Taxpayers Pay for Research and Corporate Profits

Harnessing the U.S. Taxpayer to Fight Cancer and Make Profits – The New York Times – 12/19/16

It has long troubled me that when tax-funded researchers find a promising new drug, they don’t publish the details but rather start a company to sell that drug.

Dr. Belldegrun, a physician, co-founded Kite Pharma, a company that could be the first to market next year with a highly anticipated new immunotherapy treatment.

His stock in Kite is worth about $170 million. Investors have profited along with him, as the company’s share price has soared to about $50 from an initial price of $17 in 2014.

Kite’s treatment, a form of immunotherapy called CAR-T, was initially developed by a team of researchers at the National Cancer Institute, led by a longtime friend and mentor of Dr. Belldegrun.  

Now Kite pays several million a year to the government to support continuing research dedicated to the company’s efforts.

“Research dedicated to the company’s efforts” of making a profit, that is.

The relationship puts American taxpayers squarely in the middle of one of the hottest new drug markets. It also raises a question:

Are taxpayers getting a good deal?

Critics say that taxpayers will end up paying twice for the same drug — once to support its development and a second time to buy it — while the company reaps the financial benefit.

“If this was not a government-funded cancer treatment — if it was for a new solar technology, for example — it would be scandalous to think that some private investors are reaping massive profits off a taxpayer-funded invention,” said James Love, director of Knowledge Ecology International, an advocacy group concerned with access to medicines.

The debate goes squarely to one of the nation’s most vexing challenges: rising health care and drug prices.

Kite is one of a growing number of drug and biotech companies relying on federal laboratories. Analysts expect the company to charge at least $200,000 for the new treatment, which is intended as a one-time therapy for patients.

Insisting on lower prices, federal researchers say, would drive away innovative partners that speed the drug-development process and benefit patients. But with the government doing so much pivotal research, others say that the private sector cannot afford to walk away.

“The market is so reliant on the knowledge and know-how that comes out of the government and academic labs,” said Dr. Aaron Kesselheim, director of the Program on Regulation, Therapeutics and Law at Brigham & Women’s Hospital in Boston.

Price curbs, he said, “would not suddenly lead to a total abandonment of this pipeline. It couldn’t possibly.”

The National Institutes of Health, the parent agency of the National Cancer Institute, currently has about 400 cooperative research agreements with companies, and licenses hundreds of patented inventions for private-sector development.

Kite executives and national health officials characterize their partnership as a model arrangement in a system established by Congress three decades ago.

Of course, it’s a model arrangement for pharmaceutical companies since they are getting free research.

Ironically, part of their justification for high prices is that research is so expensive – but taxpayers are paying for it!

The system has given birth to the cancer drug Taxol, the AIDS drug Prezista, two cervical cancer vaccines and a widely used test for H.I.V. infection, among other innovations.

But the government’s share of any Kite success would be modest, much lower than some academic research groups have wrangled in immunotherapy deals worth hundreds of millions of dollars.

Federal officials counter that the reward to the taxpayer is not money but the drug itself.

Moreover, government officials say, companies in such deals must take significant financial risks and expenditures on their own, without any guarantee that the drug will be approved.

Kite says it has spent more than $200 million on research and development, including running larger clinical trials than those conducted by the cancer institute, and recently spent about $30 million to build a factory that will be able to make treatments for up to 5,000 patients a year.

A Public-Private Partnership

Like many business deals, this one began with a personal relationship — in this case between Dr. Rosenberg and Dr. Belldegrun.

When the fellowship ended in 1988, Dr. Belldegrun became a prominent surgeon at the University of California, Los Angeles, but the two men stayed in touch.

Eventually, Dr. Belldegrun, 67, got the entrepreneurial bug. He co-founded a biotech company, Agensys, which was acquired by a bigger company for more than $500 million. He was also involved with Cougar Biotechnology, which developed the prostate cancer drug Zytiga and was acquired by Johnson & Johnson for $1 billion in May 2009.

A month later, Dr. Belldegrun formed Kite with a group of colleagues and investors to pursue cancer immunotherapy.

Over the next two years, the National Cancer Institute worked out a deal with Kite that was signed in 2012. It was the first of eight contracts between the government and the company that generally take two forms.

In one type of contract, Kite licenses patented inventions and agrees to pay the government royalties, roughly 5 percent of sales of any commercial product arising from a particular patent.

However, there is no such license specifically for KTE-C19 because the underlying treatment was not patented by the N.C.I., so royalties will be minimal.

Under the second type of contract, known as a cooperative research and development agreement, Kite provides money to the N.C.I. to support research.

