II. The distributor agrees:

(a) To maintain an adequate and compresensive stock of CIBA products, and permit periodic examination and inventory by a CIBA represen tative.

(b) To provide and maintain adequate facilities and personnel to service CIBA products for its customers.

(c) To promote actively the sale and use of CIBA products to its customers through methods customarily employed in its business on products of the character included in the CIBA line.

(d) To accept reasonable introductory shipments of new or revised CIBA products.

(e) To pay invoices promptly, taking cash discount of 1% 30 days from date of invoice; or paying net amount within 45 days from date of invoice.

(f) To supply CIBA products at all times when specified-without any attempt to substitute any other brand on such specifications.

(g) Not to reproduce CIBA labels and package inserts except, in the latter case, for purposes of providing professional information to inquiring physicians.

(h) Not to repackage CIBA merchandise for resale.

III. Conditions of Sale:

(a) All orders shall be subject to acceptance and approval by CIBA at its principal office in Summit, New Jersey.

(b) All orders accepted by CIBA shall be subject to delays, failure to deliver or cancellation caused by strikes, fires, damages to plants, warehouses or laboratories, wars, riots, embargoes or other contingencies beyond the control of CIBA.

IV. This Agreement cancels all previous Wholesale Distributor's Agreements entered into between the parties.

V. This Agreement shall become effective on the date recited in the preamble and shall remain in full force and effect throughout 1968, unless terminated by either party upon ten days prior written notice. CIBA, however, reserves the right to amend the same from time to time on ten days prior written notice to the distributor.

Title: Vice President

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Title

Distributor-Please sign in ink in above Distributor-Please do not sign in above

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Mr. DINGELL. Off the record. (Discussion off the record.)

Mr. DINGELL. Our next witness will be Mr. Robert B. Clark, presi dent of Warner-Chilcott Laboratories. Mr. Clark, we are certainly happy to welcome you for such statement as you choose to give. Upon being seated at the witness table, will you give your full name and address and those of the gentlemen who will be accompanying you. While you are being seated, the Chair will announce that our last wit ness today will be Mr. John J. Horan, who is executive vice president of Merck, Sharp and Dohme. We won't be able to hear him until this afternoon.

Mr. Clark, you are recognized.

TESTIMONY OF ROBERT B. CLARK, PRESIDENT, WARNER-CHILCOTT LABORATORIES, ACCOMPANIED BY H. ALLEN LOCHNER, COUNSEL

Mr. CLARK. Mr. Chairman, my name if Robert B. Clark and I am president of Warner-Chilcott Laboratories. This division of WarnerLambert Pharmaceutical Company is engaged in the manufacture and marketing of ethical drugs, that is, drugs promoted to the medical profession.

With your permission I would like to have with me at the witness table Mr. H. Allen Lochner of Royall, Koegel, Rogers & Wells, New = York counsel.

Mr. DINGELL. You are certainly welcome to do so.

Mr. Clark, we are pleased to have you as a witness.

Mr. CLARK. Thank you.

1

We are pleased to respond to your recent invitation to appear before your committee. My statement is confined solely to the distribution system of Warner-Chilcott Laboratories and is not in any way concerned with the distribution practices of other divisions of the company. We are prepared to provide an overall description of the Warner-Chilcott distribution system along the lines conveyed by your office to the staff of the Pharmaceutical Manufacturers Association as reported to us. Until October 2, 1967, distribution of Warner-Chilcott products was effected through sales made direct to the following classes of trade: A. Drug wholesalers, at a discount of 172 percent for products bearing the prescription legend, and 20 percent for products available on over-the-counter purchase (OTC); that is, products available for purchase without prescription. Wholesale accounts were selected to provide that the best distribution and services to all retail accounts, and were constantly reviewed to determine that this goal was maintained. We had no direct retail accounts prior to October 2, 1967. B. Noncontract hospitals, clinics, and nursing homes were sold at a discount of 15 percent with a minimum order of $50, and contract hospitals at a discount of 17 percent with a minimum order of $15. A contract hospital is a nonprofit hospital which agrees to purchase our products over a period of time at list prices less the 17-percent discount stated in the contract. By thus mínimizing paperwork, the hospital receives an extra 2-percent discount but the cash discount to which I refer later of 1 percent was not accorded to it so that it netted out to an additional 1-percent discount.

