SMALL BUSINESS PROBLEMS IN THE DRUG INDUSTRY WEDNESDAY, SEPTEMBER 27, 1967 HOUSE OF REPRESENTATIVES, Washington, D.C. The subcommittee met, pursuant to call, at 10:15 a.m., in room 2359, Rayburn House Office Building, Hon. John D. Dingell (chairman of the subcommittee) presiding. Present: Representative Dingell. Also present: Representative Burton of the full committee; Gregg Potvin, subcommittee counsel; Myrtle Ruth Foutch, clerk; and John J. Williams, minority counsel. Mr. DINGELL. The subcommittee will come to order. This is a continuation of the inquiry by the Subcommittee on Regulatory and Enforcement Agencies of the Small Business Committee into pricing practices in the drug industry. This morning the committee will be hearing from Mr. William Ford, who is with the National Wholesale Druggists Association, accompanied by Mr. Willis, his counsel. Mr. Ford, Mr. Willis, the Chair is happy to welcome you this morning for whatever statement you choose to present. Gentlemen, if you will come forward to the committee table here, please. I understand, gentlemen, you are not under subpena, so it will not be necessary to administer the oath to you, and I understand that you have no prepared statement; is that correct? TESTIMONY OF WILLIAM L. FORD, EXECUTIVE VICE PRESIDENT, NATIONAL WHOLESALE DRUGGISTS ASSOCIATION, ACCOMPANIED BY EVERETT WILLIS, COUNSEL Mr. FORD. That is correct, Mr. Chairman. I would be pleased to make a few informal remarks. Mr. DINGELL. Fine. The Chair is happy to welcome you for whatever statement you choose to present. If you will prefix your remarks by giving your full name, office, and address to our reporter for the purposes of the record. Mr. FORD. My name is William L. Ford. I am the executive vice president of the National Wholesale Druggists Association. The gentleman with me here this morning is Mr. Everett Willis. He is a member of the firm of Dewey, Ballantine, Bushby, Palmer & Wood. They serve as general counsel to the association. Mr. Chairman and gentlemen, we did not bring a prepared stateinent here this morning but I would like to offer a few remarks to you, 78-783-68-vol. 2- -6 primarily about the nature of the National Wholesale Druggists Association, and perhaps I can give you a little bit of the relationship that we play as far as the drug industry is concerned. The association itself is very possibly one of the older trade associations in the drug industry. We were founded in 1876. We have one office. That office is located at 220 East 42d Street in New York City. We have a relatively small staff organization. We have three male members on the staff in addition to myself, and normally we would have somewhere in the neighborhood of about five or six secretarial and clerical employees. Perhaps I should give you a little bit of background on myself. I joined NWDA in the fall of 1958 as director of research for the organization. In November of 1962 I assumed the additional responsibility of secretary and treasurer, and as of July 1 this year, I became the chief executive officer of the association as executive vice president. The association consists of a number of firms that are members of the association within the drug industry. We have several classes of membership. The first of these we refer to as active members. Active members are drug wholesalers, and we have roughly 370 wholesalers located in the continental United States. Mr. POTVIN. Could you repeat the number, sir? Mr. FORD. Yes, approximately 370. I think we have three or four foreign members in Canada and Mexico that we also consider as active members. These people would be wholesalers in those locations. Our second class of membership we refer to as associate members and we actually subdivide this category. I was a little surprised when I looked at our records and coincidentally, and it is that alone, we have approximately 370 associate members. We break these into manufacturers and nonmanufacturers. The manufacturers by our definition are those people who make a product, which our wholesalers are buying for resale purposes. Any manufacturer making a product that the wholesaler will use in the course of his own business we don't class as a manufacturer. The other nonmanufacturer category would include a number of advertising agencies, media, publications, manufacturer sales representatives and a few miscellaneous members of this nature. We have a very limited group of international members, I would say at the present time somewhere in the range of about 15 firms to 18 firms. These people are engaged in the drug industry practically worldwide. We have members from Europe, from Africa, South Amer ica, Asia, Australia. I think it might be in keeping with the interests of the committee here if I were to give you briefly the objectives or the purposes for which NWDA exists, and I think perhaps I can best do that with your permission by simply reading to you from the bylaws of the association. This is relatively brief. It is article 2 of our bylaws and it is captioned OBJECTIVES OF THE ASSOCIATION 1. To develop mutual acquaintance and respect among its members. 2. To foster sound business principles in all phases of drug distribution in the interests of the public as well as retailers and wholesalers. 