I have been negotiating with representatives of the federal government on behalf of biopharmaceutical companies since starting in private practice 15 years ago. It is often slow-going and complex. Covid-19 changed that: Never have I been so impressed by the government’s willingness to get deals done as I have been during the pandemic.
In my experience, major pharmaceutical companies tend to resist federal funding for research and development, in part due to concerns around intellectual property (IP) and other rights the government would expect to receive in return.
These concerns focus on three statutory rights that accrue to the government when it funds research, which generally become obligations of the funding recipient and its partners. These rights are related to so-called subject inventions — inventions conceived of or first demonstrated to work for their intended purpose (“reduced to practice,” in legal parlance), through use of federal funding — under the Bayh-Dole Act. They include:
- The U.S. government receives a non-exclusive, royalty-free license to make, use, and sell subject inventions, or to have a third party make, use, or sell them on behalf of the government anywhere in the world.
- The funding recipient takes on an obligation to substantially manufacture the subject invention in the United States, which may be waived by the funding agency but only if the recipient can show that U.S.-based manufacturing isn’t commercially feasible or that it couldn’t find a licensee to manufacture the product in the U.S.
- The government retains the right to require the funding recipient to license its invention to other entities if a license does not meet certain reasonable terms, such as the funding recipient not adequately commercializing the technology or the license is necessary to address public health issues. This is frequently referred to as the government’s “march in” right.
While some of the perceived risks are currently more theoretical than actual — no agency has yet to exercise march-in rights, for example — there are periodic calls for the National Institutes of Health or other agencies to exercise march-in provisions or use their non-exclusive license to lower drug prices. Each time a call like this occurs, the life sciences industry undergoes a brief period of panic, as it reevaluates the likelihood of the government exercising its rights under Bayh-Dole and what impact that would have on one of the most common pathways for funding life sciences research and development.
Although the biopharma industry has generally avoided accepting federal funding, it has long been a mainstay of academic research, which generates thousands of new inventions each year that are licensed to launch companies across sectors, including the life sciences. Startups that acquire new biopharmaceutical technology — whether a molecule, compound, or process — in turn typically collaborate with, or are acquired by, larger biotech or pharmaceutical companies that have the resources to conduct large-scale clinical trials and to bring those products or processes to the commercial marketplace.
While the contribution of federal funding is typically flagged during a prospective pharmaceutical partner’s intellectual property due diligence, a startup biotech’s use of such funding will generally not hold up a transaction because the industry, by and large, has been confident that march-in rights won’t be exercised and requirements to “substantially” manufacture in the U.S. can be accommodated or there is a sound basis for seeking a waiver of it.
And herein lies the crux of the issue: While established pharmaceutical companies have historically accepted the risk that many, if not most, newly acquired or licensed biopharmaceutical products and processes could be subject to potentially restrictive conditions set by federal law, they have remained sufficiently wary of these conditions to refrain from seeking such funding themselves.
The time-honored process of discovery and commercialization — along with everything else — changed with the emergence of the novel coronavirus, SARS-CoV-2, and Covid-19, the illness it causes. The world looked to the life sciences industry to solve the problem in ways that dramatically compressed the traditional processes and timelines of drug and vaccine discovery and development. And the industry did, with vaccines and therapies developed in record-breaking time.
The U.S. government was essential in making that happen. Without the availability of federal funds, biopharma companies would have had to take on extraordinary levels of risk, self-funding the complete development of not only new products but also novel platform technologies at a breakneck pace while simultaneously scaling-up for commercial manufacturing and distribution, all before knowing whether the product would be safe or effective. Those aren’t the kinds of risks biopharma companies ordinarily take on.
With its sizable budget, the U.S. government was perfectly positioned to share some of that risk. Unlike a global biopharmaceutical company, the U.S. does not have a fiduciary duty to maximize shareholder value, nor does it have to consider commercial factors such as profitability and brand recognition. Its intended purpose and function is to “insure domestic tranquility, promote the common defense [and] promote the general welfare.”
