Mr. POTVIN. But with that single exception, assuming a single outlet retailer that did not so serve physicians, then the answer is that even though his gross might exceed it, he still would have to be serviced through the wholesaler?

Mr. ABRAHAMSON. That is correct.

Mr. POTVIN. Thank you.

Mr. DINGELL, Gentlemen, the committee is grateful to you for your presence this morning and for your very helpful testimony, thank you very much.

(Additional information follows:)

GREGG POTVIN, Esq.,

Select Committee on Small Business,

House of Representatives, Washington, D.C.

ORTHO PHARMACEUTICAL CORP.,

Raritan, N.J., March 13, 1968.

DEAR MR. POTVIN: As per your request during Mr. Abrahamson's appearance before the Select Committee on Small Business on February 14, 1968, I am enclosing the answers to the General Questions-All Drug Manfuacturers' and the additional questions Mr. Abrahamson volunteered to answer.

Very truly yours,

Question 1

RESPONSES OF W. V. ABRAHAMSON

J. W. WATERS.

Answer: The prescription drugs manufactured and sold by Ortho Pharma ceutical Corporation may be broadly classified as gynecological specialties and contraceptive products.

These gynecological prescription products, numbering six, are indicated for the treatment of vaginitis. We also have two forms of fungicidal preparation used for dermatological infection.

In the Ortho Pharmaceutical Corporation contraceptive prescription product line we offer four oral contraceptives and three types of diaphragms that are controlled by Federal Prescription Laws.

Questions 2 and 3

Answer: As a wholly owned subsidiary of Johnson & Johnson, neither Orthe Pharmaceutical Corporation nor any subsidiary of Johnson & Johnson publicly reports either total consolidated sales or sales volume of its product lines Likewise, question number three is reported only to the parent company. [There was no answer to question 4.]

Question 5

Answer: Considering Ortho Pharmaceutical Corporation domestic pharma ceutical prescription sales as 100%, the percentage the following groups customers account for is:

1. Distributors 73%.

2. Chain Druggists 17%.

3. Federal, State, or Local Governments 7%.

4. Nongovernmental Institutional Purchasers 3%.

Question 6

of

Answer: Our prescription products are sold at the same price to all com mercial accounts (categories 1 and 2). Drug wholesalers (category 1), how ever, can earn an extra 4% allowance by providing extra promotional assistance and by maintaining adequate inventories of ORTHO products.

All prescription products except oral contraceptives are sold to our customers in category 3 at the same prices as those set forth in our Suggested Retail Dru Price List, or under the Federal Supply Contract if the Customer is a Federal Agency.

Customers in category 4 purchase our prescription products, except ora contraceptives, at prices equivalent to those set forth in our Suggested Retal Drug Price List.

Oral contraceptives are sold to customers in category 3 at prices averaging approximately 28% below the cost to our wholesale distributor.

1 For a list of the questions answered below, see pp. 789-791.

Oral contraceptives are sold to customers in category 4 at prices averaging approximately 24.5% below the cost to our wholesale distributor.

Question 7

Answer: Ortho Pharmaceutical Corporation publishes price lists for:

1. All Wholesale Drug Distributors.

2. Retail Drug Accounts.

3. Hospitals.

4. Federal Agencies purchasing under Federal Supply Contract.

Question 8

Answer: There is no vested authority at Ortho Pharmaceutical Corporation to depart from published price lists.

In the case of bid pricing, a Pricing Committee consisting primarily of members of the Board of Directors approves the price to be quoted.

Question 9

Answer: The only time ORTHO products are offered for sale below our price list are for bids from Federal, Sate or Local Governments. Factors considered by the Pricing Committee are the size of order, number of shipments required, costs of manufacture and delivery and competitive prices.

Question 10

Answer: As stated above, the only special pricing we have ever engaged in are in bidding situations to agencies excluded from the Robinson-Patman Act. We do not meet competition.

Question 11

Answer: We do not have forms since we do not engage in this practice.

Question 12

Answer: The duties of our detail men are to call on physicians, hospitals, family planning clinics, retail pharmacies and wholesale druggists in their territory. The objectives of the call being to promote our products and service the needs of those upon whom he calls.

The vast majority of our detail men are college graduates. They are all given intensive training in the field as well as our home office. In addition to initial training, each man is given follow-up training by his Division Manager.

At the time of a new product release, special training is given every salesman to ensure his understanding of the product.

Our pharmaceutical sales force is relatively small, by comparison with other companies, numbering approximately 240 detail men. These salesmen are assigned to sales territories. A group of usually ten to twelve sales territories constitute a division. We have twenty-two divisions. These divisions are grouped into regions of which we have four.

