Recent Research: Balancing the returns from basic research

A recent study exploring the science underlying all 356 pharmaceutical drugs approved by the Center for Drug Evaluation and Research since 2010, found each drug is based on life science investments the public sector has made through the National Institutes of Health (NIH). In addition, $230 billion, nearly 40 percent of the $586 billion the federal government has put into NIH over the past decade, can be tied to the development and success of those pharmaceuticals, contend the authors of Government as the First Investor in Biopharmaceutical Innovation: Evidence from New Drug Approvals 2010-2019. Not challenging the tremendously important role the federal government plays in life science R&D, the Bentley University researchers instead wonder if current technology transfer mechanisms enabled by the Bayh-Dole Act allow for an appropriate balance in capturing the financial returns from those investments.

Through their research funded by the Institute for New Economic Thinking, Bentley scholars Ekaterina Galkina Cleary, Matthew J Jackson and Fred Ledley, conclude the landscape of biopharmaceutical research funding has shifted in recent years towards an unbalanced risk/reward relationship between industry and the federal government. Government has become the “first investor” for biopharmaceutical innovation, funding basic research, R&D facilities, and increasingly, translational research, while industry has shifted greater shares of its R&D investments into late-stage commercialization, through which products are developed and profit is made. Private investment in basic life science research continues to decline, the paper reports.

This framework of the biopharmaceutical innovation ecosystem was more or less codified into law with the passage of the Bayh-Dole Act of 1980, Cleary, et al., contend. Bayh-Dole allowed federally-funded research in federal labs or institutions of higher education to be licensed to private companies for development and commercialization. The Bayh-Dole process is initiated by disclosure of a “subject invention,” which then places the invention on a track towards patenting and licensing for industry development. Since its passage 40 years ago, tens of thousands of licensing arrangements have been exercised, returning modest returns to the entities that performed the underlying federally funded R&D for thousands of innovations. For example, a pair of recently published papers co-authored by Whaton management professor David H.  Hsu finds that, on average, universities capture 16 percent of the value they help create through licensing revenues or equity stakes in the startups their research spawns. In the biopharmaceutical sector, trillions of dollars have been earned in profits for the company owners and stakeholders.

Methodologically, the researchers examined projects associated with the 356 approved drugs. They analyzed targeted and phenotypic (a discovery beginning with an observation of biological change in living systems) drug approvals as well as the therapeutic area for each product. Once they collected these data, they used specific Boolean search phrases in medical research databases to identify all relevant published research relating to the drug or discovery. The researchers then identified NIH’s contribution and compiled the results.  

Cleary and Ledley, in their earlier work, demonstrated the importance of basic research across life science disciplines and diseases, calling the findings “spillover effects” of public research. For example, in a previous paper Cleary and Ledley showed that of 59 new cancer drugs approved from 2010-2016, much of the research tied directly to the drug’s development was funded by institutions with missions outside of the realm of cancer research. In other words, basic research focused on other biological functions not relating to cancer contributed to the development of novel cancer drugs.      

The authors include spillover effects into their analysis for the present paper to further explore the importance of public sector investment into funding basic scientific research in contrast to private sector support for foundational science. The incentives to invest in basic research are sparse in the private sector, they argue. It is often the case that the benefits of investment in basic research do not accrue in the firm that funded the basic work. This means that private firms that invest in basic research are running the risk that their findings may benefit other firms in the market and ultimately hurt their own business, according to the researchers.

On the policy side, the researchers and others, such as the Congressional Research Service, have highlighted inadequacies in federal mechanisms for commercialization, including Bayh-Dole. One problem Cleary et al. cite is that a central aspect of the key tech transfer law is the patenting of subject inventions and commercial development. Bayh-Dole is aimed at patent generation, but publicly-funded basic life science research often does not lead directly to a patent. In fact, previous 2017 research described in Science by Li, Azoulay and Sampat, has shown that the impact of NIH funding is not captured adequately by measuring the number of patents. They found only 8.4 percent of NIH grants generate a patent directly.

Cleary et al. argue in the current paper that no other mechanism currently exists to govern the translation of scientific discoveries for public value. The intended public value created by biopharmaceutical innovations include better health, job creation, and economic growth. Rather than a public sector return on investment in the form of public value, private firms are achieving record profits. From 2000-2018, the authors note, the 35 largest pharmaceutical companies had a cumulative revenue of $11.5 trillion far surpassing other companies in the S&P 500.

Overall, Government as the First Investor in Biopharmaceutical Innovation: Evidence from New Drug Approvals 2010-2019 concludes that federal support for basic life science research and NIH translational research must be renewed and sustained. Whether it is creating foundational research for novel cancer treatments or leading to a direct patent, public investment in basic research benefits society and improves the lives of citizens through health improvements or even job creation. At the same time, it states there is a need for innovative policies beyond Bayh-Dole that ensure public sector investments in science are efficiently translated into public value. Private firms have reaped much of the monetary return on investment generated by public investment, the authors hold, without much accompanying support for basic research and greater public understanding of life science.