Summary: The Army does not need to require fair pricing in general as a condition of an exclusive patent license with Sanofi for its Zika vaccine inventions. To achieve fair pricing, the Army must intend to exercise its government license to practice and have practiced these inventions plus any made in the CRADA. By commissioning others to make and sell Zika vaccine on behalf of the United States Government, the Army can effectively achieve fair pricing for the federal marketplace–everywhere the federal government is authorized to supply (or pay for) vaccine for a government purpose. If the Army has no intention to use its government license, then it is in effect allowing Sanofi to create a private monopoly designed to extract monopoly prices. The Army’s own action with regard to the government license creates the conditions under which fair pricing may be achieved. But all this might not matter–there are plenty of other Zika vaccines in development. Who knows which of these, if any, will make it “to the market”?
Army Funds Zika Vaccine Development
There is much complexity and detail here that’s not readily available. Thus, it’s easy for what follows to be off. If I get more information that requires changes to the Zika facts and analysis, I’ll add it here in [ ]s. But the general analysis is worth consideration regardless.
The Army is funding Sanofi Pasteur to develop a Zika vaccine–so far $43m under a cooperative research and development agreement with perhaps another $130m to come. According to news reports, the Army is considering granting Sanofi an exclusive license, but wants Sanofi to agree to “fair pricing.” Sanofi has rejected that idea. According to a letter written by Robert Speer, Acting Secretary of the Army, to Senator Bernie Sanders, the vaccine is based on inventions made at Walter Reed Army Hospital, subject now to two provisional patent applications. The Army refuses to release details of the contemplated exclusive license, citing “Federal law”–again, the problem of secrecy in the business dealings of government around exclusive licensing.
CRADAs are authorized by the Stevenson-Wydler Act, which in turn (as amended) references the later Bayh-Dole Act’s provisions having to do with ownership and licensing of federally owned inventions. Bayh-Dole, in turn, says that Stevenson-Wydler takes precedence wherever there is any conflict.
Under Bayh-Dole, federal agencies can grant exclusive licenses (35 USC 207), but there’s an apparatus of requirements (35 USC 209) that must be met–none of which is much more than a judgment about things. Bayh-Dole goes so far as to permit an exclusive license that includes the right to enforce the licensed patent for infringement, which means the exclusive license functions as an assignment of the invention.
In essence, such a “license” amounts to a “re-issue” of the patent to a private party. First the government issues a patent to itself, and then it assigns what it has got from itself to a favorite private party. But because of the secrecy element, it’s as if a patent were issued in secret, so that the law governing the patent is not what’s in federal patent law but rather in the “private patent law” of the exclusive license agreement. The federal agency gets to make up its own patent law governing the patent in addition to federal patent law. Bayh-Dole is pow’ful strange.
If the Army granted non-exclusive licenses to the inventions, starting with Sanofi, then the Army could operate its licensing program without the cloak of secrecy. The Army could set fair, reasonable, and non-discriminatory licensing terms, and everyone would know the conditions for access. Each license would be the same, but for contact information, start dates, and the like. Bringing licenses out into the open would be a starting step to allow public review of a relationship between the government and private parties. But that openness doesn’t get at “fair” pricing.
Fair Pricing and Government Patent Policy
There are no “fair pricing” provisions in Bayh-Dole. The closest Bayh-Dole comes is the definition of “practical application”–that the benefits of the use of a subject invention are available to the public on “reasonable terms.” But there’s no definition of “reasonable,” not even “reasonable” to whom–the licensee? the licensor? the “public”? At best, we can note that there would be no reason to call out “reasonable” if it meant “anything not illegal.” That is, antitrust issues are already addressed by law, so there’s nothing added by including “on reasonable terms” as a matter of compliance. We might then argue that “on reasonable terms” means “more favorable to the public than the legal terms possible under a patent monopoly.” Still, that’s not much to go on and not directly “fair pricing.”
