Taxpayers Fund The Research; Pharmaceuticals Reap The Profits

Yesterday's NY Times had a front page story on the development of new cancer immunotherapy treatments. Most of these have been developed over the years by the National Cancer Institute (NCI), a part of the National Institutes for Health (NIH). The NIH is a taxpayer funded institution and, by the mid-1990s the NCI was responsible for the development of nearly two-thirds of all anti-cancer drugs approved by the FDA. Now Kite Pharmaceuticals is paying the NCI several million dollars a year as part of a public-private partnership to continue development and, eventually, delivery of a new treatment for certain blood cancers like non-Hodgkin's lymphoma.

Kite Pharmaceuticals was co-founded by Dr. Arie Belldegrun who was a research fellow under the lead of an NCI legend in the field of cancer research, Dr. Steven Rosenberg. Dr. Rosenberg has no financial interest in Kite. In 2012, Kite signed the first of many deals with NCI to help with the development of a treatment for certain blood cancers that it calls KTE-C19 which relies on a treatment developed by NCI. If the treatment proves to be successful, it could generate billions per year in profit for Kite. Kite has spent over $200 million on R&D, trials, and construction of a factory that will create KTE-C19 for over 5,000 patients a year, so the company is certainly taking a financial risk. According to Dr. Rosenberg, NCI spent about $10 million dollars on the research that Kite is currently leveraging.

The real question is whether the taxpayer who has essentially funded the underlying research that led to the development of KTE-C19 will be adequately compensated if it does become a success. The NCI and the NIH are pure research facilities that are not allowed to be investors in for-profit companies, although they can secure patents and other technologies that can be licensed. So how will the economic benefits if KTE-C19 flow back to the taxpayer.

One option is to make sure the cost of the therapies developed in conjunction with NIH are reduced. Since KTE-C19 requires only one treatment for a cure, as opposed to ongoing treatment, estimates are that it may cost at least $200,000. Current law allows the NIH to force companies in these partnerships to restrict prices, but the NIH does not use that power because they believe it limits interest in these kinds of partnerships. History has borne this out as partnerships increased by 300% after pricing restrictions were lifted. On the other hand, we don't have too look too hard to see how many of these pharmaceutical companies exploit the monopoly position that having access to these treatments usually gives them. Others argue that the taxpayer reaps the benefit from the mere delivery of the therapy and that NIH and NCI would not be able to deliver these cures without a private partner. That claim is somewhat debatable as it is clear the government could control the process end to end but chooses not to. So, other than whatever licensing and patent agreements NIH has in place and the institution of price controls that the NIH is loathe to use, there is really no payback for the taxpayer.

If KTE-C19 is successful, Kite stands to make billions and they would have been able to get this far by essentially purchasing years of research from NCI, most of which was funded by taxpayers. With an estimated cost of $200,000, taxpayers will actually be paying for the therapy twice - once to help develop the treatment and then again to use it. As law professor Rachel Sachs says, "The public is paying for the research and to the extent that many people, if not most, will pay through public insurance, we’re paying again." James Love, leader of an advocacy group for access to medicines says, "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."

This is yet another classic example of the current state of affairs in the US economy. The costs are always socialized and the profits always privatized. We see that with the financial community and other negative externalities such as pollution. And we see it again with the drugs and treatments that rely on taxpayer funded research.