A 1950 investigation into organized crime made Senator Estes Kefauver famous.1 Informally called the Kefauver Hearings, they had coincided with the introduction of television in the U.S. Networks were so new that they had little daytime programming. Providing live coverage of Kefauver’s probe was a last-minute decision. It was a big gamble for the young industry. The six-foot-three, 220-pound Kefauver, his face partially hidden by his oversized eyeglasses, did not look like the prototype of a television hero. His strong Southern drawl combined with a tendency to mumble often made him difficult to understand.2 Yet the daily soap opera about the Italian mafia, with a parade of colorful mobsters squirming and blustering before the subcommittee, became a national obsession. When Kefauver took his show to New York City for eight days of gripping testimony from top gangsters, Time noted it “will occupy a special place in history.… People had suddenly gone indoors into living rooms, taverns, and clubrooms, auditoriums and back-offices. There, in eerie half-light, looking at millions of small frosty screens, people sat as if charmed.… Dishes stood in sinks, babies went unfed, business sagged and department stores emptied while the hearings were on.… Never before had the attention of the nation been riveted so completely on a single matter.”3 Thirty million Americans tuned in to the hearings, about 90 percent of those with TVs. Kefauver became a public champion.4 I
Kefauver tried parlaying his fame into becoming president. He ran in 1952 and 1956, barely losing the Democratic nomination both times to Illinois governor Adlai Stevenson. In 1956, Kefauver ran as Stevenson’s vice president, but Eisenhower trounced them. The following year he was appointed the chairman of the Senate’s Antitrust and Monopoly Subcommittee. He used that platform to cultivate an appeal to “the little fellow” by launching high-profile investigations into the steel, auto, and bread industries (Time coined “In Kefauver we anti-trust” for his new role).5
Kefauver’s drug probe got under way in December 1959. From the start he made it clear he was bothered by an industry where only a few firms dominated sales and had unfettered discretion to set prices.6 Pharmaceuticals accounted for thirteen of the top fifty firms in America.7 He intended to find out, he said, if they abused the patent system to control the pricing and the market for a few incredibly profitable medications.
Kefauver had assembled a small but experienced investigative team, led by two FTC veterans. John Blair was an economist who had proven on large FTC probes his talent for navigating through voluminous company files to compile evidence of wrongdoing. The general counsel was Paul Rand Dixon, a decorated World War II Navy pilot (he would be appointed the head of the FTC before the hearings finished). Both realized their staff of six economists and attorneys would be hard pressed to keep up with the drug industry’s small army of publicists and lobbyists as well as teams of lawyers and seasoned expert witnesses.8 The pharma firms had some powerful allies, including the American Medical Association, many chambers of commerce, and the nation’s pharmaceutical associations. All feared that “politically inspired” hearings would result in more federal regulation, maybe even price controls. That had happened in Europe after World War II when many nations implemented national health care programs. Putting the governments into the role of buying drugs from the pharma industry led to the creation of panels of physicians and bureaucrats empowered to either get price concessions or block the sales of drugs judged too expensive. The United States, meanwhile, remained the only industrialized country that allowed pharmaceutical companies to set prices.9
The subcommittee’s focus was on competition and pricing in different drug categories: antibiotics, hormones, tranquilizers, and diabetic medications. Subpoenas were served on nineteen companies. They ordered the testimony of key executives and the production of tens of thousands of internal files, including patent licensing contracts and purchase and sales agreements.
The hearings got under way with a string of top executives who all resented testifying.10 Schering’s president, Francis Brown, was first. He had served as general counsel to the Federal Deposit Insurance Corporation before his appointment to run Schering after the government seized it as a German asset during World War II. When the Plough family later bought Schering at public auction in 1952 for $29 million—$281 million in 2019 dollars—and renamed it Schering-Plough, it kept Brown at the helm.