The Kennedy patent policy, which Bayh-Dole (apparently) displaced, dealt with fair pricing indirectly. The definition of “practical application”–largely taken up by Bayh-Dole–was one element of its approach. A second element was a time limit on achieving practical application–three years from the date of patent issue, for contractors that owned “principal rights” in inventions made with federal support. Harbridge House found that two-thirds of federally supported inventions managed by commercial contractors in 1957 and 1962 achieved practical application by the time a patent issued (see page I-26)–these were, for the most part, inventions arising in Department of Defense contracting. From the time an invention is made until three years past issue is typically about six years. If the patent owner has not taken “effective steps . . . to bring the invention to the point of practical application” or has not “made the invention available for licensing royalty free or on terms that are reasonable in the circumstances, or can show cause why he should retain the principal or exclusive rights for a further period of time, the government shall have the right to require the granting of a license to an applicant on a non-exclusive royalty free basis.” The idea is that if a patent owner cannot get things done quickly, then things ought to be free or nearly so.
We might gather from this usage of “reasonable in the circumstances” that “reasonable” requires one to reason away from “royalty free” rather than down from “monopoly maximum.” That is, one would have to show a reason “in the circumstances” why a license should not be royalty free. A royalty can’t be arbitrary–it has to be reasoned–even if one might argue the royalty is “low,” that’s still not “reasonable in the circumstances” but rather “arbitrarily set below customary rates.” Nothing about that is “reasonable.”
Bayh-Dole Requirements for Federal Exclusive Licenses
The Secretary of the Army observes in his letter to Sen. Sanders that no other company has “applied” for a license to the prospective inventions–but one wonders if companies would apply if the license on offer was royalty free.
But the “reasonable” in licensing terms is not “fair pricing.” Fair pricing has to do with what consumers (or their proxies) pay for access. We might ask whether “fair pricing” constitutes a “reasonable” term for licensing. Let’s work through the requirements in Bayh-Dole, 35 USC 209, which stipulates four primary conditions.
(1)granting the license is a reasonable and necessary incentive to—
(A) call forth the investment capital and expenditures needed to bring the invention to practical application; or (B) otherwise promote the invention’s utilization by the public;
Given that the U.S. government has put up $43m for development already, one wonders if the standard for exclusivity has been met. It would appear that exclusivity is not necessary–the government is covering a substantial portion of the development costs. How is the exclusive license a necessary incentive to develop the invention at private expense?
(2) the Federal agency finds that the public will be served by the granting of the license, as indicated by the applicant’s intentions, plans, and ability to bring the invention to practical application or otherwise promote the invention’s utilization by the public, and that the proposed scope of exclusivity is not greater than reasonably necessary to provide the incentive for bringing the invention to practical application, as proposed by the applicant, or otherwise to promote the invention’s utilization by the public;
This is just an opinion clause, since it’s about what the Army decides is in the public interest–the public doesn’t get any say in the matter. “You will eat your gruel as we decide.” But that opinion is to be based on the exclusive licensees “intentions, plans, and ability”–it’s just that all of those things are apparently “trade secrets and proprietary information” and so we will never know just what Sanofi’s intentions, plans, and ability have been considered. In any event, the scope of exclusivity–which would include field of use, territory, term of exclusivity, and involve the various rights of making, using, and selling–could also include price requirements. Requiring a lower price than a monopoly can support is not an antitrust problem.
(3) the applicant makes a commitment to achieve practical application of the invention within a reasonable time, which time may be extended by the agency upon the applicant’s request and the applicant’s demonstration that the refusal of such extension would be unreasonable;
Here, the drafting technique is to state a requirement and then walk it back (a variation on the theme of listing a set of criteria and then making those criteria subjective, as in (2)). Thus, the exclusive license with Sanofi must include a time provision for achieving “practical application.” The time must be “reasonable”–again, with no guidance. Something less than the full term of the patent, perhaps. But what’s left unstated is why there should be a deadline on practical application if there’s nothing that happens after that deadline–the deadline could be extended of course. But in the Kennedy patent policy, the deadline passes and the patent owner has to “show cause” rather than merely “demonstrate” that “refusal of such extension would be unreasonable.” Another drafting trick–shifting the burden of the provision. There’s happy corruption everywhere in Bayh-Dole. It’s what happens when the foxes, having dined on chickens, write the laws for future meals.
