In April 1961, Kefauver’s subcommittee introduced Senate Resolution 1552, a sweeping bill that proposed landmark changes to the patent, trademark, antitrust, and regulatory laws that applied to the pharmaceutical industry.1 Its title was evidence of its ambition: the Drug Industry Antitrust Act.2
While pharma firms disliked the entire bill, they were most alarmed by a few provisions that promised to upend the way the industry priced its drugs. The seventeen-year exclusive selling monopoly granted by drug patents would be cut to five. Worse yet, after three years the patent holder would be required to license its drug to all comers for a royalty capped at 8 percent. Cross-licensing of patent rights, as the tetracycline manufacturers had done to fix prices, would be illegal. Companies that tried obtaining a patent by slightly modifying the chemical structure of an existing drug, a me-too drug, would have to prove that the alteration resulted in a “significant therapeutic benefit.”3 And that would also be the standard to extend patents on existing drugs. It would end abuses such as Lilly’s use of minor alterations to dominate the insulin market for more than fifty years after the drug’s 1920s release.4
As for trademarks, in addition to listing the brand name on all drug labels, the generic name—which the FDA would select—would be required in an equal-size font.5I And, to the particular consternation of Arthur Sackler and his Medicine Avenue syndicate, the bill required that drug ads include full and accurate information about all reported side effects.6 No other industry, claimed Dr. Hugh Hussey, the chairman of the AMA’s Board of Trustees, required advertisers to tell “the whole truth.”7
The proposed legislation provoked a massive pharma industry lobbying campaign. The drug companies condemned it as anti-American and unconstitutional since it limited patent rights for only one industry. If enacted it would harm science and innovation and slow the development of lifesaving medications. Sackler suggested a clever line of counterattack relevant to the ongoing Cold War (somewhat ironic given his leftist politics). If government regulators dampened the pharmaceutical industry’s pioneering spirit, the Soviet Union would be the greatest beneficiary from any loss of American scientific leadership.
The Senate bill was not pharma’s only problem. The FTC had opened a new investigation into the pricing and advertising practices of thirty-seven manufacturers and distributors. And a New York federal grand jury had returned indictments against Pfizer, Lederle’s parent, American Cyanamid, and Bristol-Myers, as well as their CEOs, charging criminal antitrust violations in the marketing of antibiotics.8 The only good news was that an FTC examiner dismissed the charges the FTC had brought three years earlier against Pfizer, Lederle, Bristol-Myers, Squibb, and Upjohn for conspiring to fix tetracycline prices.9 Few involved on either side of that litigation could have then imagined that the criminal and civil questions of whether those five drug companies had engaged in a highly profitable criminal conspiracy would not be resolved for another twenty-seven years.II
In June 1961, Kefauver’s subcommittee released a damning 384-page final report, based on its public hearings of the previous year and tens of thousands of subpoenaed internal company documents.10 It presented the case for why Congress should pass his proposed statute. Many of the entrenched problems about the pharmaceutical industry highlighted in the report would vex regulators and consumers for decades to come.11
Its conclusions were straightforward. “Drug prices are unreasonable” and resulted in “extraordinary margins and profits.” The industry’s “monopoly power” kept prices artificially inflated. The leading companies “abused patents” and deployed misleading and “exceptionally large advertising and sales promotion.”12
Pharma was different from any other industry Kefauver had investigated: “He who orders does not buy; and he who buys does not order.”13 Doctors acted essentially as “purchasing agents” for consumers, who cannot price shop for a similar product since the physician’s prescription locks them into buying a specific drug. “The consumer is ‘captive’ to a degree not present in any other industry.”14 Price increases do not affect the prescribing habits of doctors. Schering’s president, Francis Brown, had illustrated the point during his testimony: “Unlike consumer marketing, Schering cannot expand its markets by lowering prices, Cortisone proved this. After all we cannot put two bottles of Schering medicine in every medicine chest where only one is needed, or two people in every hospital bed, where only one is sick. Marketing medicine is a far cry from marketing soft drinks or automobiles.”15
The problem was amplified since the demand for medications was not responsive to price changes. Consumers bought drugs only when they were ill or had a chronic condition requiring treatment. Slashing the price of a hormone or antibiotic did not generate extra sales. Only the sick benefited while corporate bottom lines took a beating. The report noted the firms’ internal files “left no room for doubt” that the industry exercised unparalleled pricing power over its products.16 Although there were thousands of drugs on the market, just a few dozen were responsible for three quarters of all sales.17 The top fifteen companies had gross margins approaching 80 percent and net profits that were double the average of nonpharma industries.III18 The report blamed this outsized pricing power on the “private monopoly” that patents provided.19
Pharma executives had argued that drug innovation was possible because companies spent lavishly on R&D. The exclusive selling period afforded by a patent allowed them to recoup their costs and earn a profit. The Senate report countered that by listing important medications discovered at universities, foundations, nonprofit institutions, and clinics, all places where profits did not figure into the decision of whether or not to conduct new drug research.20 Moreover, it emphasized that patents were originally introduced as a reward for the solo inventor but the drug industry had converted it into a search for products that held the greatest potential profit. The inventors for drugs were employees working in corporate laboratories and they had assigned all their rights to their employers. 21
Kefauver’s report sent shivers through the drug business. It raised the spectre the U.S. might adopt the European model of public health, one in which governments regulated prices.22
The report underscored an inherent shortcoming in the way drugs were developed, as relevant today as it was fifty-seven years ago: “The problem is with companies whose sole concern is business… the richest earning[s] occur when a new variety or variant of a drug is marketed before competing drugs can be discovered, improvised, named, and released.” Secrecy before the rollout of a new medication was instrumental to its success and to ensure rivals did not get an early start on developing a competitive product. The result was that most drugs were marketed after a “minimum of clinical trials” intended to do the very least required to demonstrate there were not any “potential dangers from toxicity.”23 The public, buying drugs prescribed by doctors, were effectively guinea pigs on whether the medications had long-term safety issues.
