this has not happened in other countries, and there is no reason to assume that it would take place here.

Repeatedly in the drug trade press I have seen our proposals on patents described as a simple curtailment of the duration of the patent grant from 17 to 3 years. This is a distortion. What I am proposing is that the grant still be for 17 years, during the first 3 of which the patent holder shall have exclusive rights, but that for the remaining 14 he shall be required to license qualified applicants upon the payment of a royalty of up to 8 percent on the licensee's sales. A qualified applicant is one who holds a license from the Secretary of Health, Education, and Welfare to manufacture the drug.

By specifying precisely the qualifications of the licensee and the size of the royalty, years of litigation before the courts will be avoided in establishing who is a "qualified applicant" and what is a "reasonable" royalty.

It is true that the requirement to license others will reduce somewhat the profits of the patent holder. But, as I have pointed out earlier, there is ample room for a reduction in those profits without impairing what would be regarded as a reasonable return on investment. Moreover, the receipt of 8 percent on sales from the licensee is a not inconsiderable return, particularly since such income can be received without the necessity of making any expenditures for production and distribution. With a few exceptions, the royalty rate of 8 percent is higher than that found in patent license agreements examined by the subcommittee in the course of its investigation. There is also the possibility that with additional firms selling the product, new uses may be developed which would result in greater sales than if the product had not been licensed. As compared to the practice followed by most other countries of refusing to grant patents on pharmaceutical products at all, or of coupling such a grant with Government price control, this is a rather modest proposal. It is the best way I can conceive of bringing down the prices of ethical drugs through the force of competition while at the same time assuring a more than reasonable return on their investment to the patent-owning companies. The other principal provision concerning patents has to do with what are referred to as molecular modifications and drug combinations. During the hearings physicians objected to the constant introduction of allegedly new drugs through "molecular manipulation" or the combining of existing drugs. Since the drug companies are usually able to secure patents on these slight modifications or combinations, they can afford to launch them with "blitz" campaigns as important new drug discoveries. In Dr. Bean's words, they can make "a quick kill with the quick pill," before physicians are able to discover that the new "wonder drug" is nothing more than this year's model of the same old products. In the words of Dr. A. Dale Console, formerly medical director of Squibb:

The problem arises out of the fact that they [the drug companies] markets so many of their failures. Between these failures which are presented as new drugs and the useless modifications of old drugs, the addition of zinc to vitamins is a good example, most of the research results in a treadmill which moves at a rapid pace but goes nowhere. Since so much depends on novelty, drugs change like women's hemlines and rapid obsolescence is simply a sign of motion, not progress as the apologists would have us believe.

I doubt that there are many other industries in which research is so free of risks. Most must depend on selling only their successes. If an automobile does not have a motor, no amount of advertising can make it appear to have one. On the other hand, with a little luck, proper timing, and a good promotion program a bag of asafetida with a unique chemical side chain can be made to look like a wonder drug. The illusion may not last, but it frequently lasts long enough. By the time the doctor learns what the company knew at the beginning, it has two new products to take the place of the old one (hearings, pt. 18, pp. 10372-10373).

To cut down on this flow of manipulated molecules and useless combinations, the bill provides that a molecular or other modification of an existing drug or combination of two or more existing drugs is not patentable unless the Secretary of Health, Education, and Welfare has determined that the therapeutic effect is significantly greater than before the modification or combination. This, in effect, transfers the initial determination of therapeutic effect for these types of drugs from the Patent Office to the Department of Health, Education, and Welfare. The reason is simply that the Department, which embraces not only the Food and Drug Administration but the National Institutes of Health and the U.S. Public Health Service, has vastly more knowledge and resources to make such a determination than the overburdened examiner in the Patent Office. A precedent for this arrangement exists in the treatment of patents for plants, on which no patent can be issued without a prior determination on the part of the Department of Agriculture, which in this field is far better equipped than the Patent Office to determine what constitues a significant improvement.

