Taxpayers invest tens of billions of dollars in drug research through the National Institutes of Health (NIH) each year. It's generally a wise investment because NIH researchers can undertake the cutting edge and risky research that drug companies don't have the guts to do on their own dime. When NIH makes discoveries, it hands over its research to the private sector to develop and market the drug, but unfortunately gets little more than peanuts in return.

When researchers from the National Institutes of Health developed the cancer-fighting drug paclitaxel, they were doing more great work to save lives. However, scientific success turned into fiscal failure when pharmaceutical giant Bristol-Myers Squibb was allowed to charge exorbitant prices for the product it would market under the name Taxol, while paying just a pittance back in royalties for the taxpayer-funded research.

The story of Taxol, as told in a recent General Accounting Office report, is achingly familiar to observers of NIH. Researchers, heroes really, begin testing plant species for anticancer activity as early as the 1950s. They notice that extract from the bark of the yew tree works against tumors, and other scientists eventually isolate the paclitaxel and figure out how it prevents cell divisions. NIH conducts the clinical trials and proves that paclitaxel has potential. But since NIH cannot legally produce or market drugs, it enters into a transfer agreement with Bristol-Myers Squibb in 1991, after 30 years of research. Under the deal, the corporation takes all of NIH's research, finishes the clinical trials, markets the drug, and prices it autonomously. NIH ignores its own rules that require the company to show evidence the drug would be reasonably priced. For their troubles, NIH and the taxpayers get a measly 0.5 percent of sales as royalties, even though NIH's rules allow royalties of 5 to 8 percent.

Then Taxol takes off, becoming the highest-selling cancer drug in history and earning $9 billion for Bristol-Myers Squibb off of its $1 billion investment in development. People afflicted with breast, ovarian, and certain lung cancers as well as AIDS-related Kaposi's sarcoma benefit from the new treatment… if they can afford it. In 2001, Bristol-Myers Squibb charges between $1,000 and $2,000 per dose for Taxol! America's taxpayers lose twice, because NIH receives only $35 million in royalties for its $484 million investment in research, and Medicare pays $687 million for Taxol from just 1994 to 1999. Even though taxpayer money funded Taxol's discovery and much of the research that would make it marketable, Bristol-Myers Squibb charges Medicare roughly $500 more per dose than it charges private doctors.

NIH claims that it was not in a good position to negotiate with Bristol-Myers Squibb because paclitaxel could not be patented, was not guaranteed to work at the time of the agreement, and was very specific in the way it targeted cancer. Nevertheless, Bristol-Myers Squibb could and did receive a five-year monopoly on the drug-which it extended for more than three years through a series of lawsuits against generic manufacturers, for which it was ultimately sued by 29 U.S. states. As evidenced by its subsequent enormous success, there was clearly a market for Taxol. The negotiations failed largely because NIH is overwhelmingly concerned with esoteric research to the detriment of concern for the bottom line.

This is the process of technology transfer, where federal taxpayers subsidize drug research for multi-billion dollar pharmaceutical companies, and get minimal financial returns. NIH has the dual mandates of conducting research to develop necessary medicines by undertaking the expensive and wide-ranging research the private sector won't touch and to get the drugs on the market at a reasonable price. In the case of Taxol, it failed at the latter. It also has an obligation to the taxpayers to recoup some of its expenditures in royalties. There is no reason why NIH should not profit from its research on an incredibly profitable drug. That money could be reinvested in more NIH projects to develop groundbreaking new drugs and would save the taxpayers valuable money in these lean budget years.

To date, NIH has only recouped seven percent of its initial investment, while Bristol-Myers Squibb and its investors have enjoyed a 900 percent return. NIH also failed to ensure that the drug would be priced fairly and that all federal programs would receive a discount. Clearly, NIH didn't push as hard as it should have in negotiations and the result is its investors, the taxpayers, are stuck paying more than they should for a drug they developed.