The conclusion reached by Dr. Sanders in the enclosed study which were of particular interest to us, since they support and document some of our previous statements and recommendations to the Congress, are as follows:

(1) The value of patents to individual inventors and small business is very great.

(2) A very large proportion (50-60 percent) of patents developed through private effort and investment is actually used for commercial purposes.

(3) The allegation that there is widespread suppression of patents by corporations has not been verified by documented studies. On the contrary, it appears that unused patents are unused primarily because of economic considerations. (4) Patents are more intensely exploited by small business than by large. (5) Individual inventors and the small business sector continue to make a significant contribution to the advance of knowledge, invention, and patenting of inventions.

(6) The quality of patents applied for and issued, as attested by utilization, is increasing.

(7) Comparatively few patentable inventions result from Government R. & D. contracts. (8) Inventions have little intrinsic commercial value in the hands of the Federal Government.

(9) The proportion of patents developed with Federal R. & D. funds put to commercial use is much smaller than for those developed with private funds. (10) Companies engaged in federally financed R. & D. are usually not those with the highest skills in the area of development sought.

(11) The Government should waive all its commercial rights to patentable inventions because this would result in more commercial exploitation of economically worthwhile inventions.

We believe that the data provided by Dr. Sander's study will be valuable to the committee because it brings together much of the available statistical data regarding patent exploitation by business.

EXAMPLES OF GOVERNMENT INFRINGEMENT ACTIONS AGAINST SMALL BUSINESS We are submitting as an attachment to this letter a compilation of complaints which have been assembled by our association, to present dramatically exact fact situations covering Government actions complained of by small business. I am asking the committee to delete the names of the complainants and other corporations referred to in the complaints, for a number of reasons-fear of reprisal, pendency of litigation, etc. We feel that these reported incidents which represent only a handful of the numerous complaints which we continue to receive should stir the committee to take appropriate action to incorporate some relief similar to S. 1047 in whatever legislation it reports to the Congress.' In conclusion, we wish to express our appreciation for the opportunity to present these additional comments to the committee.

Very truly yours,

Senator JOHN L. MCCLELLAN,

HENRY J. CAPPELLO,

Consultant on Patent Policy.

NEISLER LABORATORIES, INC.,

Decatur, Ill., August 25, 1965.

Chairman, Subcommittee of Patents, Trademarks, and Copyrights, Senate Judiciary Committee, Senate Office Building, Washington, D.C.

DEAR SENATOR MCCLELLAN: Reference is made to hearings held by your subcommittee on S. 789, S. 1809, S. 1899, and S. 2326.

Aware of hearings scheduled by your committee for August 17, I had requested an opportunity of presenting a statement at a later date inasmuch as it was physically impossible for me to be available on the 17th. In a letter of August 10, your chief clerk, Mr. Steven G. Haaser, graciously suggested that should I so desire it would be acceptable to submit a statement for inclusion in the record. 1 Material contained in committee files.

Toward this end, I have prepared a written statement which I would like to respectfully submit for consideration by your subcommittee for inclusion as part of the record pertaining to hearings on these bills. The statement is submitted in duplicate and I trust that it is in proper form for consideration by your subcommittee.

Respectfully yours,

C. J. CAVALLITO, Director of Research.

STATEMENT OF DR. CHESTER J. CAVALLITO, DIRECTOR OF RESEARCH, NEISLER

LABORATORIES, INC.

My name is Cheser J. Cavallito; I am currently director of research, Neisler Laboratories, Inc., Decatur, Ill. Until a few months ago, our company operated as an independent concern in the pharmaceutical industry. We are now a subsidiary of Union Carbide Corp. Throughout the period of almost 15 years that I have been with the company, we have been engaged in creating and marketing new drugs.