In the IPA program, which operated under the Kennedy (and then Nixon–pretty much the same) patent policies, exclusive licenses were limited to three years from the date of first commercial sale or eight years overall, whichever came first. That sort of deadline permitted competition after practical application and a period of commercial sales at monopoly prices. Of course the IPA also walked back the term restriction on exclusive licenses, which could be extended. Bayh-Dole passed originally with a term restriction on exclusive licenses granted by nonprofits to large companies, but that restriction was quickly removed by amendment four years later.
The upshot is that a diligence requirement doesn’t result in “fair pricing”–in fact, making the licensee work faster might mean the licensee has been given the incentive to price high. That is, the apparatus of the exclusive license leads to a “reasonable” finding that a high price is necessary to “recover” the extra expense and risk and lost opportunity involved in rushing something into production.
(4) granting the license will not tend to substantially lessen competition or create or maintain a violation of the Federal antitrust laws; and
There are two elements here. The second is that the license doesn’t contribute to illegal activity under antitrust law. That’s a serious concern, but given the lack of enforcement of antitrust laws with regard to the management of patents on inventions concerned with public health these days (compare the court in dealing with WARF’s refusal to allow its methods of introducing vitamin D into margarine). The first element, however, is the interesting one–that the exclusive license will “not tend to substantially lessen competition.” Admire the drafting a moment–“not tend to substantially.” Isn’t that a sweet ambiguity? The Army can navigate this provision by arguing that there’s only one qualified “applicant” for a license, and therefore there’s no prospect of “lessened” competition. Of course, in that case, there is also no need for an exclusive license, since no one else (so the Army implies) wants to sell the Zika vaccine.
(5) in the case of an invention covered by a foreign patent application or patent, the interests of the Federal Government or United States industry in foreign commerce will be enhanced.
If there will be foreign patent applications on the Zika inventions, then this requirement also applies. Just what the “interests” of the federal government or “United States industry” in foreign commerce might be is left unstated–but clearly those interests are not merely those of an exclusive licensee. The provision does not say the “interests of the exclusive licensee in foreign commerce”–it’s the interest of a domestic industry.
The Army’s Stated Criteria for an Exclusive License
Bayh-Dole sets out five conditions for an exclusive license, all required–necessary for private capital, public served by plans with narrow exclusivity, reasonable diligence, no lessening of competition, and government and industry interest in foreign commerce. But look at the criteria that the Army says it will use:
In deciding whether to ultimately grant a license, the U.S. Army will consider a number of factors including: (1) the number of competing vaccine development efforts currently underway around the world;
The competition that matters, apparently, is global competition–but Bayh-Dole is concerned with U.S. competition, and antitrust in the U.S. The Army skips to FDA approval–again, a U.S. concern, not a global one. The Army’s representation of “competition” is designed to lead one away from the requirements of Bayh-Dole.
(2) the substantial cost required to fully develop, produce, and distribute a FDA-approved vaccine, which necessitates commercial investment;
But the Army is paying much of the “substantial” cost. The word “fully” here marks the shift. It’s as if companies have to pay anything to sell a product, then gosh they need an exclusive license or they won’t have a “necessary” enough incentive. That makes no sense. The big incentive is the profit on sales of a vaccine that will be used millions of times, less the risk that the vaccine will fail to get FDA approval (or approval in other countries). But here apparently the criterion will be simply whether the company will spend money to make a product based on what’s been “developed” already with $43m of federal money–all of the IP and data rights for which ought to be with the US government, if the government has handled its research contracting properly.
If Sanofi has operated via a U.S. subsidiary and thus somehow has worked it so that Sanofi has the right to “elect to retain title” in all inventions made with federal funding, then of course the license to the Walter Reed inventions is pro forma, as the government has worked it so that Sanofi can lock (almost) everyone else out of a development path to produce a vaccine using the Walter Reed starting point.
(3) the potential risks assumed by the vaccine developer in moving a vaccine through the regulatory process;
What are the “potential” risks as compared with “actual” risks? And what are the risks specific to this Zika vaccine, not just risk in general faced by “a vaccine”? And given the data available from the present development work, how have those risk assessments changed? Consider: if the Army licenses its inventions immediately, before any significant “development” work has been done, then there may be great uncertainty that can be construed as “risk.” But if one has spent $43m to work on the inventions, and then proposes to license the inventions, there ought to be a whole lot less uncertainty. How much “risk” does the Army run if it is planning on spending another $190m on the effort? How does that “risk” change if it grants an exclusive license now to Sanofi, as opposed to granting a license later?
