Eli Lilly & Co.'s use of independent wholesale distributors provides valuable support to many small businesses handling medical products and to the general public. Retail pharmacies and hospitals have access, within reasonable distances, to wholesale houses carrying the Lilly line. This relieves them of the financial burden and responsibility of maintaining large and complete inventories of our products. It helps to insure to the patient that he will get fresh, potent Lilly products. An explanation of Lilly pricing policies and practices is important to a full understanding of Eli Lilly & Co.'s product distribution. As stated earlier, Lilly sells exclusively to its wholesale distributors with the exceptions already noted. We have no direct accounts with retail pharmacies, hospitals, physicians, or city, county, and State governments.

Our merchandise is available to all our wholesale distributors on the same terms. We have no "free goods" or promotional allowances for anyone. We give quantity prices to our wholesales distributorson the same basis for all-by reducing their costs when they have made quantity sales to their customers.

A common practice in the drug business is to allow lower prices city, county, State, and Federal agencies, as well as nonprofit and charitable institutions, on purchases of supplies for their own use. Congress has encouraged procurement of drugs for Government agencies at lower prices and has specifically recognized the status of private charitable and educational institutions in the Nonprofit Institutions Act of 1938. That act, as you know, exempts purchases of supplies by the designated institutions for their own use from the provisions of the Robinson-Patman Act. We have tried to enable our wholesale dis tributors to provide pharmaceuticals to such institutions on a competitive basis by lowering the wholesaler's cost on selected Lilly items. It has always been our understanding that this exemption in the Nonprofit Institutions Act was intended to apply only to supplies purchased by institutions for their own use. Previous testimony heard by this subcommittee has suggested that-in some localities, at least institutions may be departing from the purpose of the exemption and engaging in retail sale of such supplies in competition with community pharmacies. If the subcommittee finds that, in practice, the exemption is being extended beyond its intended purpose, Eli Lilly & Co. would support appropriate amendatory legislation to correct competitive inequities.

I have tried to be responsive to areas in which the subcommittee has expressed an interest, and I shall be glad to answer questions which you may have.

(The attachments to the prepared statement follow :)

HENRY F. DEBOEST

Henry F. DeBoest is vice-president for corporate affairs of Eli Lilly and Company. He is a member of the company's Board of Directors and of the execu tive committee of the Board and is a director of a Lilly subsidiary, Eli Lilly International Corporation.

DeBoest joined the firm as a salesman in Eugene, Oregon, on July 25, 193 In 1934 he was transferred to Portland, becoming manager of the Portland dis trict in 1939. He returned to that post in 1945 after three years as a chemica warfare officer with the United States Army in World War II.

Transferred to the home office in Indianapolis on August 1, 1947, DeBoes spent four years as assistant director of the production control division. He was

reassigned to the sales organization in 1951 as director of sales for the central region and subsequently held the posts of director of sales for the eastern region (1953), executive director of sales (1958), and vice-president for sales (1965). Born in Oregon, DeBoest was graduated from Corvallis High School in 1925 and received a Bachelor of Science degree in pharmacy from Oregon State University in 1930. He had two years' experience in retail pharmacy in Salem before joining Eli Lilly and Company. He is registered as a pharmacist in his home state.

DeBoest is a trustee of the Philadelphia College of Pharmacy and Science and a member of the American Pharmaceutical Association.

ELI LILLY & Co.'s DIVERSIFIED OPERATIONS

Eli Lilly and Company was founded ninety-one years ago by Colonel Eli Lilly, who undertook to develop a line of quality medicines formulated according to the best available medical knowledge and produced under careful controls. From this beginning, the company has grown into a worldwide corporation with diversified operations. It has a broad line of almost 800 drug products for use in nearly every field of human medicine.

In addition, the company is actively engaged in the production and marketing of specialized agricultural chemicals; products for animal health and nutrition; products for industry, including paper and plastic packaging materials; and a line of products for lawn and garden. In 1966, 31 percent of net sales was from products other than medicines for human use.

The drug manufacturing industry is characterized by extensive research activity, which results in the frequent introduction of new products. The success of the company's business depends in part upon its ability to be competitive in developing new products. It also depends upon maintenance of the company's established reputation for the manufacture, sale, and distribution of products that meet high standards of quality.

The company is engaged in extensive scientific research programs in organic chemistry, biochemistry, pharmacology, virology, and biology, looking toward discovery and development of new and improved therapeutic agents.

Products in the field of human medicine are distributed throughout the United States, principally through approximately 400 wholesale drug distributors, which maintain substantial inventories of these products. This marketing policy assures immediate availability of Lily products to physicians, dentists, pharmacies, and hospitals and eliminates the need for the company to maintain supply centers. The company is engaged, directly and through its Elanco Products Company division, in the discovery, development, manufacture, and sale of chemical and other products for use in agriculture and industry. A subsidiary of the company, Creative Packaging, Incorporated, designs, manufactures, and sells a diversified line of paperboard and plastic packages and containers. These areas of the company's business have been increasing in importance during the past few years. The company's principal officers are located at 740 South Alabama Street in Indianapolis. United States manufacturing facilities are located in Indianapolis, Lafayette, and Greenfield, Indiana; Roanake. Virginia; Omaha, Nebraska and in Puerto Rico. The company manufactures or distributes its products through its own facilities in twenty-two countries outside the United States and sells it products in approximately 135 countries. The company and its subsidiaries have more than 17,000 employees.

Mr. BROYHILL. Thank you very much, Mr. DeBoest.

On page 3 of your testimony you use the term, "satisfactory service." Could you more fully explain to the committee what you mean by "satisfactory service"? Is this just getting the appropriate sales quota in every month or every quarter?

