The new oral antidiabetic drugs constitute a similar case in point. The leading seller is Orinase, discovered by a German firm (Hoechst) and marketed in this country by the Upjohn Co. Those sufferers from diabetes, who can substitute the oral drug for insulin injections pay a list price of 14 cents a tablet, for which the druggist pays 8 cents. The cost of production, including tableting, bottling and packaging, is only seven-tenths of a cent. At 3 tablets a day, the typical patient must pay $150 a year for an amount of a drug which is manufactured at a total production cost of about $14.

The well-known mild tranquilizer, Miltown, sells to the public for 10.8 cents a pill, to the druggist for 6.5 cents, but costs only seven-tenths of a cent to manufacture.

Or take the case of the wide-range antibiotics-a type of product with which most parents are all too familiar. These are the drugs which cost the consumer around 50 cents a capsule and are prescribed for a wide variety of infectious diseases in adults as well as children. The largest-selling product of this type, tetracycline, is sold to the druggist at around 30 cents a pill. Yet the average production cost, again including tableting, bottling, and packaging, is less than 3 cents per capsule. On a single sale of this product to the U.S. Government amounting to $830,625, one company made total profits of $562,339, of which $239,135 remained after payment of all taxes. In other words, before-tax profits amounted to five-eights of the sales

value.

Since these margins above production costs are greater than in any other manufacturing industry, they make possible profit showings which can only be described as extraordinary. According to the FTC-SEC, the rate of return on net worth after taxes for the drug industry in 1959 was 18.1 percent, as compared to 10.5 percent for all manufacturing. According to the First National City Bank of New York, it was 21.9 percent for 27 leading drug corporations, as compared to 11.6 percent for all manufacturing. Both sources also showed profits as a percent of sales in drugs to be about twice that of all manufacturing.

I wish to emphasize that these figures are after taxes and after all expenses, including research. The profit rates for a number of the individual drug companies are astonishing. Thus Carter Products in 1958 enjoyed a rate of return on its invested capital after taxes of 38.2 percent; at this rate it would recover its entire investment in less than 3 years. American Home Products made 33.5 percent; Smith Kline & French, 33.1; Norwich Pharmacal Co., 23.7; G. D. Searle & Co., 23.2; Sterling Drug, 22.7; Schering Corp., 21.8; Parke, Davis, 21.6; U.S. Vitamin & Pharmaceutical Corp., 20.9; and Warner-Lambert, 20.1.

With such a capacity for profitmaking, it has been inevitable that the investing community would come to look with favor on the stocks of drug companies. Since World War II the stock market quotations of drug companies have soared. Some impression of the extent of the resulting increase in values can be gained by a few examples: In 11 years the stock of American Home Products would have returned $16,480 in dividends for a $10,000 investment. In addition, the capital value of the stock, as reflected in quotations on

the New York Stock Exchange, would have risen to $137,200 at the end of 1959. Such a rise represents nearly 14 times the initial investment.

Between 1949 and 1959 another company, Smith Kline & French, paid in dividends more than double the initial cost; its stock appreciated over 24 times, the stock being split 18 for 1 during this 11-year period. The original investment of $10,000 at the beginning of 1949 was worth $244,000 at the end of 1959-an appreciation of $234,000-and the investor would, in addition, have received $20,000 in dividends.

These and similar profit showings are made by companies which manufacture products that represent the difference between sickness and health and often quite literally the difference between life and death.

While most of the leading American drug companies operate all over the world, the greater part of their unparalleled earnings come from the American consumer. This is due not only to the size of the American market, but also to the fact that drug prices are usually higher-and often considerably higher-in this country than abroad. To take just a few examples in terms of prices paid by druggists: The price in England for the arthritic drug, prednisone, is less than half that of the U.S. price. The tranquilizer, Thorazine, is sold in France by Rhone-Poulenc, the company which developed it, at only 17 percent of the U.S. price charged by its American licensee, Smith Kline & French. In England the price is only one-fourth the U.S. price; and in Germany, only one-third. The mild tranquilizer, Equanil, is sold in Germany, England, and Austria for less than half the U.S. price. The diabetic sufferer in Germany can purchase Orinase, manufactured by the company which developed it, for less than half the price charged by the U.S. licensee. In Austria, Holland, England, and France, as well as Germany, the price is less than half of the U.S. quotation. The widely sold antibiotic, Chloromycetin, can be purchased in Iran and England for about half the U.S. figure, while tetracycline can be bought for a third less in Brazil than in the United States.