It would appear that there is an implicit threat by Sanofi that it won’t do further work on the Zika virus unless it gets a monopoly position on the patents, even with the federal government paying the costs. One might think, then, that the Army would be better served by a company of the form of Medivation, which produced Xtandi largely by outsourcing every significant bit of work. For that, the Army could take a significant equity stake, do an exclusive license as well, and pump money through the company to contractors. If the vaccine is approved, then set fair pricing via equity control rather than by means of an exclusive license.
and (4) the willingness and capability of other vaccine developers to license, develop, and commercialize our nascent invention.
“Nascent” makes it clear that the Army wants the vaccine effort to be seen as “early stage, high risk” even after $43m of effort. At $43m + $190m, the cost would be on par with Medivation’s cost to develop Xtandi all the way to consumer sales. It’s not a nascent invention now.
One might think that other vaccine developers might be willing to develop their own versions of the vaccine if they are provided with federal contracts to do so. We might ask whether there were any other bids for the contract given to Sanofi. If so, why was only one contract awarded, given that the Army apparently intended to offer exclusive rights to whoever was doing the development work. It seems that an exclusive license should have been part of the development contract–or should have been ruled out from the start, and then see whether a company was interested in doing contract research to develop the vaccine without having necessarily any interest at all in doing the selling.
There’s a further problem, and that’s with the word “commercialize.” There is absolutely no requirement that the Army develop a vaccine and then “commercialize” it. The Army could provide the vaccine as a public service–not just to the U.S. but to the world. While there might be a cost to obtain the vaccine, it would be supplied “at cost.” The government would make back its investment its savings for the millions of vaccines that it otherwise would have to pay a retail monopoly price for.
But “commercialize” is even more problematic. “Commercialize” suggests not just “making a commodity product” but also “taking an asset private.” That is, the Army might have said “take for private profit-seeking our nascent invention.” But that would have sounded less in the public interest. More: in the context of an exclusive license, “commercialize” means “establish a private monopoly to exploit high prices reflecting demand created by an urgent public need.” That’s nice for profit speculation, but how again is such a thing in the public interest? Vaccine manufacturers could make a nice profit, and companies selling the vaccine could make a nice profit–but why should investors in a speculative scheme come away with 10x those profits? In the case of Xtandi, a generic manufacturer could profitably produce and sell the drug for under $5 a pill–but Xtandi is priced at $80 or more, long after it has recovered all the costs associated with its development.
Finally, let’s pick at the use of “our” in “our nascent invention.” What is this “our”–is it the Army’s? (Clearly the Army here does not mean “an invention shared with us by its inventor(s)–not that “our.”) Does “our” mean “all the government’s”? or “the public’s”? It isn’t at all clear–other than that any company willing to take a license isn’t “us” and so must be “them.” Typical adversarial Army talk for the other companies, that aren’t Sanofi, the ally.
Thus, the Army tiptoes through Bayh-Dole’s restrictions on exclusive licenses by largely ignoring them, introducing arguments that aren’t relevant but are made to sound relevant, and substituting other criteria. May as well have a law that says, do WTF you want, but you’ll have to paper over whatever you do. Bayh-Dole, a law of the Moloch state–“endless paperwork, endless harassment.”
We have worked through what’s available about the Army’s planned exclusive license to Sanofi. It looks like a done deal. And it won’t include a “fair pricing” requirement because Sanofi is reported to have rejected fair pricing–meaning, pricing lower than for maximum profit, pricing that lowers the costs to governments and insurance companies and to businesses that otherwise would be affected–you know, businesses that serve the travel and tourism industries. Pricing that lowers the cost, then, to families and reduces the medical costs associated with birth defects caused by Zika. It might be Sanofi’s point that the need for a Zika vaccine is so great that governments and companies will pay most any price and everyone will who needs the vaccine will be able to get it. The question is simply a matter of whether the profits should go primarily to the vaccine developer or to the governments and companies that are affected by Zika. In this view, “fair pricing” is just shifting wealth from producers to consumers. It’s not in the corporate genes to do things like that “in the public interest” when the premise of a public corporation that creating “wealth” for shareholders is its public purpose.
