INNOVATION AND THE MARKET

Howard Florey arrived in New York on July 2, 1941 along with a member of his research team, Norman Heatley. Florey was the chair of the pathology department at Oxford University in Britain. For the previous few years he had been conducting research on penicillin with Heatley and Ernst Chain, a Jewish refugee from Germany. Alexander Fleming, a British doctor, had discovered penicillin in 1928. As was his custom, Fleming left out petri dishes in his laboratory that were inoculated with bacteria. A mold, later identified from the Penicillium family, contaminated one of the dishes, inhibiting the growth of the bacteria. Fleming dubbed the active substance secreted by the mold "penicillin" but was unable to separate it from the broth in which the mold grew to assess its therapeutic potential. Florey's lab picked up on Fleming's research roughly ten years later. Using a sample of Fleming's mold, they managed to isolate minute amounts of impure penicillin and test it in mice. Encouraged by the results, they next tried it out on a few dying patients.

Times were different, and human trials were much easier to arrange. They found an Oxford policeman who was near death. A simple prick from a rose thorn had caused him to contract an infection that led to the loss of an eye and abscesses that had spread all over his body. After getting an injection of penicillin, a miracle seemed in the offing as his condition greatly improved. But sufficient supplies of penicillin were lacking to continue his treatment. The situation got so desperate that they collected his urine and transported it by bicycle to the laboratory to extract unmetabolized penicillin in an effort known as the P-Patrol. Supplies ran out, however, and he died. But penicillin's potential was clear, which was reinforced by the next patients they treated.

These experiments established that penicillin could be a powerful weapon to treat infection, but it would have to be produced on a much greater scale to be useful. Florey tried to get British firms involved in the effort, but they were preoccupied with World War II and were unreceptive. So he turned to the Rockefeller Foundation in the United States, which earlier had supported his research. He was given a grant of $6,000 to come to the United States to interest U.S. firms and the U.S. government in the mass production of penicillin (Neushul [1993, p. 167]). Thus, on the eve of Florey's trip to America in 1941, penicillin showed promise of being helpful in the fight against infection but could only be produced in minute amounts.

Within three years all was about to change. Dramatic clinical developments would prove that penicillin was a wonder drug, effective against an extraordinary range of conditions, including childhood killers rheumatic fever and pneumonia, venereal diseases syphilis and gonorrhea, and deadly infections incurred by burn victims and wounded soldiers. By D-day in June 1944, enough penicillin would be produced to meet all of the military's needs. A year later, penicillin would be widely supplied to civilians. All these developments would usher in a new era of medicine and with it a whole new industry. But when Florey embarked for the United States in July 1941, these possibilities could hardly be imagined.

Soon after they arrived, Florey and Heatley were directed to a government laboratory in Peoria, Illinois, that was exploring the use of deep fermentation techniques to develop new uses for surplus farm products. The lab conventionally used corn steep liquor, which is a by-product of the corn starch manufacturing process, in all of its fermentation efforts. It was discovered that corn steep liquor was an ideal medium in which to grow the Penicillium mold, increasing the output of penicillin twelvefold (Sheehan [1982, p. 67]). And it could be grown in a submerged medium rather than in shallow layers in flasks, bottles, or pans, which it was estimated would have had to stretch from New York to San Francisco to meet the U.S. military's needs during the War (Brockman and Elder [1970, p. v]).

The findings regarding corn steep liquor were conveyed in a meeting in December 1941 with research and corporate heads from pharmaceutical companies Merck, Squibb, Pfizer, and Lederle. The meeting was organized by a committee appointed by the Office of Scientific Research and Development (OSRD), which was set up to coordinate scientific research for military purposes during World War II. Prior to the meeting, Merck, Squibb, and Pfizer had been experimenting in a desultory way with producing penicillin using the shallow culture approach (Sheehan [1982, p. 69]). Hearing about progress at the lab from the head of its fermentation division, Robert Coghill, galvanized their work on penicillin. Coghill later remarked that as a result of the lab's discoveries a new pharmaceutical industry was born.

The OSRD sponsored an ambitious program involving several hundred scientists to synthesize penicillin in the laboratory, which at the time seemed like the more promising route toward the large-scale manufacture of penicillin. A sister federal agency sponsored research at a number of universities on various challenges associated with producing penicillin by growing the Penicillium mold, and it continued to support efforts at the government's Peoria lab to improve the natural production of penicillin.

The War Production Board, which was set up in 1942 to regulate production and allocation of materials during World War II, was also enlisted to help increase penicillin production. A program was set up to finance new production plants for qualifying firms and to allow for accelerated depreciation for private investments in penicillin production. More than 175 companies were considered for support. Twenty-one were elected based on their ability to contribute to the wartime effort. A total of $7.5 million ($108 million in 2015 dollars) 1 was spent by the Board on the construction of new plants and $22.6 million ($324 million in 2015 dollars) was invested by firms, much of which qualified for accelerated depreciation (Federal Trade Commission [1958, p. 52]). Firms were given regular reports on progress at the Peoria lab and other efforts supported by the OSRD and agreed to exchange information about their findings.

By 1943 penicillin's therapeutic properties had been established and the military recognized the benefits of using it on the battlefield to treat soldiers. By the second half of 1944, U.S. firms were widely producing penicillin using the submerged — or deep vat — method. Enough penicillin was produced to treat almost 250,000 patients per month, which was adequate to meet the military's demands on D-day and thereafter. Pro- duction tripled from the second half of 1944 to 1945, and...