During the hearings representatives of the drug companies attributed lower prices in foreign countries to lower labor costs. But this can explain only a very small part of the difference. Where a product such as prednisolone sells in England for 7.5 cents per tablet and in the United States for 17.9 cents, and where in the United States total production costs, of which labor costs are only a small part, amount to only 1.5 cents, it is difficult to see how differences in wage costs could possibly explain anything more than a slight fraction of the difference in price.

These extraordinary prices and profit showings in ethical drugs are made possible by the existence of a very tight control of the market in the hands of a few large companies. As compared to other highly centralized industries, an unusually large number of products in this field are produced in their entirety by just one company. In 27 out of 51 leading ethical drugs, there is a complete monopoly of U.S. production by one or another of 15 leading companies, and in 45 of the 51 products the entire output is accounted for by 3 or fewer of these companies.

As the committee report points out, the high level of concentration stems in turn from three principal sources:

(a) The success of the drug companies in persuading physicians to write their prescriptions in terms of brand names rather than generic names;

(b) Intensive and costly advertising and sales efforts directed to the physician; and,

(c) The practice followed by this country of granting product patents on drugs.

On April 12, 1961, I introduced S. 1552, the "Drug Industry Antitrust Act," a bill to amend and supplement the antitrust laws with respect to the manufacture and distribution of drugs. The fundamental purpose of the bill is to bring about lower prices of drugs by infusing competition into this monopolistic industry. It would accomplish this result by doing something about each of these three sources of monopoly power which are described at length in the report.

TRADE NAMES VERSUS GENERIC NAMES

In the case of unpatented drugs-and this is an important reservation-it is usually possible for the consumer to achieve substantial savings if his physician writes out the prescription in terms of the product's generic or official name rather than in terms of a trade name of some particular company. Two examples will illustrate the magnitude of the savings that can be achieved.

When sold under the trade name "Meticorten," the arthritic drug, prednisone, retails at a list price of approximately 30 cents a tablet. But today, when the physician writes out the prescription in terms of the generic name, prednisone can be purchased from drugstores in Washington, D.C. for less than 4 cents a tablet.

(At this point, Senator Carroll entered the hearing room.)

Senator KEFAUVER. The committee is delighted that the Senator from Colorado, Senator Carroll, is present.

Similarly, potassium penicillin G tablets are sold by Merck and the Squibb Division of Olin Mathieson to the druggist at $12 per hundred; this product is sold to druggists by one small company at a price of $2.95 and by another at $3.30 per hundred. Other smaller firms quote prices in the area of $4 or $5. If the prescription is written in terms of the generic name, the druggist is able to supply the consumer with the lower priced products of the smaller companies.

In view of the possibility of securing such savings for their patients, why is it that the great majority of physicians write out their prescriptions in terms of trade names? Fundamentally, there

are two reasons:

First, the drug companies have been remarkably successful in persuading the physicians that, if they were to prescribe in terms of generic names, their patients might receive drugs of inferior or even harmful quality.

And, second, the drug companies have made it difficult for the physicians to use generic names, even if they wish to do so, by coining long, complex, unpronounceable generic names which it is difficult, if not impossible, for physicians to remember and spell. As if this were not enough, the drug companies have on occasion

come up with several generic names for the same product, or alternatively have designated no generic name whatever.

With respect to the quality issue, there is very little in the way of solid evidence to prove that drugs offered by small companies under generic names are generally inferior in any significant degree to those of the large enterprises. For example, Mr. O. K. Grettenberger, director of drugs and drugstores of the State of Michigan, testified that on the basis of 11 years of experience—

Within the State of Michigan I have yet to find an inferior drug product, as far as generic basic medicinal substance is concerned within tolerance, as labeled, of any yet analyzed. Our analytical work has been done by the Michigan State Department of Agriculture in East Lansing, Mich. *** I am afraid that the pharmaceutical industry has overly frightened the pharmacists by implying that everything that is not a brand name is of a poor quality.