Finally, the bill would make certain types of contracts and agreements unlawful per se under the Sherman Act. It frequently happens that different companies hit on the same discovery at about the same time. In such cases they customarily file patent applications, all laying claim to the same invention. A determination must then be made as to which is the "true" inventor. To do this, the Patent Office employs the procedure of declaring an "interference," which in essence is an administrative hearing on the claims of the various parties. Increasingly in such cases the function of determining priority has been transferred from the Government to the private parties through the device of the private settlement of interference actions. The procedure is for the applicants to enter into an agreement as to which is entitled to receipt of the patent. Once this is done, the others immediately withdraw their applications and the interference proceeding is automatically ended. The patent is issued to the remaining applicant, and in exchange for withdrawing their applications the other parties become licensees. Usually these agreements contain restrictive provisions prohibiting them from selling to outside parties, prohibiting sales in bulk form, etc. And usually the company receiving the patent and all of the licensees just happen to put their products on the market at exactly the same price.

To meet these problems, S. 1552 provides that any contract, combination or conspiracy concerning drugs violates the Sherman Act if any party to a restrictive agreement agrees to (1) withdraw or cause to be withdrawn any pending patent application; (2) concede to another patent applicant priority of invention; and (3) not grant or cause another not to grant any patent license.

I wish to emphasize that what is prohibited are practices engaged in pursuant to a restrictive agreement, since the bill is in no way intended to interfere with bona fide sales of a patent or a patent right.

CONCLUSION

What we are confronted with in the ethical drug industry is the existence of prices which by any test and under any standard are excessive. A corollary problem is the danger to the public health arising from the dissemination to physicians of advertisements which are false or misleading in their claims and less than candid in their warnings. Confronted with a situation of this type, there are two different conceptual approaches to the devising of appropriate remedies. One is the approach of direct governmental controls. Thus, there have been proposals that the drug industry be made a public utility and be placed under direct governmental price control. There have been proposals that all advertising to physicians be screened and approved by the Government before distribution to physicians. There have been proposals that all prescriptions be written in terms of generic names. None of these proposals has been incorporated in S. 1552.

They have been rejected because the bill rests upon the alternative approach to the problem. This is the approach of securing relief from a monopolistic industry by infusing therein the force of price competition. Prices are to be brought down, not by governmental fiat, but by the rivalry of competing producers in the market. To make this competition fair as well as effective, certain safeguards and limitations are provided for. These safeguards will also have the corollary effect of improving the quality and reducing the quantity of information distributed to the physician. This is the traditional American approach to the problem of monopoly, and it is one which I think is particularly well-suited to the drug industry.

While I cannot predict whether in fact this bill will completely solve all of the problems to which it is directed, I know that unless this measure or something closely resembling it is adopted, the American people, whose patience with price gouging in drugs is wearing thin, will demand that their Government adopt the tougher approach of direct governmental controls. And I have no doubt that the drug companies would find such direct controls far more repugnant than the relatively moderate measures contained in S. 1552. The present situation in which the United States alone among the major powers grants monopolies on products which spell the difference between life and death, without at the same time providing for any protections to the public interest, will not long continue.

Senator Dirksen and Senator Carroll, before we get started, do you wish to make any comments?

Senator DIRKSEN. Mr. Chairman, I thought I ought to make a few comments.

First, I think I ought to correct you about the source of new drugs, when you said that Germany was the great source. I thought the record showed that two-thirds of all the new, effective, ethical drugs were initiated in the United States, and one-third in the rest of the world.

I think maybe you had better check the record. What you read, I take it from what you said, was a summary.

Senator KEFAUVER. There is a

Senator DIRKSEN. Wait a minute.

What you read you said is a summary of the majority report, and, as you know, we wrote a rather extensive minority report, and I think we refuted every one of the contentions that you made with respect to prices, lack of competition, profits and cost structure, and permanent control of the market, and this whole question of patents and everything else, which I will not go into.

I shall file my summarized statement in the record immediately behind your statement, because I thought the majority report was a bit of a fantasy that just did not stand up, in view of the 8,600 pages of testimony that we took.

You say this approach is not control. If your bill is not control, then I have never seen control in all the days that I have been around the legislative branch of the Government, and that, of course, will have other attention as we take testimony.

But I will be content not to take the time of the witnesses who came here, and just file this statement right behind yours, because it is essentially, I think, a refutation of your summary of the majority report.

Senator KEFAUVER. Do you wish to have it filed at this point?
Senator DIRKSEN. I think I would.

Senator KEFAUVER. Without objection, it will be filed.

