A review of our practice for 1967 has brought out the fact that for proprietary hospitals this is almost exclusively injectables. We do not feel there is competition here between the retail pharmacist and the hospital.

Mr. POTVIN. Although you do concede that if the hospital pharmacy, is, so to speak, selling on the street, that this would be toe-to-toe competition.

Mr. HOFF. It could be.

Mr. POTVIN. Do you have differential pricing to clinics as opposed to community pharmacies?

Mr. HOFF. No, sir.

Mr. POTVIN. What about to physicians either dispensing or nondispensing?

Mr. HOFF. No, sir.

Mr. PorvIN. I see.

To what extent, if any, as a means of preventing diversion, does your company attempt to correlate orders for nursing homes, clinics, and hospitals with the actual drug usage within those institutions?

Mr. HOFF. If I might dissect the question: Regarding nursing homes specifically, they would only have special quotation prices if they are a direct arm of a hospital. Regarding clinics and physicians they would not get special quotations. Regarding hospitals which I think is the crux of the matter, the bulk of our items are injectables there is no direct competition. The majority of the remainder would be on items that are primarily for hospital usage. For example, we sell, manufacture and sell, an antibiotic tablet that is used to sterilize the intestinal tract prior to surgery, we have hemostatic agents that are used in surgery, we have antiseptics used primarily in hospitals This really comprises the bulk of our special quotation business and there would be no competition.

To expand further if we did sell a product that might be in com petition with the retail pharmacist, I am sure it would be called to our attention, if there were competition, by our salesmen and by our retail pharmacist friends. I am sure they would know about it and we would follow through.

Mr. POTVIN. You say you are sure it would be called to your attention by salesmen. Do you mean that you have a regular policy or procedure of monitoring, if you will, or observing the actual method of disposal of these drugs by the institution?

Mr. HoFF. Are you asking whether we know exactly where each tablet goes in the hospital or out? We do not, of course.

Mr. POTVIN. I had in mind by no means so precise a situation. simply you are just saying that a reasonably alert salesman, on the basis of calling on a hospital, would have at least a general idea, and you were not implying that you had a regular program.

Mr. HoFF. That is correct. You have a general idea of what is goe

on, correct.

Mr. POTVIN. Yes.

Mr. DINGELL. If you do, wouldn't it be fair also to say you could te if there are some extraordinary large orders flowing through t hospital or the hospital pharmacy that would go beyond the re or the orders of similar hospitals?

Mr. HoFF. I would agree with that point, Mr. Chairman.

We would see exceptionally large orders, more than for the hospitals. Mr. DINGELL. Is this a phenomenon that you observe from time to time?

Mr. HoFF. As I pointed out, the type of products we special quote on just do not involve the kind of product that would be available to the retail pharmacy, so we do not.

Mr. DINGELL. I see.

So you don't find your special quotations going, let's say being the kind of items that go, to an ordinary pharmacy? But let's discuss now other items that you would sell at a better price. Would you observe any extraordinarily large orders of those flowing from hospitals or some of your other large purchases?

Mr. HoFF. Mr. Chairman, to answer your question, I think we would have to get into the area of our quantity prices listed in the trade catalog, because the products you are talking about would be purchased at those prices. We have a very limited number of quantity prices, and we have very few prices in dollar amounts, that would lead to a large purchase by any customer. There would be no advantage to him to buy and divert.

Mr. DINGELL, I see.

Thank you. Mr. Potvin.

Mr. POTVIN. Are your salesmen authorized to provide noninvoiced free goods to customers as a mechanism to reduce invoice prices other than in the manner in which you outlined to us in your statement?

Mr. HOFF. Every one of the 1,100 men we have knows he will be discharged immediately if he did such.

Mr. PorvIN. Now, you say on page 7 of your statement that you have promotional programs with respect to prescription drugs, and these usually last about a month or two and so on, and as an example you stated that you had offered one bottle of 500 tablets free with each purchase of two bottles.

Does the percentage of free goods increase at all as the size of the order increases?

Mr. HOFF. No, sir.

One offer is buy two bottles, get one free.

Mr. POTVIN. If I buy 2,000 Í get 1,000 free?

Mr. HoFF. 2,000 bottles you get 1,000 bottles free. The price would be the same as the $21 for 1,500. There is no better price by buying a larger quantity.

Mr. POTVIN. You then have no special pricing practice for chain customers?

Mr. HOFF. No.

Mr. POTVIN. I see.

A number of your competitors have also testified that they give these low prices, relatively low prices, to hospitals; and, in describing it, it seemed that, first of all, there was, of course, a quantity discount which would be entirely cost-justifiable; but they went on to say, by implication, at least, that there was also here a sort of traditional concern of your industry for this type of institution. Is there in your pricing to hospitals any factor other than just a cost-justifiable quantity discount? Would that constitute the entire difference between the community pharmacist's price and the hospital's price?

Mr. HOFF. Mr. Potvin, I think that the primary consideration is competition. We do not have in effect additional quantity discount for hospitals that need to be cost-justified.

Mr. POTVIN. NO; I am not saying that the Robinson-Patman Act applies. Would you simply explain in your own words and at your op tion, picking an item that you want to illustrate it with, give us the price to the community pharmacist on a quantity basis, and give us the price on a much larger quantity to the hospital, and then tell us of what does the difference consist. It is entirely quantity discount, economies of scale? What does constitute the difference!

