Mr. POTVIN. This is most helpful to the very, very small retailers, I should imagine.

Mr. HORAN. Yes.

Mr. PorvIN. Now, in general terms, referring to the retailer buying direct from you, and assuming that he can get together a hundred dollar order, about how much more would he pay than the retailer on, say, your middle group? That 5, 15 or 20 is dependent primarily on the speed of the turnover, I assume.

Mr. HORAN. The 5, 10 and 20.

Mr. POTVIN. At the wholesale level.

Mr. HORAN. The wholesale discounts?

Mr. POTVIN. Yes.

Mr. HORAN. No, I think with us they are to a large extent historical and competitive. The larger wholesale discounts are on some of our older products, and depend often on the size, on whether or not that product carries an order size discount and its size. They all work out. generally, they all work out such that we give the wholesaler at least 5 percent over the best retail price. Now, it may be more than that on the under $50 or over $50.

Mr. POTVIN. Sir, were you present during any of the time when we were discussing influenza vaccine?

Mr. HORAN. I was yesterday.

Mr. POTVIN. So that you are aware of the general nature of the complaints sent us by Congressman Fountain?

Mr. HORAN. Yes.

Mr. POTVIN. I note on the list supplied me by the Biologics Standards people that Merck & Co.-This is the style under which it appears here. I would presume that would be your division

Mr. HORAN. Yes; it is.

Mr. POTVIN (continuing). Has been duly licensed to manufacture the polivalent type of influenza vaccine.

Now, as you know, the precise complaint that we received was that during a time of shortage, the wholesalers in the North Carolina area did not have vaccine. As a result, public health authorities were unable to obtain it, and they alleged that it was being placed primarily in the hands of retailers. It sounded as though they were saying primarily the larger retailers. Now, could you tell us what your policy of distribution has been?

Mr. HORAN. Our policy generally or always, where we have a shortage on a product, is to attempt to allocate it fairly into the areas of need, and to allocate it fairly to both retail, wholesale, or other customers, so that in any allocation that we have made, that we did. make, our wholesalers would have been allocated some part of it, and while I haven't checked any specifics on North Carolina, I can certainly assure you that in a time in which it was short nationally, we would have tried to allocate it fairly.

With flu this year, as I think someone said, it was March before we knew the composition, so it was fairly late. Flu is always a difficult problem because it is late or may be late. You have to wait until you know what the composition is. Then you have to try to estimate whether or not it is likely to be an epidemic year, and this year was not unusual in that some say it will be and some say it won't, and then estimate.

You have a long production cycle, so you have got to estimate how much you are going to need.

We did produce this year about 5 million doses for the civilian market, and a substantial amount for the military, which is of a dif ferent composition. We had some production problem with one of the strains, and this slowed us a little, but we poured a lot of effort on it and solved that. So we were short. Our shortage was one of a temporary duration. It was a matter of being late with delivery rather than short, and at the moment we are not allocating, and have not been for a little while, because our vaccine has come through, but as I say, it is difficult. We have seen years when we sell it and 1 year, 2 or 3 years ago, our returns were over 60 percent of what we had sold. So the fact that we have now gotten this out doesn't mean it will be

used.

Mr. DINGELL. You said 60 percent over what you had sold. This meant there was not a market for that because it happened to be a light

flu year?

Mr. HORAN. It is bought but not used and under our return goods policy the dealer can return it to us for credit and does at the end of the

season.

Mr. DINGELL. This is a question you may not choose to answer be cause we are not going into your pricing structures and practices, but did that occasion you a loss that year?

Mr. HORAN. In that year I am sure it did. I don't have the accounting statement in front of me but I am sure in that year we didn't make anything on flu. In fact we consider the time required to sell it and handle it and return it, and it was not a very good way to do business.

Mr. DINGELL. It is part of the game.

Mr. PorvIN. Do you allow a cash discount to your retail direct

buying customer?

Mr. HORAN. Yes, we do. We have a 2-percent discount for cash on

both retailers and wholesalers.

Mr. POTVIN. Do you find this to be good business?

Mr. HORAN. It has been. It seemed to us to be so.

Mr. POTVIN. As far as you know, you have no thinking in your orga nization toward the end of abandoning or canceling that policy!

Mr. HORAN. I am sure we do not at this time.

Mr. POTVIN. You have no discount that would involve central warehousing, as do some of your competitors; do you?

Mr. HORAN. No, we do not.

Mr. POTVIN. I do not believe that in your statement you gave the number of wholesale distributors that you use. Could you provide that

either now or later?