(The statement referred to follows:)

BRIEF SUMMARY OF ADMINISTERED PRICES DRUGS--MINORITY VIEWS BY SENATOR EVERETT M. DIRKSEN

PREFACE

The majority view is a voluminous fantasy which appears to be nothing more than calculated review of choice quips, statements, and exhibits which were presented by biased witnesses rather than a judicious evaluation of all evidence presented, therby making the majority views a boon to business haters and drug industry baiters.

I. INTRODUCTION

In view of the extreme bias demonstrated throughout the majority's report, it is questionable whether there was any need to hold these extensive hearings over the past few years, since the same basic conclusions could have been drawn on the preconceived ideas of the staff without the necessity or expense of the time of the Senators and the money spent.

The Constitution sets forth the powers of the executive, legislative, and judicial branches of the Government and during the course of our investigations and hearings our subcommittee has invaded the province of the departments and agencies in the executive branch of the Government. It must be remembered that ours is a legislative purpose, and not a subcommittee to hold hearings just to keep the public informed of certain matters irrespective of the national character of the issue.

The majority report is practically silent on the importance of the pharmaceutical industry in this country in not only saving lives and making people well, but in cutting costs of hospital and medical expenses and putting people back to work at a much earlier date than was the case several years ago. For example, tranquilizing drugs have cut down the expenses of caring for the ill in institutions, thus a savings of millions of dollars in taxes and returning patients to useful lives.

II. THE DRUG INDUSTRY

The record shows that drug prices were held down while business costs in 1948-58 period soared with wages 70 percent higher and construction costs up 64 percent. As a matter of fact, in most any category you may wish to take into consideration, the level of the price of drugs rose the least. The more effective drugs of the 1960's take less of the individual's health dollar than 30 years ago. This is not taken into consideration in the other advantages mentioned above. The majority report has made unwarranted attacks on the integrity of firms which have exerted every possible precaution to insure high quality products.

The subcommittee also failed to point out vividly the tremendous amount of money spent in research, which resulted in many new drugs, whereas, in Russia there was not one known drug founded.

III. ADMINISTERED PRICES

The majority report again goes into detail about their theory on administered prices thereby creating improper inferences. The minority view explains what administered prices are that they are a necessary part of our economic system; that 90 percent of products used are sold at administered prices; that administered prices are not synonomous with monopoly prices; and that our industrial system could not exist without the administered price theory.

IV. MINORITY ANALYSIS OF MAJORITY'S CHARGES

Point 1.-After careful analysis of the testimony adduced at the hearings, the minority finds that the position in the majority's report that the drug industry has had a price, profit, and cost structure that was uncompetitive is unfounded and erroneous.

The minority report vividly shows that the majority used erroneous exhibits in attempting to show an extreme markup, whereas, the record shows that the drug manufacturer earned approximately 11 percent of sales, which is not out of proportion for the nature of the industry.

Point 2.-After careful analysis of the testimony adduced at the hearings, the minority finds that the position in the majority's report that the drug industry has a permanent control of the market is unjustified, erroneous, and unfounded.

Every firm which develops a new product under our patent laws has temporary control of the market for that particular product, inasmuch as it secures a patent on its development. However, the record shows that there are other drug manufacturers who hold patents to a competing drug. As a matter of fact, testimony during the hearings disclosed that after a period of 5 years most drugs become obsolete and any firm which wishes to maintain leadership in competitive field is engaged in a constant race with its own research staff. Point 3.-After careful analysis of the testimony adduced at the hearings, the minority finds that the position in the majority's report that the patent system has not operated effectively in the pharmaceutical industry is erroneous and unfounded.

The minority views point out the philosophy of the patent system in this country and its role in the great development in all industries as well as in the drug industry and it refutes the suggestions in the majority's report that other countries do not look upon patents in the drug industry as we do here in this country and the implications therefrom. After careful review of the comments made in the majority report as contrasted with the text taken from Mr. Leonard J. Robbins' article, "Pharmaceutical Patents in Foreign Countries," there is a completely different concept of patent protection abroad than the majority report attempts to convey.

Point 4-After careful analysis of the testimony adduced at the hearings, the minority finds that the position in the majority's report that contributions by American industry to American research are negligible is erroneous and unfounded.

The minority views quote your colloquy with Mike Gorman, executive director of the National Committee Against Mental Illness, and goes on to point out the great amount of money expended for research and the valuable contributions in the form of new drugs resulting therefrom.