Visibly irritated by the sharp questioning, Brown accused the senators of trying to exercise “thought control” and scolded them for “misconstruing” information to generate “headlines.”11 Schering’s drug prices were “pretty reasonable,” he contended. John Blair challenged that, since the company’s brand of a hormone drug (prednisone) was marked up 1,118 percent of its production cost.12
Merck’s president, John Connor, arrived flanked by two Nobel Prize–winning scientists and lectured the committee that its investigation would “slow the forward march” for better drugs.13 Parke-Davis’s CEO Harry Loynd did not hide his disdain for the “ridiculous proceedings.”14 Loynd, a trained pharmacist, had worked as a detail man for twenty years at Parke-Davis before rising to the top spot. He believed that good sales trumped poor drugs. “If we put horse manure in a capsule, we could sell it to 95 percent of these doctors,” he once told his sales team.15
All the CEOs cited said their enormous research and development costs could only be recouped by the drug prices they charged. That excuse for the big markups would serve as the template for pharma’s deflection in all future price investigations.
Dr. Austin Smith, president of the Pharmaceutical Manufacturers Association, complained that the senators had made the drug industry a “whipping boy” so they might open “the back door… to socialized medicine.” Smith set a new low when he argued that the focus on pricing was misplaced: “All of us feel compassion for elderly people who find it difficult to pay for medication.… If the pharmaceutical industry is at fault here, it is because it has helped to create a pool of millions too old to work by prolonging their lives.”16 Even Smith’s allies shook their heads in disbelief when he told the subcommittee that the costs of drugs were lower than funeral costs.17
Kefauver thought such arrogance would spark a backlash against the pharma bosses. Not many Americans, however, were paying attention. The nuances of patent and antitrust law, licensing deals, royalty arrangements, drug chemistry, and testimony from well-coached economists proved far less interesting than the colorful and often profane mobsters from whom Kefauver earned his fame.18
This time, no television network broadcast the hearings live. John Blair, the investigative staff’s chief economist, noted that Kefauver himself “became increasingly concerned with getting to a wider audience” and that “a formidable problem” was that much of the investigation “had gone largely unreported by the press.”19 Kefauver was frustrated that not even a disclosure about Upjohn’s 10,000 percent profit margin on one of its drugs got much press.20 He could not understand why there was not more anger after Squibb’s former medical director Dr. A. Dale Console testified that “more than half” of the drugs on the market, or “on the drawing board,” were “useless.” The only reason they were sold was because “they promise sales.”21 The number of reporters covering the hearings had dwindled by the time it got to the intricacies of the patent battle over tetracycline.
Kefauver knew that a quirk of World War II labor policies meant his drug hearings faced a hurdle in captivating public interest. Most Americans had health insurance coverage through their employers and few were affected directly by rising drug prices. Before the war, there had been only two nonprofit insurers, Blue Cross, created by a group of Texas hospitals in 1929, and Blue Shield, founded by doctors in 1939 in California. They provided catastrophic care insurance designed to lessen the financial impact of a major illness or prolonged hospitalization. Fewer than 10 percent of Americans had signed up by the time the U.S. entered the war. In 1942, Franklin Roosevelt invoked extraordinary wartime powers to freeze all private enterprise “salaries and wages, as well as bonuses, additional compensation, gifts, commissions, and fees.”22 With so many workers suddenly in the military there was a severe labor shortage. Businesses had competed for workers by raising salaries and offering incentive bonuses. FDR’s order stopped that, but it had an exception. It allowed companies to grow “insurance and pension benefits… in a reasonable amount.”23
That might not have seemed a big deal until later that same year, the Revenue Act put into effect a punitive tax rate of 90 percent on “excess profits,” defined as anything greater than what the company had earned the year before the war. The Revenue Act’s silver lining was that it gave domestic companies a financial incentive to provide health insurance for their employees. The costs of such insurance became deductible to employers.24 An IRS ruling the following year exempted employees from paying taxes on the value of their employer-provided health insurance. The perfect alignment of the different events meant that by mid-1943, corporate America addressed its labor crunch by luring workers with generous health insurance benefits. The number of Americans covered by health insurance jumped from the prewar 10 percent to 30 percent a year after the war (1946). The arrival in 1951 of the first for-profit insurers, Aetna and Cigna, kicked off the next wave of public enrollments.25 By the time Kefauver started his hearings, 70 percent of all Americans had health insurance plans that also covered the most widely prescribed drugs, including antibiotics, tranquilizers, psychotropics, and sulfa meds.26
Kefauver’s instincts about what the public wanted to hear were normally impeccable. While he was determined to push forward on his drug industry probe, he also directed his investigative staff to double their efforts to dig up more than price markups and possible collusion. Proof of how wide a net they cast is in an extraordinary March 16, 1960, memo in which John Blair wrote to the subcommittee’s chief counsel, Paul Rand Dixon.27 The subject was “Sackler Brothers.”28
During the course of the drug investigation I have from time to time heard the rumors of the “Sackler Brothers” or “Sackler Empire.” At first I had been under the impression that this is something of a “fringe” operation, of passing interest because of its unique character but of little substantive importance. As I have gathered further information, however, I have been forced to modify this earlier impression.