Mr. HORAN. I think I did mention we have 482 wholesale accounts.

Mr. BANSE. Page 5.

Mr. HORAN. That would be perhaps about 250 different companies. approximate number of wholesalers at that time to your present

number?

know how large it is. I can find out for you. But I would say it would Mr. HORAN. There has been an increase, a net increase, and I don't be a fair number certainly of increased accounts over 5 years.

Mr. POTVIN. Has this likewise been true in the number of your retail accounts?

Mr. HORAN. I haven't looked back at the number of retail accounts. I would think they have been increasing. It would be a much larger

number, of course.

Mr. POTVIN. Has there been any change in the last 2 or 3 years in your structure of discounts, your best orders or any other variety? Mr. HORAN. No.

Mr. POTVIN. This has been a fairly stable pattern?

Mr. HORAN. I think our last change was in 1962, I believe.

Mr. DINGELL. Do you have specific criteria that you impose with regard to acceptance of wholesalers?

As

Mr. HORAN. We are guided, I think, primarily by customer need. Our own policy of trying to make our products widely available also. you can see, we have a large number of wholesale accounts. We don't think it is good policy to take on every posisble wholesaler. You may get the volume of business done through them so small that it is of no interest to anyone.

We do look, I think, generally, at whether someone seeking to act as a wholesaler for us fulfills a wholesaling function, and then we look, and I think our primary consideration is whether we have an adequate wholesale distribution in that area, or need additional distribution, and I say our definition of what is adequate has been quite liberal, since we do have a very large number of wholesale accounts. Mr. DINGELL. Do you impose geographical limitations on the number of your wholesalers so that you limit them on any geographical basis?

Mr. HORAN. No, we do not.

Mr. DINGELL. If, let's say, I were to apply for a franchise, for the privilege of serving as one of your wholesalers, what would I have to demonstrate to you in connection with that?

Mr. HORAN. I think if you applied and it was clear to us that you were acting as a wholesaler, in a position to stock our products and service retailers, we would look ourselves, I think, at the area which you told us you were going to serve, able to serve, willing to serve, and see whether we needed, felt the need for increasing, enlarging our wholesale distribution in that area.

Mr. DINGELL. Would you apply anything, really, other than that, and the question of whether I would be of good character and appropriately licensed by the States and jurisdictions I intended to serve? Mr. HORAN. No, no other requirement. A good credit rating.

Mr. DINGELL. And a credit rating.

Mr. Potvin.

Mr. POTVIN. Mr. Chairman.

Mr. Horan, there is one thing that I had meant to ask you. You have mentioned that you do respond to requests for bids. Could you tell us what your policy is as to the type of institution or establishment that you will deal with on a sealed bid basis, and what the parameters are?

Mr. HORAN. Yes, our bid business with Government, Federal Government, generally city, county, and State that purchase on bids and a much smaller percentage of the voluntary hospitals.

Mr. POTVIN. Nonprofit hospitals, however?

Mr. HORAN. Yes.

Mr. POTVIN. You do not do so with a profit type?

Mr. HORAN. No, and we control this quite closely from West Point. Mr. POTVIN. Sir, we have been submitting a more or less standard set of very broad general questions on the structure of your product line, your distribution and so on to each of your competitors, and after we adjourn, if I may give this to counsel.

Mr. HORAN. Yes.

Mr. PorvIN. And if you could respond within such time as the Chair designates.

Mr. HORAN. We will certainly try to do so.

Mr. POTVIN. I have nothing further, Mr. Chairman.

Mr. DINGELL. Mr. Williams.

Mr. WILLIAMS. No, thank you, sir.

Mr. DINGELL. Mr. Horan, the committee is grateful to you for your presence today and your patience. We are grateful to you for your very helpful testimony.

(The committee's questions and answers thereto follow :)

MERCK SHARP & DOHME, DIVISION OF MERCK & CO., INC.1

GENERAL QUESTIONS-ALL DRUG MANUFACTURERS

1. Please describe for us the range of prescription drugs which you manu

facture.

Merck Sharp & Dohme is the domestic ethical drug division of Merck & Co., Inc., responsible for marketing the company's prescription drugs in the United States. We sell about 115 different prescription pharmaceuticals and biologicals, principally products of our own research and development. Our products are marketed in a wide variety of dosage forms and strengths so that we have over 300 seppeutic fields of diuretics, antihypertensives, corticosteroids, anti-inflammatory arately priced items in our catalog. We have major product entries in the theraagents, phychotherapeutics, virus vaccines, and other biological products. your last fiscal year, taking into account all your subsidiaries, etc.? 2. What was your approximate total annual sales on a consolidated basis for

The consolidated sales for the year 1966 for all products of Merck & Co., Inc. were $418,436,157. The consolidated sales for the yr. 1967 for all products of

Merck & Co., Inc., including Calgon Corp. were $528,126,000.00.

prescription drugs sold in the United States or to U.S. customers in your last 3. And what, approximately, was your consolidated gross sales volume for all

fiscal year?