There are good reasons for assuming that Mr. Grettenberger's experience is not unusual. After all, prescription drugs must meet the exacting requirements of safety, purity, quality, and so forth, as prescribed by the Food and Drug Administration under the law. Failure to comply with these standards is a criminal offense. Nonetheless many physicians have feared that because of inadequacies of funds and staff, the Food and Drug Administration under present law is not able to do an adequate job of enforcement, and that consequently, unless they prescribe by trade names, there is a real and present danger that their patients may receive a drug of inferior quality.

In two specific ways the bill seeks to eliminate whatever grounds there may be for this widely held aprehension. In the first place, it provides for Federal licensing of all drug-manufacturing companies. Wherever we say "drug manufacturing companies," that refers to producers of prescription or ethical drugs.

No drugs can be marketed unless the producer has an unsuspended and unrevoked license. No license is to be granted unless the compony meets standards established by the Secretary of Health, Education, and Welfare as necessary to insure the continued chemical structure, strength, quality, purity, safety and efficacy of the drugs. The license can be suspended or revoked if the Secretary of Health, Education, and Welfare finds that the firm is not qualified to make the drugs for which he has received the license or has adulterated or misbranded them. These same provisions also apply to imports of foreign drugs.

To implement these licensing provisions, the bill gives to the Secretary of Health, Education, and Welfare further powers to enter and inspect any drug establishment. Incidentally, the powers to be granted here are the same as those requested by the Food and Drug Administration in 1952, but not sought, for some unknown reason, since that time.

These provisions put real teeth into the Food and Drug Act. By realizing that any firm which produces inferior drugs can have its license to do business suspended or revoked, the physician should gain assurance that any drug sold in the country, whether produced at home or abroad, whether made by large companies or small companies and whether marketed under a brand name or a generic name, is of adequate and acceptable quality.

With respect to the problem of unpronounceable, duplicate, and nonexistent generic names, it must be recognized that at present no one has real authority to compel a change in generic names which are originated by the drug companies. The Council on Drugs of the American Medical Association, the pharmacopoeia of this and other countries, may make recommendations for changes in the generic name, but the drug companies are not compelled to accept them, and in fact generally do not do so. To meet this problem the bill places upon the Secretary of Health, Education, and Welfare the responsibility of establishing the generic or "official" names of drugs. The tests to be used are those of usefulness and simplicity. The power is retroactive in that the Secretary can cause review to be made of generic names in effect at any time and determine whether revision of any of the names is necessary or desirable in the interest of usefulness and simplicity. When he finds that a generic name is unduly complex or is not useful, he may designate another name to be used in its place. The bill provides that every drug shall have a generic name but that there shall not be more than one generic name for any drug. To assist physicians, the Secretary is directed to publish a list of all revised generic names and such other matters as he deems necessary for the effective use of those drug names. Also on all labeling-which includes advertising material mailed directly to the physician-the generic name must be printed in type as large and as prominent as that used for any brand name appearing on the label.

The Secretary of Health, Education, and Welfare is thus equipped to devise generic names which the physician can remember, pronounce, spell, and write on his prescriptions. If the generic names themselves are useful and simple and if physicians realize that by virtue of the licensing and added inspection powers, all drugs sold are of adequate and acceptable quality, the bases should be established for a substantive increase in the writing of prescriptions in terms of generic names. For those drugs which are not subject to patent monopolies, the result should be dramatic savings to the consuming public.

ADVERTISING AND PROMOTION

Advertising and promotion, as carried on by the drug industry, has come to be an important source of monopoly power in that the amounts spent by the major companies have reached such proportions as to be far beyond the resources of their smaller competitors. According to Mr. Seymour Blackman of Premo Pharmaceutical Laboratories, the principal problem faced by the small drug manufacturer is the difficulty of competing in the face of the tremendous amounts spent by the large drug companies on advertising and promotion:

As this investigation proceeds, it will become evident to you that the only real competition that we have in our field is the tremendous competition for the eye and ear of the physician, how many pages of advertising we can put out, how many samples we can distribute, how many detailmen we can put in the field. These and these alone govern the ultimate acceptance of the product (hearings, pt. 14, pp. 8205–8206).

For the entire industry, promotion expenses run around $750 million a year, or nearly four times the $200 million available in 1957 to all medical schools in the United States for their educational programs. For the 22 largest drug companies, approximately 24 cents