The Sackler brothers, among others, are both of the medical journals formerly edited by Dr. Welch, head of the Antibiotics Division of the F.D.A. Any outfit which has been able to establish such close ties with the most powerful man in government with respect to antibiotics is hardly a fringe operation. However, the clandestine manner in which they carry on their multitudinous activities also suggests there may be more here than meets the eye. Finally, the very number of organizations in every facet of the drug industry which are under their ownership, control or influence, is such that they must be regarded as constituting a relatively large-scale operation.
Blair identified Dr. Marietta Lutze, Arthur’s second wife, as the group’s “fourth member.” Over two months the investigative staff drew the startling conclusion that “The Sackler empire is a completely integrated operation,” including creating “new drugs in its drug development enterprise”; insuring that “various hospitals with which they have connections” do the clinical testing and produce “favorable reports”; “conceive the advertising approach and prepare the actual advertising copy”; make certain the ad campaign is “published in their own medical journals”; and to “prepare and plant articles in newspapers and magazines through their public relations organizations.”29
Attached to the memo was a list of twenty companies his investigators believed “the Sackler brothers own or control” through proxies. That was no easy task, Blair acknowledged, “since the whole operation is cloaked in secrecy.”30 One of the earliest ventures, Pharmaceutical Research Center, was “a known ‘cover’ for Sacklers.”31 The web of interconnected firms with hidden interests and financiers, warned Blair, had become proficient at making money from many different parts of the pharmaceutical trade. Some Sackler-controlled companies tested, promoted, and sold new drugs; others cashed in on government grants from the National Institutes of Health; and a diverse group had carved out a lucrative niche with medical publications.32 (The NIH funding for private industry drug and medical research reached $100 million annually in 1956 and would more than double to $250 million by the end of the decade.)33 II 34
As comprehensive as the list was—they had found Sackler’s ownership stakes in the journals edited by the FDA’s Henry Welch—they also missed some key connections. Sackler’s equity in Bill Frohlich’s ad firm and his IMS medical data collection company remained a well-guarded secret. And the investigators did not find any of the huge private company grants the Sacklers had obtained using outdated Creedmoor credentials.