Sales of prescription drugs in the U.S. are made by the Merck Sharp & Dhome Division and for the year 1966 they represented 42% of the total sales for the company or approximately $175,000,000. Sales of prescription drugs in the U.S. represented 37% of the total sales of the Company or approximately $195,000,are made by the Marck Sharp & Dohme Division and for the year 1966 they

000.00.

forth?

4. Would the difference be made up by exports, proprietary products, and 80 The balance of the company sales, 58%, represented sales of proprietary prod ucts, household products, chemicals, and animal health and nutrition products

and sales abroad.

prescription drugs vary among these four broad categories?

6. Please tell us, in general percentages for example, how your prices on

Our catalog prices to retail druggists, non-governmental institutions, physi cians, physicians' clinics, and non-federal hospitals and institutions are identical from retail catalog prices, depending on the product involved and the order size Our catalog prices to wholesalers are set to provide a discount of 5, 15 or 20% 1 The answers bearing confidential information are retained in subcommittee files.

discount given to direct retail customers. The percentage is established to assure that the wholesaler receives at least a 5% discount from our best retail order size price. Our V.A. schedule government prices are usually equal to our wholesale prices. In some instances there are quantity prices in this schedule which are somewhat below our wholesale prices. Our prices to federal, state, county and city hospitals and institutions on bids may be lower than our wholesale prices and the degree to which they vary depends upon the quantity of the products purchased and the competitive situation.

7. For which of these four categories do you publish pharmaceutical drug price lists?

We publish three pharmaceutical price lists: one for wholesalers, one for V.A. schedule federal hospitals and institutions, and one which covers all of our remaining customers, mainly retail druggists, proprietary and non-profit hospitals, physicians, and physicians' clinics.

8. Where is the authority vested in your corporation to depart from published price lists?

The authority to depart from published price lists is retained by the Merck, Sharp & Dohme Division Management. Prices other than those in our catalog may not be quoted by Professional Representatives or Field Management personnel, unless a specific delegation has been given to them in writing. Such delegations when given are in terms of prices on specific products and are not blanket authorizations to depart from published price lists.

9. Please describe for us how decisions are made in any departures from published price lists?

Departures from published price lists are only made when responding to competitive situations and, as indicated in Question #8, these decisions are all made by the Merck Sharp & Dohme Division Management. When we are requested to bid in large quantities by governmental or non-profit hospitals and institutions, decisions on these bids are made by Merck Sharp & Dohme Division Management.

10. Take for example, a "meeting competition" situation arising under the Robinson-Patman Act, what sort of documentation do you generally seek? Before meeting a specific competitive price under the provisions of Section 2(b) of the Robinson-Patman Act, we require substantial evidence of the competitive offer such as

(1) Seeing a copy of an invoice,

(2) A copy of a written quotation from a competitor to one of our customers, or

(3) A signed statement from a customer that he has had such prices offered him by a specific supplier.

A written record is kept in the files covering each order shipped showing the price being extended, the competitor whose price we are meeting, and the date on which the order is shipped.

11. Do you have forms for salesmen to fill out in "meeting competition" situations? Would you be willing to provide us with copies of these forms, together with a statement of how long they have been in effect?

We have no such forms in general use. As indicated in the responses to Questions #8 and #9, Field Management may on occasion be granted authority to meet a specific competitive price on one of our products. In these instances, the responsibility for obtaining the evidence referred to in response to Question #10 rests with the Regional Manager. One of our Regional Managers has developed a form to assist him in meeting this responsibility. A copy of the form is attached. It has been in use since 1965.

12. Turning now to your detailmen and your general sales organization, will you describe their duties for us?

Merck Sharp & Dohme Professional Representatives call regularly on assigned physicians, hospitals and pharmacies. Their primary responsibility is to create demand for our products by communicating accurate, timely and comprehensive technical and clinical information about our products to physicians. They do this through verbal presentations and through supplying samples for the physi cian to use and literature for him to study. They are also available to answer questions the individual physician may ask and to obtain and convey to the physician any information about our products that he may require.

To enable them to accomplish this effectively, our Professional Representatives, most of whom hold degrees and have backgrounds in pharmacy, chemistry