Plus, the government already demands steep discounts on the drugs it purchases. Medicaid, for example, purchases drugs at a mandated rebate that is at least 23% below what other insurers pay. This rebate is on top of the sales, corporate, and other taxes that the government already claws back from drug companies.
In other words, even if the government controlled the licensing rights to every patent developed with federal funding (as was the status quo before the Bayh-Dole Act) and was able to license those technologies to the private sector for commercialization (which it was incapable of doing in the decades before Bayh Dole), the government is already getting a much bigger discount than any licensing deal would ever yield.
The drug development ecosystem is complex. The government helpfully bankrolls some basic research. But it's the private industry that funds development. This development can cost upwards of $3 billion per successful drug, after accounting for the costs of the roughly 88% of experimental drugs that enter clinical trials but don't make it through the FDA approval process.
In fact, a 2022 analysis from Vital Transformation found that for every $1 in public funding for approved drugs that relied at least in part on a patent developed with government funding, private industry spends about $66 to bring a drug to the market.
The White House premised its march-in proposal on the idea that patients and insurers overpay for medicines that benefited from basic research investments. But the government already enjoys the best of both worlds -- robust economic growth from innovation, tax revenues from those innovations, a healthier populace, and preferential regulations that give it discounted prices.
Disrupting this delicate balance would make patients, workers, and taxpayers all worse off.
Philipson is an economist at the University of Chicago who served on the White House Council of Economic Advisers as a member and acting chairman, 2017-20.
