The Other Drug War
by James Love
November 30, 2002
Throughout the 1980s, lawmakers enacted a series of "technology transfer" laws designed to provide incentives for commercial development and to prevent foreign interests from benefiting from U.S.-funded research and development. These laws made it increasingly easy for drug companies to obtain exclusive rights to federal research without being subject to pricing controls. To appreciate how this combination of protection and laissez faire plays out, consider the case of the drug Taxol.
Taxol, an important new oncology drug, may be an effective treatment for breast, lung, and ovarian cancers. Taxol's only approved source is the bark of the Pacific Yew, a rare and slowly maturing tree that is found mostly on federal lands.
Taxol was discovered, manufactured, and tested in humans by NCI over a 30-year period. Early studies on cancer patients were carried out under government grants at a number of universities. By 1991 the federal government had completed Phase II clinical trials on six types of cancer, and had plans to test Taxol on 24 more.
According to Dr. Samuel Broder, Director of NCI, the federal agency was "totally responsible" for the development of Taxol, including the collection of the Yew bark; all biological screening in both cell cultures and animal tumor systems; chemical purification, isolation, and identification; and sponsorship of all clinical trials. Broder has estimated the taxpayers will spend about $35 million on past and future Taxol research.
Rather than allow many firms to develop Taxol competitively, NCI decided to award the rights to a single firm in the form of a CRADA (a Cooperative Research and Development Agreement, a contract between federal agencies and firms outlining the terms of joint research efforts). The notice for the CRADA was published in the Federal Register in August 1989, and firms were given just 45 days to respond, despite the complexity of the CRADA proposal. Four companies responded. The winning "bidder," was Bristol-Myers, a firm that was particularly well prepared, due largely to the fact that it had hired an NCI official, Dr. Robert Wittes, who had knowledge of the NCI Taxol program. The Bristol-Myers Squibb "bid" was submitted jointly with Hauser Chemical company, the firm that was then under contract to NCI to manufacture Taxol for the government's clinical trials.
The Bristol-Myers/NCI CRADA gave the firm exclusive rights to NCI's government-funded research, including the records of research completed before Bristol-Myers entered the Taxol picture, as well as all "new studies and raw data" from future NCI-funded Taxol research, which NCI agreed to make "available exclusively to Bristol-Myers," so long as the company is "engaged in the commercial development and marketing of Taxol." The company also received the exclusive rights to harvest the Pacific Yew trees found on federal lands.
In return, the government receives no money or royalties, but only Bristol-Myers Squibb's "best efforts" to commercialize Taxol, including a commitment to supply Taxol for government-run clinical trials, which were needed to obtain FDA marketing approval for the drug, and to an ambiguous "fair pricing" clause for Taxol
The fair pricing clause is dubious. Prior to the CRADA, NCI had used Hauser Chemical, a private firm, to manufacture Taxol for research purposes. Bristol-Myers Squibb continued to contract with Hauser both to supply the government with approximately 17 kilos of Taxol and to provide Bristol-Myers Squibb Taxol for commercial sales, once the company received FDA marketing approval. According to Securities and Exchange Commission filings, Hauser agreed to supply Bristol-Myers Squibb with more than 400 kilos of Taxol by August of 1994, subject to FDA marketing approval, for approximately $100 million, or about $.25 per milligram.
The FDA approved Taxol for sale in the United States in December of 1992, and Bristol-Myers Squibb announced a wholesale price of $4.87 per milligram, more than 19 times the cost of the drug from Hauser. To appreciate the magnitude of the markup, consider that the 400 kilos of Taxol produced by Hauser for $100 million had a wholesale value of $1.94 billion. (The difference between the cost of the drug from Hauser and the wholesale value of the product was greater than the entire cost of all drug company investments in human use clinical trials in 1989, the latest year for which data are available.)
For a patient taking Taxol, who responds to the treatment, the cost of the drug may exceed $10,000--while Bristol-Myers Squibb's costs of manufacturing the drug are about $500. Based upon the available data, it is unlikely that BMS spent more than $5 million manufacturing Taxol for NCI sponsored clinical trials prior to receiving FDA approval.
The company has defended its pricing of Taxol by making sweeping assertions of the huge investments that it has made to secure "future supplies" of Taxol or Taxol analogues. But these "investments" appear to consist primarily of "commitments" for long-term contracts, such as the Hauser contract, which are related to obtaining supplies for its commercial sales of Taxol, or to secure alternative sources of Taxol.
Thus while the invention of Taxol was in the public domain, and an important source of the drug was found on public lands, NCI was able to create substantial barriers that would discourage other firms from entering the Taxol market. The Taxol CRADA also illustrates the lengths to which the government will go to enhance monopoly power in the marketing of new drugs, even when technologies are not patentable. Taxol sales are expected to exceed $800 million per year, which are large, even by industry standards.