Blair identified people who could help build a case against the Sacklers. They included the FDA’s Welch; an unidentified New York college professor who doubled as a clinical writer at Pfizer; a “disenchanted” former McAdams executive; an investor known only by the last name “Collier” who had been cut out of his rightful share on an antibiotic; and a “well-known and respected” Mexican doctor who was furious that the Sacklers had used their influence to force the cancellation of his competing antibiotic symposium in Mexico. Blair also noted “that the Sackler brothers, perhaps through some dummy, are said to be large owners of the stock of Pfizer as well as other leading companies.”35
A week later, Blair zeroed in on how Sackler and Martí-Ibáñez might have compromised the FDA’s Division of Antibiotics.36 Henry Welch had a heart attack shortly after the subcommittee asked for copies of the last decade of his tax returns. The reason for his fright became evident once the investigators got the records. Welch reported $287,142 in “honoraria” in six years of editing two journals for MD Publications ($3.2 million in 2019). His annual FDA salary was $17,500.37 Welch had once told some FDA coworkers that his government salary barely covered his income tax. They did not report it since they thought he was joking.38 A third of Welch’s payments had come from what Arthur Sackler had promised, Pfizer’s purchases of reprints of articles from the journals he edited.39
Welch and Martí-Ibáñez were scheduled for public testimony on May 17. Both canceled. Welch’s doctor claimed he was too ill to be put under “any emotional or physical strain” and two physicians for Martí-Ibáñez said he had glaucoma and that “severe emotional stress and tension are known to aggravate glaucoma and may cause blindness.”40
At a public hearing on May 18, Kefauver finally had a subject that got national attention. The subcommittee presented the evidence about how Welch had cashed in. The HEW secretary held a press conference the next day and demanded Welch resign. In a resignation letter he submitted later that same day, Welch was defiant and blamed “politics” for his predicament. He claimed no one could find “any article, paragraph or sentence, which reflects a lack of editorial or scientific integrity.”41 Adding to the fury was the disclosure that the federal Civil Service Commission had approved Welch’s request for a disability pension after his March heart attack. It was now not possible to deny him his full benefits.42 The Welch debacle forced the HEW secretary to appoint an internal Special Investigative Unit to probe whether there were more widespread conflicts of interest inside the FDA. It concluded that Welch was an isolated case.43 (The FDA’s official historical timeline omits any reference to Welch.)44
The Sackler brothers were fortunate they did not get pulled into the Welch scandal. Arthur and his McAdams agency had edited Welch’s big fixed-dose antibiotic speech, and most of Welch’s money came from reprint purchases by Sackler’s client, Pfizer. Moreover, Welch had told the Saturday Review’s John Lear that Martí-Ibáñez had shared with him that he had two secret investors. Welch insisted, however, that he did not know who they were. Lear’s hunch was that it was Arthur Sackler and one of his brothers, but he could never prove it.45 The Senate investigators also suspected the Sacklers owned a controlling stake in MD Publications but did not have the resources to investigate that.
Arthur Sackler did not appear worried about Kefauver’s probe. Instead of following each twist and turn of the hearings, he spent more time on his growing art collection. He lobbied for and got an appointment to Columbia’s prestigious Advisory Council of the Department of Art, History, and Archaeology, a position he kept for thirteen years.46 Arthur had wanted that Columbia appointment so badly that he created Medimetrics International, a “scientific research and development” firm. He and his first wife, Else, owned a majority; but he gave Columbia a 39.1 percent bequest of the company about six weeks before he got picked for the Advisory Council.47 Meanwhile, Sackler continued adding to a growing roster of pharma clients. When he had too much work, he sent the client to one of his “competitors.” That happened with Parke-Davis, which ended up at Bill Frohlich’s agency.
Sackler had founded Medical Tribune just before Welch’s public meltdown. It promised a concise summary of important developments affecting their profession, everything from pharmaceuticals to politics. It was supported solely by drug ads. Arthur had pitched his idea for Medical Tribune to Georges Doriot, a legendary entrepreneur and Harvard business school professor who is credited as the “father of venture capitalism.”48
Arthur invited Doriot to make an investment in Medical Tribune. Doriot was one of the most respected names in the business world. One of Doriot’s most quoted remarks was that “Someone, somewhere, is making a product that will make your product obsolete.” Arthur pressed the idea that Medical Tribune was unlike anything else. Doriot not only invested but lent his name to it publicly. He praised Medical Tribune and announced it was one of only thirty ventures in which he had put his own money.49 His backing for what he called “the first independent paper for doctors” attracted considerable attention in the financial press.50
Medical Tribune’s masthead listed it as a wholly owned subsidiary of Medical and Science Communications Development Corporation. Only a handful knew that Arthur’s first wife, Else, secretly controlled that company. It had been incorporated in Delaware, where shareholder secrecy is sacrosanct, in February 1960, only three months before Welch’s humiliating denouement. The following month it was incorporated in New York and Nevada.51 On its masthead, Sackler listed Doriot as the president, and Medical and Science Communications Development was “an affiliate” of Doriot’s much admired venture capital firm, American Research and Development Corporation.
