Part 5
The means of correcting patent abuses and of renewing competitive opportunity in industry are available in existing law and with relatively minor modifications in the scope of governmental authority. Unless we are willing to accept private industrial government as a substitute for a free economy, it must be our determination that the spirit and purpose of the patent laws and the conditions necessary to competition shall be securely established. If we would avoid the destruction of the patent system as the consequence of its abuse, it must be made clear to monopoly groups and industry that they cannot base their restrictive practices and policies on patent privileges.
5
_Medicines_
In a very real sense the producers and distributors of medical products occupy a position of public responsibility. On the whole, those in the drug industry who are charged with this responsibility have carried out their obligations in a highly praiseworthy manner. They are to be commended and congratulated.
In nearly every instance in which the standards of service and of public welfare have not been maintained we find that monopoly groups have been responsible for the abuse of public confidence. When monopoly is able to impose restrictive conditions on the production, the price and the distribution of vital medicines and to determine who may buy and sell products, it is in the interests of the drug industry and the public alike for government to intervene.
Thus when it was found that a small ring of producers had been able to maintain fixed prices on insulin and to pick and choose those who would be allowed to distribute insulin to the public, it was necessary for the government to act.
There are approximately two million persons in the United States suffering from diabetes. Most of these sufferers require one or more daily injections of insulin. They are dependent for their very lives on an adequate supply of the drug at a reasonable price. Yet a monopoly group exploiting its privileged position took advantage of the industry and of the public to impose arbitrary prices and unreasonable conditions of distribution. Wholesalers, distributors, and retailers were compelled to adhere to the edicts of the monopoly group under the threat that if they did not do so, no insulin would be sold to them.
The possible consequences of this exercise of monopoly power on the well-being of victims of diabetes are appalling, yet in the hands of monopoly the needs of the public become subordinated by the edicts which are imposed on the industry and the public alike. It is for this reason that the industry itself, as well as government, must continuously be vigilant to oppose the growth and exercises of monopoly power and to stimulate wholesome competition.
Few effects of monopoly have been more insidious than the consequences of cartel control over many areas in the drug and medical field.
Because of cartel and patent agreements which carve up world markets and divide fields of production, American drug manufacturers have in some cases been denied the right and the chance to develop the American drug industry to its full possibilities. Because international cartels have been able to set up their own trade restrictions, American drug manufacturers have been prevented from competing within the United States. In many cases American manufacturers have been barred from engaging in competition in other countries and from exporting to such countries. In particular, American producers have found themselves shut off from South American markets. Illegal patent abuses and agreements have in other cases prohibited American manufacturers from entering production or carrying on research in many important fields dominated by foreign interests.
The fight against disease is a primary concern of society everywhere. Yet the brilliance and the industry of modern scientists have all too often been perverted by the efforts of selfish groups to fasten the grip of monopoly on products essential to health and welfare. There have been numerous illustrations of the malignant effects of monopoly on national health and on the maintenance of free enterprise in the pharmaceutical industry. It is instructive to recall some of the more flagrant examples of the abuse of monopoly power in the drug and medical field.
The cartel spirit in the pharmaceutical field is exemplified by the following paragraph, written in July 1938 by the German company, I. G. Farbenindustrie:
“There is an agreement between German and Swiss firms of the Chemical Pharmaceutical Industry for the protection of original preparations which are marketed by the individual members of the group.... This agreement provides that products which compete with the original products of members of the association and their subsidiaries or affiliated firms shall not be introduced in any country throughout the world.”
This agreement may be described as a conspiracy to deprive the world of the benefits of research in new drug products wherever such benefits may conflict with the vested interests of any of the participating drug manufacturers.
The present war is not the first time that the United States has found itself dependent in a period of crisis for vitally needed drugs and medicines on cartels dominated by foreign interests. During the first World War the scarcity of salvarsan, of veronal, of novocaine, and similar synthetic medical products seriously affected the health of our people. It was not until after the war was over that we were able to relieve some of these shortages. In the years between the World War and the present global war cartel interests once more were able to reestablish their monopolistic control over new pharmaceutical products.