My personal qualifications are set forth in appendix A to this statement. The above bills relate to the vitally important subject of rights to inventions made in connection with Government-financed research. I do not propose to discuss the provisions of the bills. Rather, I would like to present to you some of the facts relating to research in the field of new drugs, based on some 25 years of experience in this field. These facts, I beleive, show beyond question that the public interest is jeopardized by any legislation that would (1) impair the full and complete interchange of information and cooperation between academic and institutional scientists and industry research personnel or (2) remove the patent incentive in connection with the research and marketing of any new chemicals having possible drug utility. But before detailing these facts, let me discuss my general observations in more detail.

As I understand the situation, it is agreed by all concerned that the results of Government-financed research should be made available to the public to the maximum possible extent. The only question is how this can best be accomplished. Some have taken the position that where the Government pays for some part or all of the activity leading to an invention, there is some form of giveaway if the contractor (or, indeed, any private enterprise) is given ownership of the patent rights. One fallacy of this approach lies in the assumption that the contractor (or other private enterprise) acquires some sort of presently existing and commercially valuable right in a new product. At least in the drug industry this is not so. There may, indeed, be some patent rights or prospect of patent rights in a product that shows some promise of drug application and some indication that it might survive the long period of development and marketing before any return on investment is made. But there is almost never, if ever, a drug invention made during the course of Government-financed research that is carried to the point of commercial practicality at Government expense. This is not due to any inadequacy of individuals engaged in Governmentfinanced research. My experience and I believe the experience of others who have observed the activity-is that the personnel involved do their best to give the Government full value for its money under the conditions they face. The missing ingredient is one that the Government never has supplied in the past and I do not believe can supply in the future. This is the spirit of enterprise. Unless there is a strong incentive to take risks nobody will do so. And without the risk taking, drugs cannot reach the point of practical application. Indeed, the risk taking required in the drug industry is probably greater than that of any other substantial industry.

Where Government patent ownership is not involved, our patent system is a vital factor in attracting risk effort inthe development of new drugs, and thereby improving our health. It also makes possible the publication of research findings and the interchange of scientific knowledge that vastly increases the rate of our scientific progress. The U.S. patent system is particularly strong. Without it, it is highly unlikely that the United States would have developed the world's strongest and most productive pharmaceutical industry. Of some 587 new single chemical drug entities that became marketed drugs between 1941 and 1963, 355 originated in the United States. U.S. firms accounted for 321 of these.

This record, I am sure, reflects the fact that a concern in the U.S. drug industry has a very strong incentive-through the patent system-to make the successive risk investments required to bring a drug to the point of practical application and usefulness to mankind.

To the extent the patent system does not apply as to a particular drug, this incentive is lost. Where the consequence of Government-financed research is a curtailment of available patent rights, the effect of the patent system as a stimulus to these risk investments is reduced, or even lost entirely. The spirit of enterprise is no longer fully effective as to such drugs. Their potential may never be realized because of lack of incentive to perfect and market them.

The patent system can be rendered ineffective as to a drug by Governmentowned patent rights that are simply thrown open for use by anyone. It can also be rendered ineffective by premature publication disclsoure of the chemicals, which curtails available patent rights.

The history of drug developments supports a conclusion that it is necessary— as a practical matter-to have the strongest possible patent rights for new drugs. Any Government activity that curtails such rights may result in potentially important drugs remaining unexplored and never carried to the point of practical utilization for the benefit of mankind. The policy of the Government as to Government-financed research activity, may curtail possible patent rights by impinging upon the new drug development activities of a pharmaceutical concern at any one of many points in the long road from an idea to a perfected, marketed, drug. In essentially all practical cases, the extent of the Government investment in the particular product is small-especially in relation to the inventment required of the pharmaceutical company in further research and marketing of the drug. To show why this is so I devote the next portion of this statement to a general description of the steps required to carry a drug to the point of practical benefit to mankind, with emphasis on the risk decisions that must be made and on the occasions where Government-financed research activities may be involved. The elements of risk, the decisions that must be made, and the particular capability of a business enterprise operating under incentives to make the decisions and thereby take the risks, is best brought out by tracing the history of a drug to the point at which it is available to the public. In so doing. I shall bring out both the work and contribution of the employed personnel of the business concern and the work and contribution of academic personnel who frequently play an important role in the overall sequence of events. Within the limits of this statement it is not possible to do more than state in general terms the various procedures and steps in making a drug available for practical use in medical practice. But the sequence set forth is present in nearly every case, including particularly the steps from idea to invention to commercial product. It should be added that it takes more than an idea to make an invention; it takes more than an invention to make a product; and it takes more than a product to make a drug commercially available where it can be used by mankind.