The simple question, then, is whether it is also a public purpose to create wealth for investors by exploiting public health needs. Is the Army’s contribution of $43m pretty much a subsidy for such exploitation, to reduce the cost and risk of bringing into existence an engine that produces the vaccine, but does so to produce wealth for investors. One side is the public benefit of a vaccine but the premise is maximum wealth from a monopoly on that vaccine. There are other ways to produce and distribute a vaccine–one doesn’t have to hand a monopoly to a company built to produce 10x the profit that otherwise might be available.
Of course, non-exclusive licensing is no guarantee that prices will be lower through “competition.” Look at what happened to insulin, which was licensed by
The indictment alleges that the defendants unlawfully combined to bring about arbitrary, uniform and noncompetitive prices for insulin and to prevent normal competition in the sale of the drug.
A lawsuit filed Monday accused three makers of insulin of conspiring to drive up the prices of their lifesaving drugs, harming patients who were being asked to pay for a growing share of their drug bills.
Fair pricing is not a necessary result of non-exclusive availability.
Stevenson-Wydler CRADA Licensing
Under Stevenson-Wydler, a federal agency is all but required to offer exclusive licenses to CRADA participants for anything that’s created under a CRADA (15 USC 3710a):
The laboratory shall ensure, through such agreement, that the collaborating party has the option to choose an exclusive license for a pre-negotiated field of use for any such invention under the agreement or, if there is more than one collaborating party, that the collaborating parties are offered the option to hold licensing rights that collectively encompass the rights that would be held under such an exclusive license by one party.
Once the Army decided to include only one company in the development effort, it had pretty much also determined that that company only would obtain a license to the initial inventions as well. The Army would have had to involve more companies at the start–create a manufacturing consortium–if there were to be non-exclusive licenses.
The Government License to Practice and Have Practiced
It might appear that we are stuck with the Army’s choice to create a private monopoly around their potential Zika vaccine, as well as with the idea that this private monopoly should be exploited by a corporate engine that’s programmed to maximize profit. It could be otherwise, but isn’t. But this isn’t the end of the possibilities for “fair pricing.” We have yet to consider the government’s license. Here’s Stevenson-Wydler:
In consideration for the Government’s contribution under the agreement, grants under this paragraph shall be subject to the following explicit conditions:
(A) A nonexclusive, nontransferable, irrevocable, paid-up license from the collaborating party to the laboratory to practice the invention or have the invention practiced throughout the world by or on behalf of the Government.
There’s no guidance in Stevenson-Wydler for the meaning of “practice the invention or have the invention practiced.” The language derives from the Kennedy patent policy, which does provide a definition (why is it that recent legislation can copy the wording but not the definitions of the Kennedy patent policy?):
made or have made, used or have used, sold or have sold
The IPA repeats this definition. “Government,” too, is defined in the Kennedy patent policy but not in Stevenson-Wydler:
any agency thereof, state, or domestic municipal government
That is, the “Government” is any element of government. In Bayh-Dole, the operative term is “Federal agency.” Federal agency does get a definition (35 USC 201(a))–executive agencies and military departments (Army, Navy, Air Force). Executive agencies, in turn, include as well “Government corporations” and “independent establishments” (such as the CIA and the Federal Trade Commission). Under Bayh-Dole, the government license is oddly scoped:
With respect to any invention in which the contractor elects rights, the Federal agency shall have a nonexclusive, nontransferrable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States any subject invention throughout the world
The federal agency “shall have” a license–but the license is “to practice and have practiced” (that’s make, use, sell; have made, have used, have sold) “for or on behalf of the United States.” We don’t see “for or on behalf of any “Federal agency” (to use the defined term)–instead, it’s “the United States,” which would appear to comprise both the federal government and the various states that are the “United States.” While the government license is not transferable, it clearly allows sublicensing or rather freedom from a claim of infringement by any government entity practicing or having practiced the invention.