Failing to combat the most damaging pandemic in a century would have been a derogation of its duties as a sovereign. And while the U.S. government has an obligation to use taxpayer funding responsibly, it would be hard to argue that funding the development of Covid-19 countermeasures was not an appropriate role for the government or use of taxpayer funds.
The U.S. government jumped in early during the pandemic to offer its support to the life sciences industry and shoulder the substantial amount of risk created by extraordinary circumstances.
In the pre-pandemic era, federal agencies were not known for being flexible in negotiations on types of contract instruments, intellectual property rights and deviations from internal policies. But in the time of coronavirus, the government agencies that entered vaccine, therapeutic, and other negotiations with major biopharma companies were prepared to be flexible from the outset.
I saw that firsthand as I negotiated more than two dozen contracts with the U.S. government on medical countermeasures against Covid-19, including contracts for two of the four most widely used Covid-19 vaccines.
Instead of using ordinary procurement vehicles, which tend to be rigid, constrained by Federal Acquisition Regulations (FAR) and the Bayh-Dole Act, agencies found creative — but appropriate — ways to employ contracting alternatives, using statutory powers like the Department of Defense’s (DoD) prototyping authority to negotiate contracts outside of the FAR framework.
The fact that the DoD was involved shows a high degree of creativity on the part of the federal government. While the Biomedical Advanced Research and Development Authority (BARDA), which is part of the Department of Health and Human Services, would typically run point on negotiations for pandemic countermeasures, the DoD stepped in with support when BARDA required additional resources. This proved highly beneficial to private industry, as DoD has broader contracting authority than most other agencies, including BARDA.
And when DoD determined it could benefit from expertise on regulatory or other aspects of the biopharma industry, its negotiation team requested specific assistance from people at other agencies, including BARDA and HHS.
As federal agencies learned how to exercise their authority collectively to use more flexible contracting instruments, they also employed a great deal of patience and flexibility during negotiations. The agencies actively listened to companies’ concerns around intellectual property. They understood why it would present huge business risk to a biopharma company for the government to require a license to its background IP, or why including a U.S. manufacturing clause could be highly impractical under the circumstances. In many cases, government lawyers agreed to novel provisions (novel for the government, at least) that would limit its rights to step in and take over activities or acquire licenses to pre-existing intellectual property.
It was remarkable to see how willing the U.S. government was to get deals done, and how far it went to close them.
One of my take-home lessons from having negotiated Covid-related contracts with the federal government is that government may be a better contracting partner than biopharma companies previously appreciated. While not all situations lend themselves to the use of federal funding, there may be circumstances outside of a pandemic in which the government would make a good partner for big biopharma companies, such as when there is high government interest in the development and commercialization of new life sciences products and technologies intended to promote the public welfare and where the traditional biopharma company funding model doesn’t work.
A good example is the development of new antibiotics. This work has basically stalled out, even though the U.S. — and the world — are in desperate need of new antibiotics. Established biopharma companies have little incentive to create new antibiotics, which are typically administered for only a short time, are among the lowest-priced therapeutics, and new or more expensive ones are generally held in reserve.
Even if an antibiotic is safe, effective, and successful in the marketplace, it is unlikely to be highly profitable, and therefore is unlikely to maximize shareholder value. By comparison, high-priced drugs for chronic conditions such as diabetes or asthma, which are taken often over patients’ lifetimes, are much more likely to maximize shareholder value.
But with U.S. government funding to offset a substantial portion of the financial risk, the development of antibiotics could become more enticing to big companies. Of course, for government funding to be an attractive option for biopharma companies in this scenario and others, the government would likely need to exercise some of the substantive and procedural flexibility it demonstrated during pandemic negotiations.
The simplest way to begin addressing possible collaboration may be for both parties to identify medical issues that are real, imminent, and have concrete impacts on the U.S. economy and recognize that when the U.S. government is flexible, it can be a valuable partner to private industry.
Kristen Riemenschneider, an attorney specializing in life sciences transactions, is a partner in the Washington, D.C. office of Freshfields Bruckhaus Deringer LLP.
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