MAKING THE INVENTION

The first step in the long road to a new drug of use to mankind is the invention. For a new synthetic drug (that is, new chemical compound useful as a drug) the work begins with the idea or concept of the new chemical structure or structures, followed by devising a way of making them. For a new drug derived from a natural source, the work begins with the idea or concept that some natural plant or animal material may contain a material useful as a drug. followed by devising a way of testing, isolating, determining the structure and possibly synthesizing the active substance or substances. Under today's conditions, these steps are becoming increasingly more difficult and require much more vision and ingenuity than may appear for the less difficult and more readily apparent drug leads have been pursued by others in the past.

In the case of a chemist in a pharmaceutical company laboratory, he is usually using his scientific knowledge and experience intuitively conceiving or visualizing new chemicals with a hoped-for, specific, biological property of potential value in medicine. Having so visualized the chemical (which may be a new synthetic chemical compound or some derivative of natural plant or animal material), he then proceeds to devise ways to make it.

In the case of an academic scientist, possible new drugs (whether new synthetic chemical compounds or derivatives of natural plant or animal materials)

are conceived predominantly in the interest of advancing scientific knowledge or a part of a teaching program. The academic scientist may or may not be interested in the potential biological properties of the substance. Many academic chemists, for example, are totally uninterested in such properties. An academic chemist in the chemistry department of a college of pharmacy, however, is usually interested in biological properties. In the case of an academic biologist, such properties are of major interest.

But whether the interest is only one of chemistry, or is also a matter of possible biological properties, the product envisioned must be made. In the case of some possible drugs, such as those in the sulfa-drug group, this may not present great difficulties. In the case of other drugs, such as some steroids and antibiotics, it may be exceedingly difficult to make the product. In many instances an academic scientist is at this point compelled to obtain the help of others. Frequently such help is obtained without cost from a pharmaceutical concern having experienced personnel and facilities for conducting unusual chemical processes.

After the product has been made, it is still necesary to demonstrate biological activity before there is a drug invention. This procedure is usually carried out quote differently in the laboratories of a pharmaceutical concern than in the case of a product originating in the work of an academic scientist. In the laboratory of a pharmaceutical company, the chemicals having potential drug activity are distributed to scientific specialists such as physiologists, pharmacologists, biochemists, endocrinologists, microbiologists, immunologists, or others having the skills and facilities to determine the presence of biological activity. These scientists conduct tests in the laboratory on experimental animals or living systems using test methods in which the performance of known drugs is recognized. They also look for any novel or unusual response that might suggest a new or unpredicted biological effect and possible application of the chemical. An important part of the work of these scientists is devising new testing procedures capable of detecting biological activities not previously subject to test or of improved responsiveness and reliability as to biological activities covered by previously available tests.

In the case of an academic scientist, biological testing is necessary to make a new drug invention just as in the case of the company scientist. However, in many instances an academic chemist is not interested, or only mildly interested, in biological properties. In such instance he will cooperate with a pharmaceutical concern interested in testing the products he has made, but will do nothing more to bring such testing about. Where the academic scientist is decidedly interested in biological properties, he may have facilities available to make such tests, in which event they are likely to be carried out. More frequently, however, he either has no facilities for this purpose or he needs more elaborate facilities than are available at the institution. In this instance the academic scientist must again turn to the laboratories of a pharmaceutical con

cern.