Kefauver’s investigative staff had also focused on Medicine Avenue. “Abuses and corruption” were problematic in the visits to physicians by the detail men (20 million annually), direct mailers to doctors (750 million a year), free journals supported only by pharma advertising, and ever-grander exhibits at medical conventions.24 Pharma companies had become addicted to the hard sell; the largest firms spent a robust quarter of all income on promotion (which the companies labeled “physician education”). One out of every six employees at the largest firms was a detail man. The promo and ad budgets were the fastest-growing expense for every firm, mushrooming from less than $100 million to $750 million over a decade.25
Arthur Sackler and his colleagues had taken advantage of an FTC loophole that exempted all ads directed to physicians from any oversight. Congress had created that exception believing that since doctors were knowledgeable they would not fall prey to misinformation or slick promotion. The Senate probe demonstrated that physicians were as susceptible to bad information as the general public. According to a three-year study of thousands of direct-to-doctor ads, more than half contained unreliable or misleading statements.26 Some were not truthful, others deceptively ambiguous. Although every pharma firm had a physician as medical director, the ad departments frequently bypassed or overruled them when it came to more questionable promotions.27
In two thousand pages of ads run in leading medical journals, 40 percent “ignored side effects entirely” while the rest “dismissed the subject with some sort of reassuring phrase.” The McAdams agency had introduced some of the most commonly used taglines: “virtually free of side effects,” “with no irreversible side effects,” “without clinically significant side effects,” “relatively nontoxic,” “few side effects to worry about,” and “absence of serious side effects specifically noted.”28 The one that Arthur Sackler used the most was “side effects are generally of a transient and non-serious nature.”29
Kefauver’s subcommittee had found that doctors were overwhelmed by all the ads for the spiraling number of new medications, upward of five hundred a year. Many were slight chemical alterations of an existing drug and marketed with similar and easily confusable names. A busy physician had to sort through competing brand names and generics from foreign companies. The plethora of promotional materials was dubbed “the therapeutic jungle.”30
That was no mistake by the drug companies. Internal marketing files from top firms boasted about how their products benefited from “the confusion technique,” the perplexity caused by hundreds of ever-changing products. Sometimes the information overload caused physicians to keep prescribing the same pill with which they had been comfortable for years. That was especially true of those who had practiced for a long time. They had difficulty running their practices and keeping up with the flood of new information. Drug companies knew that was a reason to lock a doctor early on into a patented brand. Yet, in other cases, the new drugs served as “built in obsolescence.” It forced physicians unable to keep abreast of all the latest developments to adopt whatever the detail men promoted as the latest and greatest.31
Few doctors thought they were to blame. Half of physicians polled reported that their earliest source of information about a new drug was not from ads but from the detail men.32 Those pitches were always given in the privacy of the doctor’s office and never put to paper. Often mixed into the presentation extolling the benefits of the new drug, the detail men raised fears about the safety and efficacy of competitors, particularly generics.33 The government was so obsessed about lower prices, they claimed, that it had allowed generics without adequate safeguards for quality and safety.34, 35
It was difficult for physicians to determine if everything the detail man said was accurate science or mixed in with some hyperbole. The Kefauver panel had asked early on: “How often is the misrepresentation a matter of individual overzealousness and how often does it reflect deliberate company policy, codified into specific instructions to the detail man?”36
The internal files of Parke-Davis provided at least one answer to that question. It had marketed its successful antibiotic Chloromycetin for nearly a year when the first reports trickled in about some patients developing aplastic anemia, a rare and sometimes fatal condition affecting the bone marrow. The National Research Council had reported as early as 1952 that Chloromycetin was linked to nearly half the cases. It recommended a warning be sent to all prescribing physicians and hospitals that because of the potential severe adverse effects, “it is essential that adequate blood studies be made when prolonged or intermittent administration of this drug is required.”37
What did Parke-Davis, and Bill Frohlich, whose ad firm was responsible for this account, send to doctors? They changed “essential” to “should” and suggested that Chloromycetin was “no more dangerous” than other strong antibiotics.38
The FDA intervened and ordered Parke-Davis to “revise labeling that would caution physicians explicitly against its indiscriminate use.”39 The detail men told doctors to ignore the substance of the FDA warnings. They turned the setback into a victory, boasting that the FDA’s failure to ban the drug was “the highest compliment ever tendered the medical staff of our company” (emphasis in original).40 That spin on the FDA’s action undercut the prominent warning on the label and doctors’ prescriptions for Chloromycetin remained the same.