The myth of German superiority in the production of organic medical compounds has been dispelled for many years. It is necessary, however, to recall that this prestige rested not on superior skill but on the abuse of monopoly and patent privileges. A well-known instance of the way in which the German cartel interests sought to exploit their monopoly position is the story of Bayer 205, sometimes called Germanin. Shortly after the end of the World War I. G. Farben announced that it had discovered a cure for sleeping sickness, the disease which is so prevalent in Africa. The Germans refused to reveal the formula for Bayer 205. Instead they sought to use their discovery as the basis of an exchange of the secret process in return for the restoration of Germany’s lost colonies. While this bold attempt to balance medical achievement against political advantage is an extreme case, it nevertheless reflects a cartel attitude.
From the standpoint of the progress and growth of the American drug industry it must be realized that the influence of cartels has been the principal factor in keeping American products from world markets. Foreign concerns, by making treaties with monopoly groups in the American drug industry, have been able to monopolize practically the entire continent of South America. One typical agreement between an American corporation and a German concern divided the world market for more than 400 pharmaceutical and chemical products into non-competitive areas. Among the fields included in the agreement were quinine derivatives, sulfa drugs, vitamins and narcotics. The American firm was prohibited from exporting. This same pattern of restriction by which American producers were barred from selling to South America has been found in a whole roster of cartel agreements involving pharmaceutical products. The effects of these agreements have severely handicapped our good neighbor relations with South America and have made more difficult the establishment of healthy trade between the United States and Latin American countries.
If we are to succeed in our efforts to create a better postwar world, it should be evident that we must uproot every vestige of illegal monopoly control over products essential to the health and welfare of our people. Whether the restriction stems from the efforts of a cartel to confine American industry to the domestic market, or to strangle research and production by American concerns, or to use patents to impose unlawful restraints on trade in the drug industry, it must be our determined purpose to restore free enterprise in the pharmaceutical field. Given freedom of opportunity and the incentive to enter branches of the industry heretofore dominated by cartel interests, we may rest assured that American drug manufacturers will demonstrate their outstanding capabilities in research and their ability to compete both at home and abroad. Competition will benefit the American drug industry and permit it to attain its maximum development. What is perhaps even more important, this country will be assured that in the future the health and welfare of its citizens will not be dependent upon the arbitrary exercise of monopoly power.
I am sure that responsible persons in the pharmaceutical industry will not argue that European technology in this field is so superior to ours that competition is futile. If American manufacturers have free access to technology and are not barred by the misuse of patents and the resurrection of cartel arrangements, then the industry will find itself in a healthier financial and technological position as well as in a position more fully to discharge its obligations to the American people. The myth of European superiority in the medical field has been carefully nurtured by foreign interests which have used this propaganda as a commercial device. Only free competition and free enterprise can fully dispel this myth. This cannot be done, however, unless the pharmaceutical industry sees to it that victims of diabetes, malaria, pellagra, rickets and arthritis are not at the mercy of privileged groups who have abused public confidence and exploited human suffering.
The laboratories of our pharmaceutical industry have brought forth wonderful discoveries. Their achievements have been a boon to the human race. But they have a responsibility to erase the blemish caused by those few who have misused their economic power to violate their trust.
The promotion of public welfare as well as the best interests of the pharmaceutical industry are served when research, production and distribution are carried on free from the taint of monopoly. National health, like national economic well-being, demands that freedom of opportunity to conduct research, to engage in business, and to compete in domestic and foreign markets be preserved. No compromise is possible with monopoly control in an industry which is so directly concerned with human welfare.
6
_Synthetic Hormones_
The use of synthetic hormones in the United States has grown to such an extent that the annual sales amount to many millions of dollars. Something more than half of the entire business in this country has been carried on by four companies. Each of these companies is the subsidiary or affiliate of a corresponding company in Europe. The European companies belong to a hormone cartel which has controlled the hormone business most effectively abroad and in the United States.
After investigating the ramifications of the cartel’s activities in this country the Department of Justice prosecuted the four American companies for violations of the antitrust laws. Pleas of nolo contendere were entered by the four corporations and by five of their officials and fines totalling $54,000 were assessed and paid. At the same time, on December 17, 1941, the defendants consented to the entry of a decree in a civil action brought by the government, which enjoined them from further activities in violation of the antitrust laws.
These are the basic aspects of the hormone cartel:
1. Research has been seriously affected by restrictions imposed by foreign cartel members.
2. German interests have entered into patent licensing arrangements with American affiliates under which they--the latter--agreed to withhold their products from Latin American markets.
