Mr. POTVIN. And your price is $9.96 per 100-milligram tablets in quantities of 100, for one hundred 100-milligram tablets. Abbott's price is $9.96 for one hundred 100-milligram tablets. Your price for the same number of 250-milligram tablets is $21.99. Abbott's price list disclosed that it, too, is $21.99.

Do you feel that you could increase whatever market share you have by cutting your price?

Mr. DEBOEST. We have cut our price from time to time and, in so doing-within the framework of what we think is good business judg ment-I believe have expanded our market.

Mr. POTVIN. Could you have your marketing people look at the last two or three price decreases that you had, and then give us the correla tive market share result that ensued?

Mr. DEBOEST. I am not sure that this can be done, but we will try. (The information follows:)

7. ERYTHROMYCIN PRODUCTS (TR. 906-907)

As has been true of most prescription drugs, antibiotic drugs have experienced a history of substantial price declines over the past decade. In the period 19581967, the price of the Company's erythromycin Products (Ilosone and Ilotycin) declined nearly 25 percent, principally as a result of major price reductions in 1960 and 1962. The annual share of new antibiotic prescriptions accounted for by these two Products reportedly varied during the decade from just under 5 percent to nearly 9 percent.

There was, however, no particular correlation between the price reductions and the market shares of these two Products. Indeed, the market shares declined somewhat after the major price reductions in 1960 and 1962.

One reason for the lack of correlation is that our competitors lowered their own prices on erythromycin products to meet the Company's reduction. Another rea son is that during this period the prices of penicillin, tetracycline, and other antibiotics competitive with erythromycin products also significantly declined. An additional factor was the introduction of new and improved antibiotic drugs. Also, the fact that other competitive factors, such as therapeutic effectiveness and minimizing of side effects, influenced market shares as much as price, and sometimes more, limits the extent to which a price reduction can increase market share. It is difficult, if not impossible, to isolate the effects of a price reduction from the effects of other factors.

Mr. BROYHILL. I want to ask a question there. In your business experience, when you reduce prices like this, is it usually followed by a price decrease by your competitors?

Mr. DEBOEST. Very frequently.

Mr. PorvIN. Mr. Chairman, Congressman Jim Wright of the Texas delegation has sent us a matter from a constituent. It is a rather outraged letter. I will read it to you if I may. It is quite brief. It says:

GENTLEMEN: Enclosed are checks to the hospital totaling $177.75 and checks to Dr. Taylor for $130. The anesthesiologist has been paid separately. These charges are for pulling four wisdom teeth for my daughter, Cynthia, and are the most outrageous that I have ever seen in my lifetime. God help any individual who has an illness who would be subjected to charges such as these.

I have never quibbled about paying doctor bills, dentist bills, and hospital bills before, but this is almost unbelievable. It is no wonder that charges by individ uals in the medical profession are bringing our country into a more socialistic

society.

I am not ill-tempered nor writing this letter in anger but rather in shock, and I certainly intend to forward an itemized statement of your charges on to our Congress, as it is my understanding that they are constantly surveying the medical profession due to exorbitant charges.

(Discussion off the record.)

Mr. POTVIN. Now, in looking at the itemized statement of All Saints Episcopal Hospital of Fort Worth, Tex., we find a long list of pharmacy charges running from November 22d to the 25th totaling $32.35. We then find three charges, one for $3, one for $1.80, and one for $6.40. It says "Take-home Drugs."

Now, it is in this area of take-home drugs and outpatient and that sort of thing that it seems to me the community pharmacist has one of his most serious problems. Can you tell me your thoughts on this, sir? Do you feel that a take-home drug is a sale that is made in competition with the community pharmacist?

Mr. DEBOEST. Sir, that would have to be qualified with what the "take-home" drug is and the circumstances under which it was pre

scribed.

Mr. POTVIN. Are there drugs that hospitals are allowed to give patients that community pharmacists are not allowed to sell?