Mr. DEBOEST. No, sir. It is a much broader matter than merely seeing that we sell an adequate amount. It has to do with the servicing of the retailers and in due course, of course, their customers. It means that proper delivery facilities are made available and that within reasonable limits, if credit needs to be extended, these credits are extended, If special handling is required, it means that this special handling is accomplished. By that I mean perishable items. An example would

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be smallpox vaccine, which is a rather inconsequential item economically but very important to the people who receive it, and it must be delivered to the retailer or the eventual user, for that matter, in a frozen state. These are all elements of the servicing, plus a reasonable amount of personal contact between the distributor and his customer, in order to make sure that a proper relationship exists.

Mr. BROYHILL. In your statement you said that there are 411 wholesale distributors which handle your product. Do any of these distributors compete with each other in the same geographical area?

Mr. DEBOEST. Yes, sir. As an example, in the State of California we have 45 distributors.

Mr. BROYHILL. Counsel has a question.

Mr. POTVIN. When you say distributors, sir, you mean, of course, at the wholesale level?

Mr. DEBOEST. Wholesalers, that is right.

Mr. POTVIN. Of those 45, can you give us the breakdown on how many might be affiliated as separate establishments of the same firm?

Mr. DEBOEST. Mr. Potvin, the Brunswig organization has 17 in the State of California. McKesson has 14. The balance would be from relatively smaller organizations, some of them completely single operations. Four or five of them are members of a small chain of pharmaceutical wholesalers.

Mr. POTVIN. So there would be 17 in one group, 14 in another, and four or five in another. That would get us up to say 33 or 34 of the total of how many, sir, 45?

Mr. DEBOEST. Forty-five, yes,

sir.

Mr. POTVIN. So that there would, most likely, be something in the neighborhood of six, seven, or possibly eight firms represented.

Mr. DEBOEST. I believe that is correct.

Mr. POTVIN. For the entire State of California.

Mr. DEBOEST. Yes, sir.

Mr. BROYHILL. Mr. Morton, do you have a question?

Mr. MORTON. I want to welcome you here, Mr. DeBoest.

On page 6 of your statement you say, concerning the subject of pricing:

We give quantity prices to our wholesale distributors on the same basis for all by reducing their costs when they have made quantity sales to their customers. I would like you to give me an explanation of that. I don't see exactly how it works. Would you tell me more about your quantity discount system?

Mr. DEBOEST. Congressman, in the first place, in order to understand this, we must realize that the wholesaler is our customer. We make no sales to the retailer, to the hospital or to the State, city, or county governments; so the only way that allowance can be made for quantity sales is for us to adjust the cost of this merchandise to the wholesaler, and he in turn makes the sale.

Mr. MORTON. Does this mean that on similar quantities that would be bought they would not enjoy the same quantity discounts?

Mr. DEBOEST. To the best of our knowledge, they would not, sir. They all receive merchandise and are billed at the same price. Now, if they deliver from their inventories quantities in certain amounts to

eligible customers, then we will adjust their costs for that merchandise delivered from their inventory.

Mr. MORTON. Let's take a hypothetical case of a wholesale distributor in a large metropolitan market, where there is a division of the market between the multiunit chain drug retail operators and the single-unit or "Ma and Pa" drugstores.

If one of your products is bought in a large quantity by the chain operator, and then distributed to the units through his own distribntion system within his own company, the price of the merchandise going to that chain would be lower in cost to the wholesaler and to the retailer than the price of the same merchandise going to the single-unit operations. Is this not correct?

Mr. DEBOEST. It would depend on the quantity, sir. If the "Ma and Pa" drugstore were to buy the same amount, the price would be the same, in all probability.

Mr. MORTON. I understand that. If the multiunit organization however, buys in quantity sufficient to meet the discount program or allow ances that you have, this price reduction then is passed on to him, and he gets the advantage of quantity buying and lower cost of the merchandise, providing he can buy in that quantity. Is that correct? Mr. DEBOEST. Yes, you are correct.

Mr. MORTON. I yield to counsel.

Mr. BROYHILL. Mr. Potvin.

Mr. POTVIN. Mr. DeBoest, first of all, could you supply us with a list of the discounts available and the various quantities on which those discounts are predicated? In other words, a complete schedule of your total discount structure.

Mr. DEBOEST. We have a published series of sheets which are carried by our salesmen and by all of the wholesaler salesmen and which are available to all the telephone solicitation people and the wholesalers around the country. This we would be happy to submit, although we would prefer it not be entered in the record, for competitive reasons. Mr. BROYHILL. This will be submitted to the committee for examina tion.

Mr. DEBOEST. Yes, sir.

(The information is retained in subcommittee files.)

Mr. BROYHILL. Mr. Morton.

Mr. MORTON. Mr. DeBoest, are you including hospitals in the term "nonprofit institutions"?

Mr. DEBOEST. Yes, sir. Tax-exempt, nonprofit hospitals are included in the nonprofit exemption.

Mr. MORTON. Organizations such as the Red Cross and hospitals which buy products you manufacture would fall into that preferred category?

Mr. DEBOEST. The Red Cross, as we mentioned in our statement, is frequently sold directly from Indianapolis. This is one of our two direct accounts, the Red Cross and the Federal Government.

use,

does

Mr. MORTON. If a hospital, in turn, has an in-house retail outlet for pharmaceutical products, which anyone can go in and that hospital have a perfect legal right to conduct such a business. as far as you know?

Mr. DEBOEST. Sir, I am not competent to state. I will defer to counsel on this.