3. To acquire and disseminate for the use of its members such business infor mation as may prove of value to them. 4. To assist its members to improve their efficiency through research and education. ists As 5. To promote the use of full service wholesale druggists by retailers and manufacturers. It is my understanding, of course, that this committee is interested in essentially the welfare of the small businessman in the drug industry, and I think perhaps it would be appropriate to indicate to you the degree of interest that we share in this subject with you gentlemen. I can perhaps best do this by indicating the tie between the wholesale members of NWDA and the retail segment of the drug industry. Depending on whose mailing list you use for an authority, I would guess that in this country you would find somewhere in the negihborhood today of 53,000–55,000 retail pharmacies. Of these, probably somewhere in the range of 5,000-6,000 would be classed as chain drugstores, here again depending on the definitions that one uses, and the balance of the customers would be what we would refer to as independent pharmacists. Our members are completely dependent or to a very large degree dependent upon the welfare and the continued success of the independent pharmacist in business. As a matter of fact, about 3 or 4 years ago AWDA did a very brief survey to determine the type of outlet to whom our customers, or rather, our wholesalers were selling at that time, and I believe the statistic that we came out with indicated that 88 percent of the sales of our NWDA wholesalers were being made to pharmacies. Now that 88 percent would include sales to both chains and independents, but I can tell you from personal knowledge that the vast majority of the business of our members is going to independent pharmacies, and we are, therefore, and I think quite obviously, very much concerned with the continued welfare and existence of the independent pharmacist. I certainly don't come before you gentlemen this morning and want to pose as an expert in this field of drug distribution, because I don't claim to be; but I think that our members would feel that there are some problems confronting the independent pharmacist in the practice of his profession, and that perhaps jeopardize or threaten his future in this business. Just to mention a couple of these, our association has been concerned about the problem that faces the pharmacist in terms of the competition, sometimes we think unfair competition, regarding the price at which he must pay for his merchandise compared to the price that other people distributing similar merchandise happen to be paying. We are concerned about the problem that the independent pharmacist faces in terms of competition from the out-patient dispensing facilities of hospitals that we think sometimes is inappropriate and unfair. Rather than my rambling here, I think if you would permit me, I would like to read to you the text of two resolutions which were offered and adopted at NWDA's last annual meeting, which was in the fall of 1966 on these particular topics. The first of these resolutions was entitled EQUALITY OF BUYING OPPORTUNITY FOR RETAIL PHARMACISTS Whereas some pharmaceutical manufacturers have utilized pricing policies and procedures which establish lower prices and/or special allowances for hospitals and clinics, which buying advantages are not available to other retail pharmacists, and whereas it is believed that all retail pharmacists should enjoy an opportunity to buy on a basis which is not less favorable than that which applies to said other groups, therefore, be it resolved that the National Wholesale Druggists Association herewith recommends to pharmaceutical manufac turers that they review their pricing structures and procedures and consider the adoption of a policy which will afford "equality of buying opportunity" for the retail pharmacist in full compliance with the law. In a somewhat similar vein, our annual meeting adopted another resolution that was captioned: DISPENSING TO OUT-PATIENTS IN TAX FREE HOSPITALS The text of that resolution read as follows: Whereas the dispensing of medicinal preparations to out-patients of tax free hospitals, which otherwise would be filled through retail pharmacy channels, in violation of the Robinson-Patman Act is an unfair competitive practice, and not in the best interest of a free an private enterprise system. Therefore, be it resolved that the National Wholesale Druggists Association goes on record as condemning this practice. Gentlemen, our association has not taken any further action since the adoption of these resolutions on either of these topics, but I can assure you that the sympathies and support of the drug wholesalers, represented by our members, I think are completely behind the independent pharmacist and his struggle for continued existence in the business community. Another problem area that we see confronting the pharmacist today, frankly, has to do with some of the competition that we think he is receiving or is likely to receive from Government itself. I think from previous testimony that I believe has been offered to this