Mr. DEBOEST. Well, no, sir, with great exceptions. There are a few but they would not be "take-home" drugs, as I understand it. The only thing that I could visualize in the case that you are just talking about was that there might have been a paste made up to fit into the tooth socket which the physician wanted or the oral surgeon wanted especially prepared in that hospital. I would have no way of knowing. But in general I think we can say that the furnishing of drugs to outpatients or to patients off the street probably results in a competitive inequity to the retailer, and this is why we recommend an examination and ultimately a definition of what "for own use" means. Mr. BROYHILL. The bells have been rung for a quorum call of the House. We will recess at this time and reconvene at 2 p.m.

I would like to ask a few questions at that time. We can also hear from the other witness scheduled.

(Whereupon, at 12:20 p.m. the subcommittee recessed to reconvene at 2 p.m. the same day.)

AFTERNOON SESSION

Mr. BROYHILL. The subcommittee will come to order.

When we recessed, we were questioning Henry F. DeBoest, vice president of Eli Lilly & Co. I believe counsel has a few more questions he would like to ask you, Mr. DeBoest. We appreciate your coming back this afternoon.

Mr. POTVIN. Mr. Chairman.

Mr. DeBoest, I was pleased to note in the January 2 issue of FDC Reports that Lilly apparently is in fairly robust financial condition at this time, looking at the figures on your gross and your net and so forth. Now, in general terms have your dollar sales increased or decreased over the past 5 years?

Mr. DEBOEST. Increased.

Mr. PorvIN. And would that most likely be true in the New York City area?

Mr. DEBOEST. Yes, I believe so.

Mr. PorvIN. And how many wholesalers have you added in New York in the past 5 years?

Mr. DEBOEST. I would have to check the list, Mr. Potvin. I do not know.

Mr. POTVIN. Could you give us a ball park guess, I do not think their identity is important, but as to number?

Mr. DEBOEST. Including a division of an existing wholesaler in the area, in the last 5 years there were two.

Mr. POTVIN. Now, there were two wholesalers, but branches of, I hope I pronounce this correctly, Schefflin?

Mr. DEBOEST. Yes, sir.

Mr. POTVIN. They left the distributive structure in New York and went out of business in fact?

Mr. DEBOEST. Yes, sir.

Mr. POTVIN. Recently two other distributors left New York, Ketchum and D. Kaltman, both very major houses?

Mr. DEBOEST. That is correct.

Mr. POTVIN. That is they physically left New York, is that correct? Mr. DEBOEST. That is right.

Mr. POTVIN. They are serving them out of New Jersey as I understand it?

Mr. DEBOEST. That is right.

Mr. POTVIN. Both of these cut away members of small retailers who were either unwilling or unable to purchase the required size of orders, and both cut back on traditional services and their deliveries are less frequent and so on, according to the testimony in our record at least. Now, we find, sir, the following. The very smallest retailers in New York City are being hurt in this way. There are wholesalers who will give them discounts but who do not have all the lines, particularly Lilly. There are wholesalers who have Lilly and who offer discounts, but they require an order of a size that the small retailer cannot produce. Hence to get Lilly, they have to pay not only more for Lilly but, indeed, on a great deal of the rest of the merchandise because they cannot buy just your product from those wholesalers.

Now, does this not suggest to you that you perhaps need either additional wholesalers in the area or that the polícies of some of your wholesalers are detrimental to the smallest retailers?

Mr. DEBOEST. I do not believe it is true in either case, sir.

Mr. POTVIN. You do not feel that there is something unfair about having to place a minimum order of a size greater than you can generate, in order to get the same price as your competitor down the

street?

Mr. DEBOEST. I am not sure that this is the case in the area to which you are referring. We have, I believe, 13 distributors serving the area. Mr. POTVIN. Would you define the area?

Mr. DEBOEST. Probably you should define the area, sir.

Mr. POTVIN. How many distributors do you have physically either in Manhattan or Queens, in that area?

Mr. DEBOEST. The physical presence in a particular borough of the city I think is irrelevant as relates to the service delivered. Serving Manhattan and boroughs, which I presume is what you are referring

to

Mr. POTVIN. Yes.