Mr. HOFF. Competition. Getting back to our basic premise, we special quote when there is a need for a special quote because of competition in that general product area.

Mr. POTVIN. In other words, competition to get on the hospital's formulary would be one example of it?

Mr. HOFF. I do believe from having read some prior testimony that we are not entirely agreed on the importance of the formulary. If I might explain that a second, the formulary, as I understand it, is merely a procedure for the hospital to control the drugs available in that hospital. A drug may be accepted for use by the Pharmacy and Therapeutics Committee, put on the formulary and made available. Obviously the Upjohn Co. wants every one of our products available to the physicians who work in that hospital.

Now, you, I think, referred to or maybe made the point by getting on the formulary we automatically get the business in the product area. We haven't found this to be true.

Mr. DINGELL. But, conversely, if you are not on the formulary, you are going to be hurt if it is a large hospital, in terms of doctor ac ceptance?

Mr. HOFF. Correct.

Mr. DINGELL. In terms of sale in a particular area, the formulary does constitute a competitive pressure of some magnitude since the large hospitals in a particular area would tend to have some practice of comparing formularies one with the other; am I correct? Mr. HOFF. Generally, yes, sir.

Mr. DINGELL. So that whether you are on a formulary or not does constitute a competitive pressure upon you or upon your company; am I correct?

Mr. HOFF. Could I make a point?

Mr. DINGELL. Certainly, certainly.

Mr. HoFF. It seems to me that we are divorcing, in our discussion of formularies, the product advantages from cost somewhat. I would like to go back to product advantages.

Mr. DINGELL. Well, I am keenly aware of the fact that formularies are going to try to constitute efficacious drugs, those that work, and I am also equally aware that they are going to try to find those drugs that best serve their patients.

But I am equally aware that the hospital is going to try to hold down, within reasonable limits, the minimum number of drugs that are necessary to provide good high-quality medicines in the hospital. These are all factors that enter into this. Of course, the pressure on s drug supply house or a manufacturer is to try and see to it that his drugs are as widely distributed as possible, and I am sure you

will

agree that it is highly desirable from a manufacturer's standpoint to be on the formulary of the hospital; am I correct?

Mr. HOFF. Correct.

Mr. DINGELL. Now, what Mr. Potvin, I believe, has been trying to stress is the fact that this does place competitive pressures on a manufacturer, not just on Upjohn, but on any manufacturer to try to get on these hospital formularies; am I correct?

Mr. HOFF. Yes, sir.

Mr. DINGELL. All right.

Mr. POTVIN. All right.

Now, the competition in the drug industry is just a little different creature than, say, in washing machines or automobiles, to use a fairly familiar Michigan example. Now, within the community-pharmacist realm typically, it does not take the form of price competition; that is to say that you send your detailmen out, as do your competitors, and a number of you make products that might be used for the same therapeutic purpose; is that not correct?

Mr. HOFF. That is correct.

Mr. POTVIN. So you attempt to win the hearts and minds or at least the fountain pens of the physicians, if he writes the prescription, then the druggist must necessarily fill it with that trade-marked product; is that correct?

Mr. HOFF. That is correct.

Mr. POTVIN. So that the competition takes not the form of price competition here, but in attempting to convince the physician of the therapeutic value of your product.

That is not the kind of competition you are talking about. You are talking about some sort of price competition constituting part of the difference between the hospital price and the community-pharmacist price. Could you define that kind of competition for us?

Mr. HOFF. I am still not sure I understand exactly your question. Mr. POTVIN. Here you make a product called, I can't say this correctly, Erythrocin.

Mr. HoFF. We do manufacture and market Erythromycin. The trade name you referred to belongs to some other company.

Mr. PorvIN. I am sorry about that.

[Laughter.]

Mr. POTVIN. Would you say that again, just refer to it as this product for the rest of this discussion.

Mr. HOFF. This product.

Mr. POTVIN. Can you give me a ballpark estimate of what your price in bottles of, say, 100 to community pharmacists would be?

Mr. HOFF. About $22.

Mr. POTVIN. About $22? OK.

Now, a hospital, of course, would not buy in that quantity, but let us assume a quantity of 5,000 would be a reasonable purchase for a small or medium-sized hospital.

Mr. HOFF. It could be.

Mr. PorVIN. About what would the unit price comparable be there? Mr. HoFF. I am sorry, I don't have that information.

Mr. PorvIN. Can you tell me about what percentage it would run on your entire product line? Would it be a third, a fourth, a fifth? Mr. HOFF. Again I would strictly be guessing, I could get the figure.

Mr. DINGELL. Would you want to submit that for the record? We would like to be fair in this matter.

Mr. HOFF. I would like to. The range is so wide, Mr. Potvin, that trying to guess an average, if you will, would be unfair. (Data referred to above follows:)

TRADE CATALOG PRICE CHANGES, JUNE 1, 1967, TO DATE

Mr. DINGELL. Do you have your pricing lists available that you can consult?

Mr. HOFF. Not in this area.

Mr. POTVIN. Would 30 to 40 percent be a reasonable estimate for purposes of discussion?

Mr. HOFF. OK.

Mr. POTVIN. All right.

Mr. DINGELL. Are you satisfied with that?

Mr. HoFF. I don't really think it would be that high, but again I

don't know.

Mr. POTVIN. All right.