subcommittee, there has been some reference to the Office of Economic Opportunity and some of the so-called health centers that are being established on a test basis throughout the country. Let me make clear at the outset, and I would want no misunderstanding on this point, I think every single member of NWDA would favor without a doubt the fact that every member of our society is entitled to complete, adequate, the best health care in medicines that our industry can offer. We don't think there is any such thing as a second-class citizen. We don't think that the economic condition of the individual should be the determining factor as to the degree of medical care that he can receive. We do think, however, that there is a very substantial stake to our entire society in maintaining a free and competitive system for the distribution of drug products, and we think that the independent retail pharmacist plays a key role in this area. Again, I certainly won't testify as an expert on the OEO, but our understanding is that there have been several communities in which these health centers have been opened on a test basis, and have been opened in an area that was previously serviced by retail pharmacists, and with the Government in effect giving away merchandise to those individuals that presumably qualify by having less than a certain minimum income standard, in some instances the retail pharmacists in those trading areas have lasted about 3 to 4 weeks before they have been forced to close their doors and go out of business. We don't think that in the long range this is going to be a move in the right direction for the interest of the public at large. In our opinion the availability of the medicines that are available through the retail pharmacist on a local basis, and quite frankly, at all hours of the day and night-I am sure you gentlemen are aware of emergency service that every pharmacist has offered during his career-we think that the loss of this, if we come in with Government health centers, is going to be an irreplaceable damage. We would, therefore, feel quite strongly that we would hope this trend would not continue in this fashion. I don't mean to steal the thunder from our President's remarks, but I happen to know that the president of NWDA, in his address at our annual meeting this fall, is planning to recommend the formation of an industry committee composed of manufacturers, wholesalers, and retailers, that would work with both the Federal and the State Governments to attempt to develop the best possible system for distribution of drugs throughout our entire society. It is our strong belief that this can be accomplished by utilizing the presently available facilities of distribution, and we would hope that OEO and others could see fit to work with us along this direction. I would be a little bit remiss I am sure if I were to conclude my comments without putting in a plug for drug wholesaling, so if you will forgive me, I will try and earn a little of my pay here this morning. We think that drug wholesalers provide an exceptionally efficient way of distributing merchandise effectively and economically throughout the breadth of our entire country. I can speak, of course, best in terms of what I know about our own membership, so I think that is probably where I should confine my remarks. NWDA wholesalers in 1966, according to our operating survey, which is a satistical analysis that we have performed for many years, had sales that were slightly under the level of $2 billion. This meant that the average house size of our wholesaler members was somewhere in the neighborhood of slightly over $5 million in annual sales. Statistically, this produced employment for about 58 people per wholesale house on a full-time, year-round basis. To illustrate the efficiency with which this merchandise is handled, processed, and delivered, I think I should indicate to you that the operating costs within our industry have been declining steadily in the past years. In 1966 it was costing us on the average, costing our wholesaler members, about 1211⁄2 cents per dollar of sales to perform all of the functions that the wholesaler performs. This would include, of course, warehousing the merchandising; it would include the sales and administrative functions performed by the wholesaler; it includes the extension of credit to the retail pharmacists where this is warranted; it would include delivery, many other services that our members have to offer. There have been many criticisms, of course, of the drug industry from many sources about the high prices of drugs, but we feel that the drug wholesaler is not a cause in this area. We feel that with his distribution of products whereby his costs are about an eighth of every dollar of sales that he handles, that he is not target for criticism of unjust profiteering in the drug industry, and as a matter of fact, the net profit that our people made last year after taxes was 1.54 percent of actual sales. So our people are roughly earning a penny and a half on every dollar's worth of merchandise that they handle. And I don't believe that there really would be any critic of the industry that would feel that this was undue profiteering. |