Adding to all the discouraging revelations, the Senate report noted that even when doctors stayed up to date of the scientific press, many published papers “are written within the confines of the pharmaceutical houses concerned.”41 Upon closer inspection, the “allegedly scientific studies by doctors… amount in many cases to no more than testimonials of no scientific validity.”42 Arthur Sackler and Félix Martí-Ibáñez had refined the mixture of promotion and medical science into a veritable art.
Kefauver announced that beginning in January 1962, there would be a new round of public hearings on his proposed legislation. The first phase would focus on medical advertisements and promotion.
“The subcommittee has issued subpoenas to officials of two agencies that handle the bulk of the industry’s advertising,” reported The New York Times. “They are the William Douglas McAdams Agency and L. W. Frohlich Company [sic].”43
The first witness scheduled to testify was Arthur Sackler.44
I. At that time, pharma firms picked both the generic and brand names of any drugs they discovered. The Senate report concluded “they coined generic names so complex and unpronounceable as to virtually prohibit their use in the writing of prescriptions.” A good example was Lederle’s Kynex, an antibacterial to which Lederle gave the generic name sulfamethoxypyridazine. Once having created a long and difficult-to-remember generic name, pharma cited that complexity as a reason physicians should simply use their simpler brand names.
II. As for the tetracycline price-fixing case, it took another two years, until 1963, before the full five-member commission reversed the examiner’s dismissal. They ruled that the five companies had conspired to fix prices and that Pfizer and Lederle had also perpetrated a fraud on the Patent Office. Pfizer was ordered to license tetracycline at a discounted rate to any company that requested it. In 1967, a differently constituted five-member FTC commission reversed the finding of price-fixing but upheld the fraud count on the Patent Office. The Sixth Circuit Court of Appeals affirmed that ruling the following year. By then, there were more than 150 civil lawsuits; the plaintiffs included hospitals, union health funds, and government agencies seeking to recover what they had overpaid as a result of the price-fixing. The pharma firms collectively spent $250 million to settle all but fifty-eight cases prior to trial. The remaining lawsuits were consolidated into a class action that dragged through a byzantine course of discovery, procedural delays, and a seemingly endless battery of motions and appeals. In 1976, a Federal Appeals Court reversed the remaining FTC findings against the drug firms. State of North Carolina v. Chas Pfizer & Co Inc. 537 F. 2d 67 (4th Cir. 1976). That was four years after the tetracycline patent had expired and generic competitors had entered the market. That did not stop the litigation, however. In 1980, a different federal judge ruled against the Justice Department’s effort to invalidate the Pfizer patent. That judge held the core of the government’s case—the chief patent examiner’s testimony that he would not have granted the patent in 1954 if he had known the information that Pfizer withheld, which was not reliable because so many years had passed since the events charged in the original complaint. And, even if Pfizer did give misleading data to the Patent Office, he ruled the government had failed to prove that Pfizer had acted with fraudulent intent. The Justice Department lost its final appeal in 1982. U.S. v. Pfizer, 676 F.2d 51 (1982). When all the civil cases were finished in 1986, the total payouts by the five tetracycline firms were a small fraction of what they had earned by fixing the price artificially high for so many years.
III. About six months before the report, Lederle, Bristol, and Parke-Davis reduced the price on their branded tetracycline by 15 percent, the drug’s first ever discount. It was a preemptive move intended to demonstrate the willingness of companies to voluntarily cut prices even without any competitive impetus to do so. Kefauver and most of his Senate colleagues were not impressed and noted it in the report.