By the end of the decade, Medical Tribune would become one of Sackler’s most successful businesses. In every issue, Arthur wrote a column, “One Man… and Medicine.” It was his soapbox. He used it as a provocative forum for a wide range of topics. Sackler often attacked government regulators, ranted about the dangers of smoking and the need for mandatory car seat belts, and sometimes triggered a furious discussion in one of the medical disciplines, such as his “Does Schizophrenia Protect Against Cancer?” column, citing research at Creedmoor Psychiatric Center that he and his brothers had published in 1951 in a Sackler-controlled journal.52 III 53
Most of Medical Tribune’s success, however, came after Georges Doriot had sold his investment back to Arthur at a small profit.54 Although Doriot thought Sackler was “fascinating, brilliant and likeable,” he and his advisors were uncomfortable with Sackler’s shuffling of ownership interests between family and friends. “We had a funny feeling about it,” Doriot years later told The Boston Globe. “There was always something we didn’t understand.”55
What Doriot did not fully appreciate was that Arthur could have financed Medical Tribune on his own. Instead, Arthur knew that Medical Tribune got a priceless public relations boost if Doriot put his name to it.56
Medical Tribune debuted in the middle of the Kefauver hearings. The staff had had no opportunity to include it during its investigation. Instead, during the last four months of its public hearings, Kefauver’s subcommittee focused on antibiotics prices. It was a replay of what happened earlier in the hearings when the spotlight was on hormones. Top CEOs were grilled about why they priced their medications as huge markups of their manufacturing costs. They stuck to their script: the government underestimated their research costs and overestimated their profits.57
That was the same excuse the pharma companies put forward when confronted about why their drugs were always significantly more expensive in America than anywhere else. Fifty tablets of a popular American-made tranquilizer cost $3.25 in the U.S. but only $0.75 in Argentina or $1.48 in the U.K. Lilly’s antibiotic, Penicillin 5, was made and shipped from its Indianapolis plant and sold for $18 a lot in the U.S. but in Europe for an average of $7.25. The investigative staff discovered that the same pricing anomaly existed in all commercially successful drugs with a European origin. Swiss-based Ciba sold its hypertension medication, Resperine, at $40 a lot to European pharmacists, but its U.S. subsidiary charged American druggists $91. European pharmacists paid $10 for an allotment of French-based Rhône-Poulenc’s hypnotic sedative, Largactil; when American licensee Smith Kline sold it in America, under the name Thorazine, the same amount cost $60.58.58
When confronted by the evidence that it did not matter whether the research and development was done in the U.S. or abroad, the pharma companies shifted their argument and blamed more expensive domestic labor costs for the higher prices.59 If true, that costlier labor should have translated into smaller profits. Yet the U.S. sector averaged three to four times the average profit margin of other industries.60 Moreover, Kefauver’s staff confirmed that while European wages were lower than those in the U.S., American drug companies had “lower unit costs” than their European rivals because they were more efficient and used less labor because they had more automation.
If high drug prices were not from more expensive research, development, or labor costs, what was the culprit? Kefauver zeroed in on patents. “Unfortunately, monopoly pricing under patents is widespread in the drug industry.”61
Kefauver had dispatched his chief economist, John Blair, to visit other countries to see how they regulated their pharma industries. Blair’s finding was simple: the U.S. was the only nation that did not regulate drug prices or restrict their patents. Only twenty-seven of seventy-seven countries allowed any drug patent, and those that did granted much shorter exclusive periods. Switzerland and Germany did not permit patents on drugs but only on the processes to manufacture them. Blair had learned that the Oxford-based scientists responsible for penicillin had not patented it because they thought it was “too important to public health.” European regulators told Blair they were troubled at how simple it was for pharma companies to get patent protection without having discovered a drug but simply making a few minor laboratory alterations to a rival’s product.62 In testimony before Kefauver’s committee, Merck’s president scorned the knock-off firms for not doing any original research but acting simply as “molecule manipulators” who got their patents by tagging along on the back of hard work and innovation by others.
