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Do Private Firms Benefit Disproportionately from Taxpayer-Funded Basic Research?
Some observers have noted that companies can save significantly on research and development when they develop new drugs from chemical compounds that were discovered in government or academic laboratories. Such drugs should therefore be “reasonably” priced, according to those observers. The Bayh-Dole Act of 1980 grants the government a royalty-free license to use inventions, such as new drugs, that it had a hand in developing, but that license is rarely exercised. A chemical compound discovered through publicly funded research may be licensed to a private firm on terms specified by (or negotiated with) the institution where the compound was discovered. If the terms include royalty payments based on future sales revenue, restrictions on a drug’s price are not in the best interest of either the institution or the licensed manufacturer. For U.S. taxpayers, the primary benefits of publicly funded research come from the therapeutic value of drugs that ultimately result from that research and the Treasury’s receipt of corporate income taxes on profits from those drugs. Constraining the prices of such drugs would tend to weaken firms’ incentives to develop government-funded research discoveries into new drugs, which is a primary rationale behind the Bayh-Dole Act. The larger issue, however, is not how much firms charge for such drugs but on what terms the original research discoveries are licensed to them. Most of the costs involved in developing a new drug come not from the initial discovery research but from clinical testing and regulatory approval—costs that firms tend to bear themselves. Even so, unless licenses for taxpayer-funded research discoveries fully cover the costs of that initial research, the savings that firms gain by licensing under favorable terms may induce them to invest in developing taxpayer-funded discoveries in preference to other, more socially valuable R&D projects that they may have available. Such savings in research costs may also lead companies to invest more in R&D overall than they would other-wise. That added investment could broaden the types of drugs that firms tried to develop beyond what the market would otherwise demand or could cause drugs to be developed more quickly than the market demanded. The mapping of the human genome in the 1990s and early 2000s developed into a race between a public agency (NIH) and a private firm (Celera) that saw potential commercial value in mapping human gene sequences. In that case, NIH’s Human Genome Project supplanted some private R&D, but it did so intentionally: NIH scientists wanted to avoid delay in placing the sequenced human genome in the public domain, and they used a sequencing method that complemented Celera’s method and arguably hastened the completion of the project. The potential for overlap between the public and private sectors in that area continues, since both NIH and the pharmaceutical industry are said to be “funding work in structural genomics . . . the next step beyond mapping the human genome. In other cases, chemical compounds discovered in the public sector have sometimes provided the active ingredients for privately developed drugs . In general, the risk of crowding out seems likely to be greatest where the potential commercial applications of the government’s research are most apparent.
Evidence of a Stimulus Effect
It is seldom possible to identify particular cases in which the private sector would have performed research if the government had not. Thus, most of the available empirical evidence is based on aggregate studies. On balance, that evidence suggests a positive relationship between public and private pharmaceutical R&D.
A 1995 study estimated that a 1 percent increase in NIH-funded research produced, on average, a 2.5 percent increase in private R&D spending (with a lag of about seven years while the basic research was conducted and its findings published). Moreover, about two-thirds of the private response amounted to “spillovers”—new research outside the field in which the NIH research was conducted. Although those findings do not address whether the drug industry would eventually have done the original research itself, the study is suggestive because the private response is disproportionate: the federal spending appears to have stimulated total private investment rather than simply shifting it. A more recent, unpublished study concludes that increases in public-sector spending for basic research are associated with eventual increases in approvals of new molecular entities.