A stethoscope tied around a pile of cash, with a pill bottle nearby. The pill bottle has cash and pills inside.

What Ever Happened to NIH’s “Fair Pricing” Clause?

By Jorge L. Contreras

In the midst of the COVID-19 pandemic, calls have been made for “fair” and “reasonable” pricing of the vaccines and therapeutics that will eventually be approved to address the virus. A range of proposals in this regard have been made by members of Congress, the Trump Administration, various states, academics and civil society.

Amid this current debate, it is worth remembering the brief period from 1989 to 1995 when the U.S. National Institutes of Health (NIH) did impose reasonable pricing constraints on drugs that were developed as part of cooperative R&D agreements (“CRADAs”) between federal agencies and private industry.

The requirement was imposed by NIH in response to the controversy surrounding the AIDS drug azidothymidine (AZT). AZT, which was released in 1987 by Burroughs Wellcome, bore the then-stratospheric price tag of $8,000 per year, leading the New York Times to declare it “the most expensive prescription drug in history.”

Yet, as AIDS activists were quick to point out, Burroughs Wellcome did not discover the drug or recognize its effectiveness against AIDS. A failed cancer treatment, AZT’s potential use as an AIDS therapy was hypothesized by scientists at NIH’s National Cancer Institute (NCI). NCI licensed the compound to Burroughs, allowing the company to retain full ownership of the resulting patent as an incentive to bring the drug to market. Then, once the drug was approved, Burroughs charged what was then viewed by many as an excessive price.

The AZT incident led to protests by AIDS activists as well as Congressional hearings convened by Representative Henry Waxman (D-Cal.). As a result of this outcry, in 1989 Burroughs reduced the price of AZT by 20%. In addition, NIH inserted a new “fair pricing” clause into its standard CRADA, requiring that there be a “reasonable relationship between the pricing of a licensed product, the public investment in that product, and the health and safety needs of the public.”

From the beginning, the fair pricing clause was anathema to the pharmaceutical industry.

According to NIH, drug companies including Pfizer, Abbott, Merck and Upjohn all refused to enter into new CRADAs because of it. Worse still, some companies that refused to sign CRADAs collaborated with NIH scientists anyway, resulting in significant ambiguity regarding the ownership of resulting intellectual property.

This was the case with Myriad Genetics, which began a collaboration in 1992 with researchers at the National Institute for Environmental Health Sciences (NIEHS) to locate the BRCA1 breast cancer gene.  Because Myriad’s corporate investor and collaborator Eli Lilly had concerns about the fair pricing clause, Myriad refused to enter into a CRADA with NIEHS. When the Myriad team successfully isolated the gene in 1994, Myriad did not list the NIEHS researchers as inventors on the patents. The resulting dispute between NIH, Myriad, and the University of Utah was eventually settled with the NIEHS inventors receiving acknowledgment as inventors, but the University owning the patents and licensing them exclusively to Myriad (this episode is discussed in my forthcoming book, A Product of Nature: The Unlikely Lawsuit That Ended Gene Patenting In America [Algonquin, 2021, forthcoming] and this article).

Harold Varmus, the Clinton-appointed director of NIH, became concerned that, despite its worthy aims, NIH’s fair pricing clause was having little impact on drug pricing. Instead, it seemed to make companies reluctant to cooperate with government labs, or at least to sign agreements with them.  In 1994, NIH conducted two sets of public hearings on the fair pricing clauses and, while patient advocacy and consumer groups favored it, the pharmaceutical industry and many NIH researchers viewed it as a serious impediment to public-private collaboration.

As a result, in April 1995 Varmus decided to eliminate the fair pricing clause from NIH’s standard research agreement, reasoning that this would better “promote research that can enhance the health of the American people.”

NIH’s decision to remove the fair pricing clause attracted negative attention from various quarters, including some members of Congress. Representative Ron Wyden (D-Or), who had previously criticized Varmus for failing to secure NIH’s rights in the BRCA gene patents, joined with Representative Bernie Sanders (I-Vt.), Senator Paul Wellstone (D-Minn.) and others to push for legislation reinstating the fair pricing requirement. These initiatives largely failed. In the Conference Report for H.R. 4577 (Dec. 15, 2000), a large appropriations bill, the committee recognized “the mounting concern over the cost to patients of therapeutic drugs,” and requested that NIH “prepare a plan to ensure that taxpayers’ interests are protected” by July 2001. According to at least one source, that plan was never implemented.

Two decades later, fair pricing of pharmaceutical products is again in the national spotlight.  It remains to be seen whether Congress or the Administration adopt more decisive measures toward the control of drug prices than they have in the past.

Jorge Contreras

Jorge L. Contreras is a Presidential Scholar and Professor of Law at the University of Utah with an adjunct appointment in the Department of Human Genetics. His research focuses on intellectual property, technical standards and science policy, and he is one of the co-founders of the Open COVID Pledge, a framework for contributing intellectual property to the COVID-19 response. Professor Contreras is the editor of six books and the author of more than 100 scholarly articles and chapters appearing in scientific, legal and policy journals including Science, Nature, Georgetown Law Journal, NYU Law Review, Iowa Law Review, Harvard Journal of Law and Technology and Antitrust Law Journal. He has served as a member of the National Institutes of Health (NIH) Council of Councils, the Advisory Councils of the National Human Genome Research Institute (NHGRI) and the National Center for Advancing Translational Sciences (NCATS), and as the Co-Chair of the National Conference of Lawyers and Scientists. He is a graduate of Harvard Law School (JD) and Rice University (BSEE, BA).

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