C. Physicians, at wholesale list, namely, suggested wholesale price. to retailer. Direct physician sales constituted an extremely small percentage of our business, less than 0.5 percent.

On October 2, 1967, our distribution policy was modified as described below. Warner-Chilcott's line of drug products, the sale of which accounts for roughly 3-4 percent of total pharmaceutical sales in the United States, includes both prescription drugs and a significant percentage of drugs available by OTC purchase without prescription.

1 All discounts in this statement are from wholesale list, i.e. suggested wholesale price to retailer.

While all of our products are in competition with products of other manufacturers, in recent years the products in our line sold over the counter have faced increasing competition from manufacturers selling direct to retailers. Accordingly, to improve our distribution and to meet that competition, as of October 2, 1967, our distribution policy was modified to provide for the opening of direct retail accounts and for certain changes in our discount structure. This policy modification is now underway, of necessity on a gradual basis in a geographical sense since additional distribution points had to be opened. Under this policy modification, our products will be distributed to the retail trade as follows:

A. Drug wholesalers, at a discount of 172 percent with the excep tion of certain low-volume, slow-moving items on which 20 percent will be granted. Minimum order requirements are $500 list per order. The maximum number of orders annually is 36.

B. Retail accounts will receive 15-percent discount. Minimum order requirements are $250 list per order, with an annual minimum of $1,500 net. The maximum number of orders annually is 24.

No change has been made in terms for contract and noncontract hospitals, clinics, nursing homes, and doctors.

The cash discount for both wholesalers and retailers is 1 percent, 30 days, date of invoice, net 60 days; for noncontract hospitals, clinics. nursing homes, and for doctors, 1 percent, 10 days, end of month. As noted above, there is no cash discount for contract hospitals.

With regard to retail accounts, the following additional terms are available:

Any retail account may obtain an extra 1 percent discount provided it fulfills minimum order requirements of $500 list per order and $5,000 net annual purchase, with a maximum of 18 orders per year. These requirements of higher minimum orders and a reduced number of orders per year produce cost savings to Warner-Chilcott which are in part being passed on to the account in the form of the extra 1 percent.

For purposes of sound business administration, such accounts having a warehouse to which all shipments are made, distributing merchandise to four or more owned or leased outlets, and agreeing to observe the above minimums will be accorded the additional 1-percent discount immediately. The remaining retail accounts who demonstrate over a 6-month period their capability of meeting these minimum requirements will be accorded the additional discount retroactively.

The criteria for selection of retail accounts are the following: 1. An ability to meet the minimum purchase requirements set forth above. This is done by an application filled out by the account eliciting information as to its annual sales volume, average number of prescrip tions daily (new and refill), average monthly Warner-Chilcott purchases, and other verifying information.

2. Acceptable credit status.

In connection with promotional allowance programs, periodically OTC items are prepacked for special promotion. These packages are available both to direct accounts and indirect accounts through wholesalers.

I will be happy to answer any questions that you gentlemen may have.

Mr. DINGELL. Mr. Clark, the committee is grateful to you for your statement this morning.

Mr. Broyhill?

Mr. BROYHILL. I am going to have to leave in a few minutes, Mr. Chairman. I would like to ask just one question.

Mr. DINGELL. Mr. Broyhill.

Mr. BROYHILL. Mr. Clark, I note that you grant a 1-percent discount. to those organizations which have four outlets, owned or leased? Mr. CLARK. That is right.

Mr. BROYHILL. Would this discount be available to four retailers who purchased jointly?

Mr. CLARK. No, sir.

Mr. BROYHILL. Even though you shipped to a central location?

Mr. CLARK. No, sir. It is a policy that has to be, as I say, an owned or leased store. If there was no connection with the retailers otherwise, we would not accord the extra 1 percent to them.

