Mr. DINGELL. The committee is very grateful for your presence morning. Thank you very much. this The committee will stand adjourned until the call of the Chair. (Whereupon, at 12 noon, the subcommittee recessed, to reconvene at the call of the Chair.) SMALL BUSINESS PROBLEMS IN THE DRUG INDUSTRY WEDNESDAY, JANUARY 24, 1968 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON ACTIVITIES OF REGULATORY AGENCIES, Washington, D.C. The subcommittee met, pursuant to call, at 10:20 a.m., in room 2359, Rayburn House Office Building, Hon. James T. Broyhill presiding. Present: Representatives Broyhill and Morton. Also present: Gregg Potvin, subcommittee counsel; Myrtle Ruth Foutch, clerk; and John J. Williams, minority counsel. Mr. BROYHILL. The subcommittee will come to order. The chairman of the subcommittee, Mr. John Dingell of Michigan, is detained in another meeting, and sends his apologies. He will be along in a few minutes. He has asked me to preside for the opening of these hearings today. Present today are my colleague, Mr. Rogers Morton of Maryland, as well as Mr. Gregg Potvin, majority counsel, and Mr. John Williams, minority counsel. The next five or six sessions of these hearings on "Small Business Problems in the Drug Industry" will be devoted to the receiving of testimony from the 20 largest manufacturers of ethical pharmaceuticals. To date, our testimony has consisted almost exclusively of complaints received from various small business segments of the industry. As pointed out by Mr. Earl Kinter, counsel for the National Association of Retail Druggists, the ranks of retail druggists are thinning at a somewhat alarming rate. We have also received indications that at least some wholesalers face serious problems at the present time. It is the intention of the subcommittee to explore the distribution structure and practices of drug manufacturers, particularly as they relate to small business. Emphasis will be placed on those practices which result in community pharmacists paying a higher price than other classes of customers. It is the feeling of the subcommittee that the life-giving nature of the products produced by the pharmaceutical industry gives them a special importance in terms of public interest. It is, however, not a function of this hearing to explore the question of manufacturing costs, but, rather, to do a somewhat detailed study of distribution costs and relative prices to various classes of customers. One of the goals of the hearing is, however, to secure a lower price for community pharmacists and their customers. The subcommittee wishes to express its appreciation to the Pharmaceutical Manufacturers Association which has assisted in arrang ing the details of the appearances before this subcommittee by the sev eral manufacturers. Their cooperation has been most appreciated by the entire subcommittee and the staff. Our first witness this morning will be Henry F. DeBoest, vice presi dent of Eli Lilly & Co. He is accompanied by Mr. C. Harvey Bradley, Jr., general counsel of Eli Lilly & Co. We are delighted to have you, sir. Go right ahead with your statement. TESTIMONY OF HENRY F. DeBOEST, VICE PRESIDENT, ELI LILLY & CO.; ACCOMPANIED BY C. HARVEY BRADLEY, JR., GENERAL COUNSEL Mr. DEBOEST. Thank you, Congressman Broyhill. My name is Henry F. DeBoest. I have been employed by Eli Lilly & Co. for more than 35 years and at the present time have the responsibility of vice president for corporate affairs. Biographical data and a brief description of the Lilly Co.'s diversified operations are attached to this statement. Eli Lilly & Co. welcomes this opportunity to appear at these hearings on "Small Business Problems in the Drug Industry" and to dis cuss its policies and practices relating to the distribution and pricing of drugs. The responsibility of making available to the American people the safest and most effective drugs that can be produced is a very great one. The Lilly firm has been cognizant of this for more than 91 years. Furthermore, we are fully aware that, unless drugs are available precisely where and when they are needed, even the most effective medicine is of no value to the ill or injured. Thus, distribution of drugs, as well as their discovery and produc tion, is of vital concern to us. We hope that the subcommittee's inquiry into the distribution of drugs will serve to inform the American people of the valuable services rendered by wholesale drug distributors and retail pharmacies. It is important that everyone fully realize the exacting requirements of an effective distribution system for drugs, many of which are of lifesaving importance. The products which must be handled are often highly potent, sometimes dangerous, perishable, and frequently short; lived. Many of them must be kept under refrigeration or protected from excessive heat or cold. Some of the products, such as narcotics, must, for legal and social reasons, be handled under elaborate security measures. Emergency services must be available in times of an individual's medical crisis and in times of major disaster, such as tornado, fire, earthquake, and flood. Procedures must exist for identifying drugs by their manufacturing lot numbers so that they may be impounded or recalled if later events indicate such action would be in the public interest. Eli In distributing its products to meet these exacting requirements, Lilly & Co., relies heavily upon several hundred wholesale drug dis tributors. Its medical products are distributed exclusively through these wholesalers (with the exception of products supplied to the Federal Government and the American Red Cross). Lilly wholesalers carry a broad stock of Lilly items in quantities which will enable them to supply retail pharmacies, hospitals, and State and local governments promptly and effectively. Assuring that needed Lilly medicines are at the right place at the right time requires the exercise of good management judgment and knowledge of drug distribution problems in order to maintain an appropriate number of distributorships, located strategically throughout the country. To insure adequate distribution, Lilly management must continually evaluate population trends by geographic areas, the size of pharmaceu tical markets, the number of retail pharmacies and hospitals, and the adequacy of selling and service operations of its wholesale distributors. Whenever additional distribution facilities are shown to be needed, the company makes a thorough investigation leading to the selection of the distributor that will most likely give satisfactory service on Lilly products to the retail pharmacies and institutions dependent upon it. If too few wholesale distributors are utilized or they are not located properly on the basis of their geographic availability to various regions of the country, the almost 800 Lilly drugs may not be close at hand to meet the needs of retail pharmacies and their customers. On the other hand, if Lilly distributors are concentrated too heavily in certain areas, there results a dilution of the wholesalers' market to the point where distribution of the complete Lilly line becomes unprofitable, because of the low turnover of inventories and the reduced volume of sales. As long as the Lilly line means good business, distributors will give prompt and efficient service and will stock not only the fastmoving items but will also stock and deliver promptly those infrequently used but critically needed drugs in the Lilly line. In short, having either too few wholesale distributors or, on the other hand, too many of them may fail to secure full drug distribution services for the American people. The map on the next page indicates the geographic location of the 401 wholesale distributors upon which the company relies today. The map also shows how completely Eli Lilly & Co. is able to place its broad line of products within the reach of patients everywhere, using its wholesaler network. Lilly products are available in every county of the United States in which drugs are known to be dispensed. An estimated 99.93 percent of thte people in the United States can obtain Lilly drugs within the county in which they live. Through Lilly wholesalers the company's products go to more than 50,000 retail pharmacies and 9,000 hospitals scattered throughout the country. The company has acted to increase the strength of its wholesale distribution organization as population growth and that population's geographic distribution have required more wholesaler services in various parts of the country. Ten years ago (as of the end of the year 1958), Lilly medicines were distributed through 311 wholesalers. In the past 10 years, 25 distributors went out of business or were merged with another distributor and 115 new distributors were added-bringing to 401 the number today, an increase of more than 25 percent in the company's drug distribution outlets. In Alaska, which does not have counties, stocks of Lilly products are readily available in 25 hospitals and 35 drugstores. |