Mr. DEBOEST (Continuing). We have 13 distributors. Several of them have moved out of Manhattan in order to get more flexibility and freedom of movement, in order to deliver better service; so this

is not a pertinent fact. As relates to the size of an order, we must bear in mind, No. 1, that our wholesalers are our customers. The retailer is the wholesaler's customer. We are deeply interested in the degree of service received by a retailer. However, we also have to recognize the economics of operation of any business, and there are certain fundamental costs that must be met.

I believe the instance of certain wholesalers' restricting the amount of business or stating a minimum amount of business required is an attempt on the part of those wholesalers to either make those somewhat marginal customers good customers of theirs or make them good customers of someone else.

Mr. POTVIN. Lilly sells just through wholesalers?

Mr. DEBOEST. Yes, sir.

Mr. PorvIN. Can you give us a copy of your current franchise or other agreement that you would require a wholesaler to enter into? Mr. DEBOEST. Yes, sir.

Mr. PorvIN. And may we have from you the identity of the 115 new distributors referred to in your remarks of this morning? Mr. DEBOEST. Yes, sir.

(The information follows:)

ELI LILLY AND COMPANY

Warehousing and Distribution
Service Agreement

This Agreement, when executed by the Wholesaler's authorized representative and returned to, and executed by, Eli Lilly and Company (hereinafter called "Lilly") at Indianapolis, Indiana, will state the terms and conditions of the Wholesaler's Lilly franchise for the period indicated herein.

I. The Wholesaler Agrees:

A. Inventories.

1. To purchase from Lilly and maintain at all times a sufficient inventory of the Lilly Products listed in the Lilly Price List (such products hereinafter called separately and collectively "Products") to supply the demand for Products.

2. To resort to drop-shipment orders only when Products are not available from the Wholesaler's inventory. 3. To maintain the Products under proper storage conditions, including such refrigeration as may be specified by Lilly.

4. To supply only Products that are not out-of-date, damaged, or shopworn.

B. Sales Organization. To maintain a sales organization, including outside salesmen, adequate for personal so licitation of orders for Products in Wholesaler's trading area.

C. Sales Effort. To promote the Products, to give them full selling efforts and full distribution services, and

not to

1. Refuse or fail to supply promptly the Products when specified, or

2. Give preference to any other brand of products when no brand is specified.

D. Financial Statement. To furnish Lilly upon request a copy of its annual financial statement or other evidence of its financial condition.

E. Automatic Shipments. To accept automatic shipment of Products in reasonable quantities.

F. Payment for Products. To pay in full all invoices for Products within sixty (60) days from the date thereof. II. Lilly Agrees:

A. Shipment to Wholesaler. To sell and ship Products (other than Products restricted to sale on a third-party basis) to the Wholesaler at the Net Wholesale prices shown in the Pricers' Edition of the Lilly Price List in effect on the date of shipment, such Net Wholesale prices being equal to the Net Trade prices specified in the regular Price List less the following discounts:

1. Group Products (marked "I" in regular Price List and consisting generally of trademarked Products other than legend parenterals): 16%

2. Group II Products-(marked "II" in regular Price List and consisting generally of items, both trademarked and not trademarked, sold by manufacturers generally): 20%

3. Group III Products (marked "III" in regular Price List and consisting generally of B legend parenterals): 10% and 16%. It is suggested that the 10% be passed on to customers.

B. Handling Allowances.

1. To grant the Wholesaler, in accordance with the Chargeback procedure outlined in the Lilly Chargeback Manual, handling allowances on Products sold from the Wholesaler's inventory for which Lilly has rec ommended special Wholesaler's suggested resale prices, which allowances will provide gross margins to the Wholesaler not less than the following percentages based on such special prices:

a. Sales at Suggested Prices Quoted by Lilly upon Request or from Special Price Schedules (e.g., Quantity Price Schedule)

(1) Single items:

(a) Line extensions of less than $50

Group I Products-16%%

Group II Products-20%

Group III Products-16% %

(b) Line extensions of $50 or more-10%