Presidential hopeful Bernie Sanders took the battle against high drug prices up a notch this week.

The Vermont senator and 11 other members of Congress sent letter to the National Institutes of Health (NIH) calling for hearings to discuss whether the agency should exercise its march-in patent rights to Medivation (NASDAQ:MDVN) and Astellas Pharma's (OTC:ALPM.Y) Xtandi, a widely used prostate cancer drug.

The news sent Medivation's shares reeling, but the fall-out from a NIH hearing could have broad implications for all of biotech.

What's Xtandi?

Xtandi is a commonly used treatment for pre- and post-chemotherapy prostate cancer patients, and prostate cancer is the second most common form of cancer in men. Last year, more than 220,000 cases of prostate cancer were diagnosed in the United States alone.

Xtandi is made and marketed by Medivation and Astellas Pharma, but its patents -- up until recently -- were owned by UCLA. Earlier this month, UCLA sold its patent rights to Xtandi to a private investment group for $520 million.

UCLA discovered Xtandi while conducting NIH-funded research into why prostate cancer can grow even after patients receive treatment that limits testosterone production. UCLA licensed its Xtandi patents to Medivation in 2005, after which Medivation conducted extensive human clinical trials showing that the risk of death in patients who had previously undergone testosterone reducing therapy was 29% lower in Xtandi patients than in patients receiving a placebo.

The FDA approved Xtandi for use in metastatic castration-resistant prostate cancer patients who had undergone chemotherapy in 2012, and it was approved for use in the pre-chemotherapy setting in 2014.

Why Xtandi?

To understand why Sanders and others in Washington are singling out Xtandi, it helps to understand more about federal research funding and patents.

Before 1980, universities and other institutions that received federal grants to conduct research had to turn over patents to the government, rather than use them for their own benefit. However, the government was prohibited from issuing exclusive licenses to companies, so only about 5% of the 30,000 or so patents it had accumulated were ever licensed.

In recognition that this system was broken, and to spark development of future discoveries, Congress passed the Bayh-Dole Act in December 1980. This act grants universities and other recipients of federal funding the right to pursue ownership of their federally funded discoveries and to license patents resulting from this funding to drugmakers, such as UCLA did with Medivation on Xtandi.

To protect American consumers from harm, the Bayh-Dole Act also provides the government entity that provided federal funding the right to exercise march-in rights, which allow the government to ignore patent exclusivity if the agency that provided the funding resulting in the patent determines that a licensee of that patent is violating specific criteria, including a failure to make use of the patent or a failure to satisfy the health and safety needs of consumers.

It's this final criterion that Sanders and others think Medivation and Astellas Pharma are violating. Because Medivation and Astellas charge $129,000 for Xtandi in the U.S. -- roughly three times prices charged abroad -- Sanders argues that Americans are being unduly harmed.

Uncommonly used

Requesting the use of the act's march-in provision isn't unprecedented. Five march-in petitions have been made to the NIH since the act's passage in 1980, including a petition to exercise march-in rights on Norvir, an AIDS drug marketed by AbbVie's (NYSE:ABBV) predecessor, Abbott Labs.

The petition to exercise march-in rights on Norvir came following a decision by AbbVie to raise Norvir's price 400% in 2003. The NIH reviewed the matter to see if it should execute its patent rights and concluded that drug pricing, in and of itself, doesn't justify overturning patents via the march-in provision.

Specifically, the NIH concluded:

[T]he issue of the cost or pricing of drugs that include inventive technologies made using federal funds is one which has attracted the attention of Congress in several contexts that are much broader than the one at hand. In addition, because the market dynamics for all products developed pursuant to licensing rights under the Bayh-Dole Act could be altered if prices on such products were directed in any way by NIH, the NIH agrees with the public testimony that suggested that the extraordinary remedy of march-in is not an appropriate means of controlling prices. The issue of drug pricing has global implications and, thus, is appropriately left for Congress to address legislatively.

Super-sized impact

If the NIH were to exercise its march-in rights to Xtandi, the impact on the biotech industry could be enormous.

The NIH funnels roughly 80% of its $31 billion budget to researchers via grants every year, and because it's a major source of academic funding, NIH grants have had a hand in developing some of the most widely used medicine in America.

For example, in the 40-year period following the Bayh-Dole Act's passage, the FDA approved 153 drugs that were rooted in federal funding, including 36 biologics and 15 vaccines. Among these 153 drugs are perennial top-sellers, such as AbbVie's autoimmune drug Humira, which posted $14 billion in sales last year and has ties to research done at Rockefeller University.

However, the indication that appears to have benefited most in the post Bayh-Dole Act period is cancer. According to a 2011 study published in the New England Journal of Medicine, oncology drugs accounted for 40 of the 153 FDA approved drugs that have stemmed from federal funding. Given that cancer drug costs are typically high, a ruling against Medivation could significantly affect the licensees of these oncology patents.

Looking ahead

In the past, the NIH has distanced itself from the pricing debate, but if that were to change, it could set a precedent that leads to questioning patents protecting some of the industry's best-selling medicines. In turn, that could potentially undermine the existing relationship between university researchers and private companies. If that were to cause drugmakers to abandon those relationships in favor of their own internally developed drugs, then it could delay, or thwart, scientific breakthroughs, especially in rare and tough-to-treat diseases where trial failure is highest. Because of that risk, the NIH will probably tread carefully.