That’s for the contractor-side management. Here’s the federally owned invention-side requirement:
(1) 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;
Now we have the odd construction “retaining a . . . paid-up license.” There are two paths to go on here. In the first, one grants a limited exclusive license that permits both the licensor and licensee to practice the invention–technically, that’s a “sole” license, as the licensee is the only licensee, and thus has exclusive rights relative to a non-government market. The second path grants all rights to the licensee and then the licensee grants back a non-exclusive license for government purposes. Here, however, we have neither. The government “retains” a license–what does that mean? That the government has not granted full rights?–if that, then what’s retained isn’t a license–it’s a right. The provision is drafted as if the government grants an exclusive license and then grants itself (“retains”) a non-exclusive license. Let’s say whoever drafted this language was unclear on the concept.
We also get, here in 35 USC 209, a scope of license directed at the “?Government of the United States”–not “Federal agency” on behalf of the “United States” (as in Bayh-Dole) and not “Government” (as in Stevenson-Wydler). It’s as if folks can’t bring themselves to define their terms and use them consistently. Perhaps that’s by design. Or perhaps we learn that the people involved in drafting this sort of legislation are cleverly clueless, and that should tip us off that they also are that way when it comes to thinking about invention, innovation, diffusion, practical application, private capital, patents, commercialization, and public benefit. All these fine-sounding things are just emblems to be used to make people feel good without reference to the underlying realities of practice and consequences. Perhaps that’s what we are up against.
Stevenson-Wydler makes the grant of the government license “consideration” for the government’s contribution to the cooperative research and development activity. In the case of the Army’s collaboration with Sanofi, it would appear that the government license comes at the cost of $43m. Here’s where it gets interesting. If the government has rights in the initial inventions and a government license in any inventions made during the CRADA work, then the government has a robust set of rights by which it may produce vaccine itself and commission others to do so (and to sell), for any government purpose. Yes, Sanofi may have other background rights that it has included in its development, and a government license does not extend to those background rights, so there may be other work yet to do. And yes, too, the government cannot reveal trade secrets, patent applications, when published, blow trade secrets).
Fair Pricing By Working the Government License
Thus, there are things the Army can do in its negotiation with Sanofi to set up the use of the government license.
First, it is essential that the Army not grant an exclusive license that gives Sanofi the right to enforce the licensed patents. That amounts to giving Sanofi ownership of the inventions.
Second, it is essential that the scope of any exclusive license not give up the government’s right to practice and have practiced the invention. Although Bayh-Dole makes it clear that the government “retains” a license, it is also possible for the government to waive that license or agree not to exercise its rights under that license.
Third, any exclusive license must be conditioned on the delivery of inventions, reports, and data for use under the government’s license–that these may be used in the government’s practice (and having practiced) of inventions subject to the license granted. These are not background rights but the rights to assets created in the CRADA activities. The exclusive licensee must agree that these materials are outside of FOIA exemptions when used as part of the government’s license.
Finally, we come to the government license itself. The government license is in fact the fundamental groundwork for fair pricing. If the government declines to practice and have practiced the inventions, then it is in fact rejecting the “consideration” of the license and wasting the value of that license. If the vaccine is a financial “blockbuster,” then the government’s broad license is itself worth billions of dollars and represents the prospect of a substantial portion of the U.S. market for the vaccine–everywhere it is a purpose of government to provide the vaccine. Either Sanofi can provide the vaccine for the government, or the government can provide that vaccine itself, or it can commission others to provide that vaccine for it, and specify whatever price it wants, if any price at all.
We might argue that if the Army licenses exclusively and does not practice the government license, or commission others to do so, then it is committing an antitrust offense–it is conspiring with a company to create a private monopoly that runs against the express provisions of federal law and against the public interest. By declining to exercise its government rights, the Army contributes to a private monopoly that federal law makes clear should never be.
We may now do a thought experiment. The Army makes it clear to Sanofi that once Sanofi has an exclusive license without any “fair pricing” provisions, the Army intends to act on its government license to practice and have practiced throughout the world. To this end, the Army will announce a government-purpose authorization program under which any qualified company can produce the vaccine so long as it shares data necessary for FDA approval with other participating companies (but not with Sanofi, unless Sanofi also shares data), and provided that once costs of the regulatory process are recovered, pricing will be at “fair” levels–perhaps defined by a “cost-plus” contract, which provides each contractor to recover its expenses plus a reasonable profit from sales.