3. During the war American companies have aided their German affiliates in evading the British blockade.
4. American companies have participated in the use of paper corporations and dummy consignees to avoid the effects of the Black List in Latin America.
5. American concerns have devised deceptive labels to preserve markets for their German affiliates and to aid the spread of German propaganda in Latin America.
6. Members of the cartel have misused patents in schemes to camouflage flagrant violations of the laws of the nation.
7. The recognized benefits which might be obtained by the widespread use of hormones have been to a large extent curtailed by reason of the restrictions and illegal policies of the cartel members.
8. In the case of one of the synthetic hormones, there is evidence indicating that it may have a substantial contribution to make in connection with treatment of wounded soldiers for shock. The cartel restrictions have had their effect upon the production and wide use of this hormone as well as the others.
9. Two of the American companies have been taken over by the Alien Property Custodian and one of these has been sold.
The following explanation of the nature of hormones does not purport to be a scientific discussion. It represents my understanding of the subject based upon what I believe to be reliable authority. I merely give it for what it may be worth as background for the discussion of this cartel.
Hormones are the secretions of certain ductless glands. As they enter the bloodstream they regulate chemically practically every function of the human body. They are really special agents of chemical coordination of the body. They regulate, order and correlate bodily functions with the same precision as that achieved by the nervous system. Since their first definite isolation by the great English physiologists, Bayliss and Starling, in the early years of this century, there has grown up a whole new field of research. Infinitely small amounts of certain hormones have the most profound effects upon the human body and its emotions. As in the case of vitamins, much of our present knowledge is the result of observing the striking pathological defects and abnormalities produced by excess or deficiency of hormones.
Thus deficiency of certain of these drug-like substances from the small thyroid gland causes a marked decrease in metabolism and mental and physical sluggishness. Excess of this same hormone, or complex of substances, has the opposite effect, increasing oxidation and pulse rate, and causing nervousness and emaciation. It also has striking effects upon growth and development. Deficiency in children results in dwarfism and idiocy.
Other hormones such as those from the anterior lobe of the pituitary gland affect the growth of bone. Hormones from the adrenal glands, located near the kidneys, cause constriction of blood vessels, accelerate the heart beat and cause discharge of glucose from the liver. Insulin, one of the most widely known of the hormones, plays an essential role in the metabolism of carbohydrates. Its absence causes diabetes which is characterized by a failure of normal carbohydrate metabolism.
Medical investigators and chemists have been exploring this vast new field of research for many years. They have learned more and more about the actions and composition of these complex substances. For many years they have worked with the extracts from the glands of certain animals to obtain the hormone itself, or as much of it as could be saved in the process of extraction. At the same time they have been analyzing the composition of the hormones, and endeavoring to synthesize the active principles. Among those which have been produced in synthetic form are the male sex hormone, testosterone; the follicular and corpus luteum, both being female sex hormones; and desoxycorticosterone acetate, a synthetic substance which has effects similar to those of cortin.
Cortin is derived from the cortex of the adrenal glands. There is still some question as to the role which this hormone plays, but there is no doubt that it is essential to life. It apparently affects the metabolism of sodium, potassium, and carbohydrates. This hormone plays an important role in the concentration of body fluids and their distribution between the inside and outside of body cells. The hormone is therefore of some use in diseases or conditions where there occur marked changes in the distribution of the body fluids. Specifically, it means the hormones of the adrenal cortex are useful in the treatment of Addison’s disease, where it seems to strike a balance in the intake of salt. It has also been suggested that since surgical shock is associated with unbalance of body fluids, this hormone may be of value in counteracting the shock effects. Shock is so complex a condition, however, that there is no general agreement on the effects of the hormone. However, the hormone, or crystalline preparations possessing hormonal activity, are being used by army surgeons both here and abroad for whatever value they possess.
It is with these and certain other pharmaceutical specialties that the hormone cartel has concerned itself. The cartel is composed of five large European companies: Schering A. G. (Berlin); Ciba (Basle); N. J. Organon (Oss, Holland); C. F. Boehringer & Sons (Mannheim); and Chimio (France). Each of the first four has had a subsidiary or affiliate in this country which has been used to carry out the policies of the European company and of the cartel. I shall describe in some detail the practices which were followed in aiding the German companies to avoid the effect of the British blockade and Black List in Latin America.