Mr. BROYHILL. Thank you.

Mr. DINGELL. Mr. Addabbo?

Mr. ADDABBO. Does Warner-Chilcott have any similar disaster policy as Roche and CIBA?

Mr. CLARK. I think we have, and if I may smile along with Mr. Silloway I think all other companies do too.

Mr. ADDABBO. Thank you.

Mr. DINGELL. Mr. Potvin.

Mr. POTVIN. Mr. Chairman.

What is the Warner-Chilcott policy on diversion, first as to the hospital type of diversion which you have heard discussed already today?

Mr. CLARK. I have heard it discussed, Mr. Potvin. We have had very little experience with it, to be very honest. As a matter of fact, I cannot think of an instance where it has been brought to our attention in a way that caused me or anybody under me to take specific action. Certainly it would be our feeling, however, that our arrangements with hospitals contemplate selling them at a discount for their own use, and if there were diversion into the retail trade from the hospital, it would be in our opinion not in accord with our understanding with

them.

Mr. POTVIN. In other words, it would be your understanding that although they might have a hospital pharmacy, it should not be actively engaged in direct competition with the community pharmacy? Mr. CLARK. That certainly is our intention and understanding. Mr. POTVIN. Now, with the nonhospital type of so-called diversion, does Warner-Chilcott have a policy?

Mr. CLARK. You mean one wholesaler selling to another?

Mr. POTVIN. Yes.

Mr. CLARK. We take no action whatever on that. Once title to the goods is passed, it is the property of the person who owns them.

Mr. PorvIN. Then do you concede that your wholesalers are independent businessmen and may exercise their own judgment within the limits of the law, in choosing their customers and setting their prices? Mr. CLARK. Yes, sir.

Mr. POTVIN. And you would take no punitive or disciplinary action?

Mr. CLARK. No, sir.

Mr. PoTVIN. In discussing the 1 percent additional discount that Congressman Broyhill referred to, I note that you say:

Such accounts having a warehouse to which all shipments are made are ac corded an additional one percent discount.

In effect, are you saying then that you would not give that discount to anyone requesting drop shipment to individual establishments! Mr. CLARK. Yes, sir; that is correct.

Mr. POTVIN. And could you tell us a bit about the structure of your quantity discounts?

Mr. CLARK. Except for this discount here, I am not aware that we have any.

Mr. PoTVIN. In other words, you have no additional quantity dis counts available to either wholesalers or retailers that are not set forth in your statement?

Mr. CLARK. No, sir.

Mr. POTVIN. And do you use the promotional device of free goods upon occasion?

Mr. CLARK. On rare occasion, as the last sentence in the statement indicates, particularly with our antacid, Gelusil, we will have a prepacked display-type arrangement which will have free or bonus goods, This is available to direct accounts obviously. It is equally available to nondirect accounts through the wholesaler.

Mr. DINGELL. Are they available in precisely the same way to both direct and indirect accounts

Mr. CLARK. Exactly.

Mr. DINGELL (Continuing). And to wholesalers?

Mr. CLARK. In other words, it is a package that is bought and delivered.

Mr. DINGELL. The same price to both?

Mr. CLARK. The same price to both.

Mr. DINGELL. How about a

Mr. CLARK. I am sorry, the wholesaler gets a 172 percent discount, the retail 15, but the same package is sold.

Mr. DINGELL. The same package is sold?

Mr. CLARK. Yes.

Mr. DINGELL. Are these available to retailers who are not direct accounts?

Mr. CLARK. Through the wholesaler.

Mr. DINGELL. Through the wholesaler only?

Mr. CLARK. Yes, sir.

Mr. DINGELL. Mr. Potvin.

Mr. POTVIN. Would the obtaining of these free goods be contingent upon any particular minimum size order at the retail level, and if so. would the percentage or ratio of free goods increase with larger orders?

Mr. CLARK. To the last question, no. To the first question, only within the limits of minimum order requirements that we have set forth here.

Mr. POTVIN. So that your minimum order requirements on OTC are the same as for prescription.