Kite is now paying $3 million a year to Dr. Rosenberg’s lab and has provided $7.5 million to it in total since 2012. Based on its regulatory filings, Kite is paying $7.8 million a year for research agreements and licenses in total, with at least $4 million of that going to the cancer institute and the rest to academic or corporate partners.

Dr. Rosenberg estimated that the government has spent roughly $10 million over the years on what has become KTE-C19. He said Kite’s $3 million a year is about equal to the taxpayer funding in that area and has helped speed research.

Some immunotherapy competitors marvel at the company’s coup in tapping into the agency’s expertise. “They got 20 years of research all together in one scoop,” said Dr. Carlos Paya, chief executive of Immune Design, which is pursuing a different approach.

But government officials say few, if any, other companies were interested in the technology at the time Dr. Belldegrun came calling. Dr. Rosenberg said that before Kite, a few companies, including Johnson & Johnson, had looked at an earlier version of his technology but were wary because treatment involved processing each patient’s cells.

Dr. Rosenberg professes no interest in the business side of the Kite relationship. He does not own stock in any company, even Kite, though he could get up to $150,000 a year in patent royalties if some of Kite’s efforts pay off.

Dr. Belldegrun, in contrast to his mentor, has commercial flair. He is known for his sharp business suits, lives in the Bel-Air neighborhood of Los Angeles, and seems as comfortable on Wall Street or in high society as in the operating room.

This guy sounds like the typical lying, cheating,1-percenter that’s found a way to siphon money from first the government and later, patients.

A ‘Reasonable’ Question

The reliance of private companies on government-funded research goes well beyond obvious cases like Kite. In many instances, companies work with universities or medical centers that, in turn, have been funded from the $32 billion annual budget of the National Institutes of Health

Kite’s two main competitors, Novartis and Juno Therapeutics, for instance, derived similar immunotherapy treatments largely from academic institutions, developed at least in part with government funding

“For the most important drugs you’ll see some public-sector involvement,” said Bhaven Sampat, an associate professor of health policy and management at Columbia University. He was one author of a study that found that 9 percent of all drugs approved between 1988 and 2005 were based directly on a patent held by the public sector. But 47.8 percent of the drugs relied at least indirectly on some federally funded research.

The figures were higher for more medically important drugs: 17.4 percent had a direct public-sector patent, while 64.5 percent had at least an indirect public-sector influence.

These figures are up sharply from before the 1980s. Such partnerships and licensing deals were encouraged by the 1980 Bayh-Dole and Stevenson-Wydler Acts, and the 1986 Federal Technology Transfer Act. The laws are credited with jump-starting the biotechnology industry.

But from the beginning, some people questioned whether taxpayers were getting a bad deal.

The N.I.H. argues that if it imposes pricing restrictions, it won’t get partners. In fact, in 1995, it struck from its negotiating tactics a goal that prices be “reasonable.”

The N.I.H. can collect royalties from successful products to help offset the costs of the research, but so far these royalties have been small, amounting to an estimated $135 million in the last fiscal year from 870 licenses, with the bulk of the money coming from a small number of drugs.

The N.I.H. does not take equity positions in companies to avoid an appearance of a conflict of interest. So to critics of the government deals, drug prices are crucial to understanding taxpayer value. After all, they ask, is a drug truly widely available — which is what the government says is its measure of success — if it costs too much for some people?

One mechanism to control pricing already exists. It is called march-in rights, and it lets the N.I.H. take back control of a patent on an invention made with federal funding if the drug is not being made available to the public on reasonable terms.

The tool has gone unused.

Earlier this year, Knowledge Ecology International and another advocacy group, the Union for Affordable Cancer Treatment, petitioned the agency to exercise march-in rights on Xtandi, a prostate cancer drug that was developed by federally funded researchers at U.C.L.A. It said the price in the United States of about $129,000 a year, two to four times that in other developed countries, meant the drug was not reasonably available.

U.C.L.A. made more than $500 million by selling its royalty rights to the drug. But the N.I.H. declined to exercise its march-in rights on Xtandi, arguing that it was not qualified to judge whether a drug’s price is reasonable and that a high price does not mean a drug is not being made available to the public.

Meantime, the relationship between Kite and the National Cancer Institute is expanding to develop treatments for other cancers, including one technique Dr. Rosenberg thinks could be used to attack solid tumors like colon, breast and lung cancer.

That could mean many lives saved and maybe more billion-dollar drugs for Kite and its investors, with the American taxpayer right in the middle of the deal.


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