At this stage-making the invention-Government policy has a great influence on the extent products of possible biological activity are tested by pharmaceutical concerns. Usually the academic scientist who visualizes and makes the chemical compound (or other product) is working on some Government-financed research. This may be the very research that led to the making of the compound or other product. Under present provisions in many research contracts, the Government is believed to have full patent rights to such products, regardless of the contribution of a pharmaceutical concern in actually testing. This has forced pharmaceutical concerns in most instances to refuse to conduct such tests-for the only value of such tests to the concern is in leading to a drug which can be marketed under patent protection that will protect the necessary investment. It is essential, therefore, to have some way to provide reasonable patent rights to the pharmaceutical concern if the potential value of the products made by the academic scientists is to be realized in terms of drugs available for use.

It should be noted that in this instance there is no question of giving something away to a Government contractor who already receives compensation for services. The pharmaceutical concern receives no compensation from the Government in any event. In the past, the concerns have entered into patent agreements under which the concern obtains some exclusive rights sufficient to justify the initial biological testing and further drug development and marketing expense. If academic scientists (or their institutions) working under Government

contracts are permitted to retain sufficient rights to enable them to grant some exclusive rights to pharmaceutical concerns, this practice can continue. Otherwise, there is every indication that it will soon come to a complete halt.

I understand from discussions with lawyers that a pharmaceutical invention is regarded as "conceived" when the chemical is visualized and its probable activity identified. I also understand, however, that in some instances the "conception" is not complete until activity is demonstrated-but that under these circumstances the conception may not be that of the person making the biological tests, but rather may be considered to be that of the person who visualized the product and its probable activity that is later demonstrated to exist. Since an invention is regarded as "made" under a Government contract when "conceived" during the performance of the contract, it is my understanding that where an academic scientist visualizes and makes a product while under such contract, the invention is likely to be the property of the Government even if a pharmaceutical concern invests far more than the Government in biological tests and other activities.

If the biological testing of one or more products shows some promise of useful biological properties, it is necessary to undertake very substantial additional research before a product that may be even tested on humans is obtained. This activity entails some very important and risky decisions. The first decision is that of identifying the family of chemicals that should be made and tested to be sure that the chemical having the greatest desirable activity and the least undesirable activity is found. This is not a simple task. Endless variations in chemical structure are usually possible. A skilled scientist may be able to identify the structural components of the chemical that contribute to the activity and suggest the chemical variations that can most productively be explored. More typically, it is necessary for the chemist and the biological scientist to work in close liaison in preliminary tests directed to identification of the biological effects resulting from variation of parts of the molecule. In any case, an extremely difficult decision must be made in determining just what products should be prepared and subjected to biological tests.

This decisional process is part of the new drug development procedures that a pharmaceutical concern is designed to follow. It is particularly suitable for a business concern spurred on by the prospect of an important new drug that can be marketed under patent rights. If the testing of related products stops short of testing the optimum product, the resultant drug will not be the best possible. But if the testing goes beyond the point of diminishing returns, investment is needlessly increased and availability of the drug to the public is needlessly delayed. Decisions of this sort are best made in the environment of a competitive enterprise where wise decisionmaking results in profits and unwise decisionmaking may be economically fatal.

MAKING THE PRODUCT

The first step in making a product from the invention is to select the compound from among those tested which seems to justify further development. Among factors influencing a selection at this point are: chemical considerations such as difficulty and cost of synthesis on a larger scale, stability, physical form of the chemical, specifications, etc.; biological considerations-such as spectrum of biological activities, absorption, anticipated difficulties from toxicity or metabolic disposition; pharmaceutical consideratons such as formulation problems that might arise in converting the raw generic substance from the chemist's bottle to a stable, reproducible, functional pharmaceutical dosage form. It readily can be seen that the potential sources of difficulty are numerous and multidisciplinary. If a poor selection is made, this will be an expensive error in judgment because all of the work would need to be repeated if another compound later had to be chosen.

After a new chemical is tentatively selected for further evaluation, it is put through the paces of additional safety testing in animals and elucidation of a more complete biological profile. This, if a new compound were turned up as warranting interest because of its ability to lower blood pressure in animals, prior to its first evaluation in man it would be necessary to determine what other things the chemical might do in a wide variety of biological test systems and to conduct additional preliminary safety and toxicity tests. At this point, one is still a long way from knowing whether his new chemical is a drug.