The Schering A. G. firm is one of the most important pharmaceutical and chemical manufacturers in Germany. It makes photographic supplies, soaps, cosmetics and many other products. However by far the largest part of its production consists of medicinal specialties and fine chemicals, the former being the more important. It is the largest German exporter of pharmaceutical and medical specialties, specializing in sex hormones, vaccines, remedies for venereal and other contagious diseases, rheumatism, tuberculosis, etc., and also laxatives, anti-acids, opiates, etc. It is also one of the larger German exporters of fine chemicals, laboratory chemicals and plant protection chemicals.
At the time of the first World War, Schering A. G. did comparatively little export business. Its export system, established and carefully developed after 1918, is mainly the result of the work of one man, its former president Dr. Julius Weltzien. This export system spreads over the entire world. The procedure in establishing outlets abroad has been as follows: At first sales are made to all who may wish to buy; then, with increasing turnover, a local firm is made sole agent. When the yearly turnover reaches about $25,000, an expert sent from Berlin is coordinated with the sole agency firm. When the yearly turnover exceeds about $50,000, Schering A. G. sets up a firm of its own, directed by managers sent from Berlin. Germans, or men of German descent, are placed in all key positions, and the remainder of the staff is partly German, partly persons of the country in which the agency is located. The final step is to set up factories in the most important markets which are equipped to ampule the finished solutions and to tablet the finished substances which are used in that form. The supervision of all firms abroad is strongly centralized in Berlin.
Until recently, Schering A. G. was one of the largest sellers of pharmaceutical and medicinal specialties in South and Central America. Testimony before the Truman Committee indicated that approximately one-third of all materials shipped into South America by airmail over the German controlled _Lati_ airline, during a six months period in 1941, were chemical and pharmaceutical products. Approximately the same amount of books, maps, etc., intended for espionage and propaganda work was also shipped by air since it was the only means of avoiding the British blockade. On the return trips four-fifths of the air cargoes were of mica for the Nazi war machine and most of the remaining fifth was made up of other important war materials. The important role played by the pharmaceutical exports in providing the exchange for purchase of war materials should not be overlooked.
The interruption of exports due to the war caused Schering A. G. to adopt several different methods of continuing its foreign business. Prior to the invasion of Belgium and Holland, firms in those countries and in the Scandinavian countries were used as blinds to avoid the British blockade. Before Italy entered the war, the Milan factory was utilized as a point from which the German goods, labeled in Italy, could be sent out to the rest of the world.
The final step was to transfer to the United States the business of supplying the markets cut off by the blockade. In preparation for this emergency, several measures had been taken long before the actual outbreak of the war.
The center of the new supply system was Schering Corporation (Bloomfield, New Jersey), a firm now held by the U. S. Alien Property Custodian. This firm was established as a Schering A. G. subsidiary in 1929 to manufacture medical specialties for the market in this country. Differing from most other Schering factories outside Germany it developed the finished solutions and substances out of raw or semi-manufactured imported materials, where the others merely finished the process by placing the material in ampule, tablet and package form. Gradually extending its research, laboratory and manufacturing facilities it came to be as fully equipped to manufacture, although on a much smaller scale, all Schering medical specialties as Schering A. G. itself.
All of the common stock of this New Jersey corporation was owned by Chemical and Pharmaceutical Enterprises, Ltd. (Chepha) and held in the name of a nominee of the Swiss Bank. Chepha was owned 51 per cent by the Swiss Bank and 49 per cent by other related interests. However, it has recently come to light that the transaction in 1937 by which Chepha and the Swiss Bank got apparent control of the Schering Corporation, included an option agreement which made it possible for Schering A. G. to regain its interest at any time it so desired. Obviously the transaction was a mere sham to make it appear that the American corporation was controlled from Switzerland rather than from Germany. Actually Schering A. G. had never ceased to exercise its domination over Schering Corporation up to the very outbreak of war between Germany and the United States.
As of January 1, 1938 the two corporations entered into an extensive and detailed agreement. Two paragraphs of the preamble of this agreement are as follows:
“Schering A. G. is engaged in the development, manufacture and/or sale of medicinal, pharmaceutical, biological, and bacteriological preparations. It is the owner of processes and formulae used in the production of such preparations and is also the owner of U. S. A. patents and patent applications pertaining to such preparations. For many years it has maintained and operated and still does maintain and operate laboratories to carry on research and development work in connection with such preparations, and has thereby acquired valuable scientific knowledge, data and material concerning the aforesaid sphere of activities.