Such contracts could be royalty-free–the government does not need a share of any contractor’s income. Instead, the government wants the price to be “fair”–that is, no higher than the contractor’s actual costs plus sufficient profit to provide an incentive to participate in the program (beyond other benefits of participation, such as being recognized for supporting a public need, gaining access to potential customers for other products, and the like). Again, the “incentive” here is not to invest risk capital to develop a “nascent” invention into a commercial product, but rather the “incentive” to manufacture and sell the product so that there are multiple suppliers. These are two very different forms of incentive. The first form of incentive–that of investment capital at risk–is addressed through the CRADA and exclusive license. The second form of incentive has to do with making and selling for a profit over the marginal cost of adding a new product and the incremental cost of producing each unit of that product.
This is the thought experiment. The government has a license whose entire purpose is to break up the private monopoly represented by the patent rights on the exclusively licensed invention. The monopoly is broken–as a condition of the exclusivity–between a private marketplace (in which the government might participate by purchasing from its licensee) and a government marketplace (in which the exclusive licensee might participate by selling to the government and government-supported users). It is within the government’s power to sell Zika vaccine at whatever price it wishes–or no price whatsoever–under its government license. Once Sanofi has gone through the FDA approval process, the path for government use will be clear, the risks reduced, and the cost also substantially reduced.
Now, with this thought experiment in mind (where else?), Sanofi has something to contemplate. The government might not exercise its practice rights unless doing so is necessary to obtain what it considers a fair price for its own uses. The exclusive license with Sanofi does not have to require Sanofi to sell at any price at all. The deal to contemplate has to do with when the government will exercise the rights it has obtained as “consideration” for its support of the research. If Sanofi wants to sell into the government market, then it will have to price for that market–it will have to sell at a government-market competitive price, a fair price, even if it prices the vaccine higher for the private market, where the government does not control pricing.
We are not talking about a price that would prevent competition by being below all profit, but rather a price that would competes on the terms of the government market, which is not a free market or private market or one that is concerned with “commercialization” other than where commercialization means offering a quality product, mass produced, at a price acceptable to the government for its purposes. It is the “market” of a single buyer–the federal government–deciding on whether what’s on offer is worth buying or making for one’s own use (or having someone make it for one’s own use).
What do you think Sanofi’s response would be if it came to understand this intention by the Army? Would Sanofi walk away from the CRADA? Would it refuse to license the “nascent” inventions improved with $43m of work? Would it propose government purpose pricing that’s “fair” without agreeing to price vaccine for the private market the same way? I’m betting that Sanofi would stay in the deal and think carefully about fair pricing for government purposes throughout the world. Does the Army have the smarts and courage to find out?
Probably It Doesn’t Matter What the Army Does
Of course, the Army/Sanofi vaccine might fail. The FDA might not approve it. And there are plenty of other vaccine candidates.
Themis Bioscience is developing a Zika vaccine using technology licensed from Institut Pasteur.
Inovio Pharmaceuticals and GeneOne Life Sciences have been approved to start Phase 1 human clinical trials of their vaccine candidate.
The National Institute of Allergy and Infectious Diseases launched Phase 2 trials in March 2017 and is working with GlaxoSmithKline on another candidate vaccine.
SEEK Group and hVIVO have yet another candidate vaccine.
CEVEC Pharmaceuticals and NewLink Genetics have partnered to develop a vaccine.
No doubt this is just the tip of the iceberg. There are hundreds of millions of government research dollars in play in just the US and the UK. Any number of vaccines are being developed to compete for the opportunity. Perhaps the Army’s candidate won’t become a monopoly, even with patent rights exclusively licensed to Sanofi. Of course, perhaps most of these vaccine candidates may fail, too–but there will have been plenty of virtue-signalling about the importance of trying anything, at any cost.
Perhaps, then, the reason no other vaccine development company wants to take a license is because they are all working on their own vaccines.