Kefauver believed the legal threshold for obtaining the near copycat patents was far too low. And he was irked that when the knock-offs went on sale, they were frequently “priced to the last decimal like their predecessors. Thus the public pays for whatever research costs are involved but derives no benefits of price reduction.”63
Blair suggested reducing American patent protection to five years from the current seventeen.64 And any statute should require pharma firms with patents to license those drugs to all comers.65 Kefauver liked both ideas. The information, he told Blair, would be important in drafting a law that might bring real competition to the pharmaceutical industry.
The hearings broke in September for a recess. There were only two months remaining in a tight presidential race between John Kennedy and Richard Nixon. Kefauver himself was in a tough reelection battle with a conservative state judge. The pharmaceutical lobby saw it as an opportunity to finish off the crusading senator. Drug firms poured money into direct mailers and radio ads suggesting that Kefauver’s probe of the American drug industry was the predicate for the government to socialize medicine.66 He was vulnerable in the South to charges that he was a closet liberal. In the past, he had refused to sign the Southern Manifesto against civil rights for blacks; introduced the censure bill for Red Scare senator Joe McCarthy; and cast the single no vote on a bill outlawing the Communist Party.67
Drug companies had good reason to fear Kefauver. His plans for reworking the patent system would end many of the pricing excesses that had become commonplace. That was bad enough, they thought, to make him an implacable foe. They might have been far more alarmed had they known that privately Kefauver shared with his investigative staff that he believed there was a good argument to make that drugs were an “essential commodity.” That ruling would invest in the federal government the authority to regulate prescription prices as local and state governments set the allowable rates for public utilities.IV68
I. Kefauver won an Emmy in 1952 for “outstanding public service on television.” He was a celebrity guest on the highest-rated game show of the era, What’s My Line?, and had a bit part in a Humphrey Bogart film, The Enforcer. He was one of the few Washington politicians recognizable wherever he went and his subsequent book about the hearings, Crime in America, was a New York Times best-seller.
II. Blair’s team did not realize what the author discovered, that the addresses to which they tracked some of the companies—15 East 62nd Street and 139 East 59th Street, New York—were locations used for earlier ventures, including the phantom New York City branch of the Ophuijsen Center from Creedmoor. The Senate investigators did reveal, however, how the Sacklers transferred some entities to trusts created for their minor children, which they then managed on their behalf. And there was evidence the family owned an unnamed “photo-engraving firm which makes plates used in expensive advertisements for medical journals,” a real estate company that owned properties leased to many of the Sackler firms, and “the company that makes Lysol.” That was Lehn & Fink. Lysol was popular for decades with women for feminine hygiene. Some used it as a mostly ineffective postcoital douche for birth control, but the FDA approval of the contraceptive pill in 1960 ended that often dangerous practice.
III. When Sackler bought McAdams in 1947, he made it a member of the American Association of Advertising Agencies (AAAA), which since 1917 had represented about 90 percent of the nation’s ad firms. Arthur ran Medical Tribune from the same office as his McAdams agency. Sometimes, employees did work for both. That violated an AAAA ethics rule that prohibited ad agencies and industry-related publications from sharing the same office or workers for fear that conflicts of interest would be unavoidable. About eighteen months after Medical Tribune was created, he withdrew from the AAAA. The only public explanation for the unusual decision to leave the advertising industry’s premier trade group was not given for more than a quarter century; the AAAA’s executive vice president would say only that McAdams had been a member in good standing before it left due to “differences with other members.”
IV. There was even some discussion of federal price controls. They had been implemented on basic food items during World War I to prevent price gouging. In World War II they were again imposed on food and expanded to gasoline. The idea of mandatory price caps has been revived in Florida senator Rick Scott’s Transparent Drug Pricing Act of 2019. It would set the list price of U.S. drugs at the lowest retail list price in the U.K., France, Germany, Canada, and Japan. The Trump administration has proposed linking American drug prices to an index of fourteen nations. The pharmaceutical industry contends price caps would disincentivize innovation and result in Americans getting less access to cutting-edge drugs. In July 2019, Maryland became the first state to attempt to treat drug firms as public utilities, a move that pharma is contesting in the courts.