First line field management are our Division Managers, Regional Managers have approximately five or six Division Managers reporting to them. Regional Managers report to a national Sales Manager.

Question 13

Answer: All salesmen have a geographic responsibility. We do have four men working within the boundaries of their respective divisions covering government and non-government family planning clinics.

Question 14

Answer: Samples are shipped to our salesmen five times each year. These shipments coincide with our five detailing periods.

During the detailing interview with a physician the salesman is trained to ask the physician if he could or would use a sample. This technique we feel to be more effective than leaving a sample without determining need.

All sampes are overprinted "Sample-Not To Be Sold".

All samples given to physicians are recorded by the salesmen on the physician

call record.

Question 15

Answer: Samples may be given to a licensed physician only.

As stated above, all samples are overprinted "Sample Not To Be Sold”. Ortho Pharmaceutical Corporation policy makes it a dischargeable offense for any salesman to give any prescription sample to anyone other than a licensed physician.

Questions 16, 17 and 18

Answer: By the nature of our narrow specialized product line, questions sixteen, seventeen and eighteen can be most clearly answered as one.

Since private hospitals account for only 0.52% of our domestic sales, we do not conduct market surveys and statistical studies relating to the use of our products by these hospitals. However, we are reasonably certain that the overwhelming majority of our products sold to non-governmental hospitals are purchased for their own use.

Question 19

Answer: Our detailmen should be generally aware whether MD's have offices in the hospitals on which they call and whether an institution is selling Ortho products to private patients or to the general public.

Question 20

Answer: We know of no instance where non-governmental institutions have sold Ortho Pharmaceutical Corporation products in competition with retail druggists.

Question 21

Answer: See answer to question 20.

Question 22

Answer: See answer to question 20.

Question 23

Answer: Yes, we do consider having our products on a hospital formulary important.

Even though most hospitals procure our products from distributors, if the drug is not on a formulary it is difficult, if not virtually impossible in many cases, for the hospital to purchase and stock the item.

Questions 24 and 25

Answer: Ortho's policy with respect to the criteria used in deciding whether direct sales should be made to retailers is set forth in the statement of W. Vincent Abrahamson delivered before the Subcommittee on February 14, 1968. There is nothing further published on this subject.

Questions 26, 27 and 28

Answer: This policy has been in effect since 1940. There have been no depar tures from this policy.

During the discussion of Ortho Pharmaceutical Corporation distribution poli cies and practices, we offered to furnish confidentially to the Small Business Committee precise information on three additional points in addition to responding to the General Questions.

To the question of the differential in price between Planned Parenthood. World Population Affiliates and commercial distributors; the differential is approximately thirty-one percent. This price is the Planned Parenthood Purchas ing Plan price described by other witnesses.

The second question we did not have precise information on was the price differential to Federal Government bid procurements for very large quantity purchases. The differential, for these very large quantity procurements, was found to be thirty-eight percent compared to commercial distributors' cost. This figure pertains to large bid procurements only as compared to the twenty-eight percent differential stated in question six for all category three procurements. The third additional request was for information pertaining to the number of requests to become a distributor of the Ortho Pharmaceutical Corporation line we received in 1966 and 1967 and the number of new accounts added during this period.

After examining our records, we find that in 1966 fourteen accounts requested to become distributors and we added one. In 1967, seven accounts requested dis tributorship status and we approved one.

Mr. DINGELL. Our next witness will be George R. Cain, chairman of the board of Abbott Laboratories. We are happy to welcome you for such testimony as you choose to give. The Chair notes that you have with you another gentleman, and if you will give your full name,

please, sir, and see to it that the gentleman with you is fully identified for purposes of the record, we would be pleased to receive your

statement.

TESTIMONY OF GEORGE R. CAIN, CHAIRMAN OF THE BOARD OF DIRECTORS, ABBOTT LABORATORIES, NORTH CHICAGO, ILL.; ACCOMPANIED BY WARREN E. WHYTE, ATTORNEY

Mr. CAIN. Thank you.

Mr. Chairman, I am George R. Cain, chairman of the board of directors of Abbott Laboratories, North Chicago, Ill. I am accompanied by Warren E. Whyte, attorney in our general counsel's office.

Abbott Laboratories was founded in 1888 by Dr. Wallace Abbott who early in his career was the owner and operator of a small drugstore. In the intervening 80 years, we have grown to be one of the largest pharmaceutical manufacturers in the United States and in the world. In addition to pharmaceuticals, Abbott also markets a wide range of other products covering such diverse areas as animal drugs and feed additives, specialty grocery products, pediatric products, and fine chemicals. All told we have more than 800 products. Of these, approximately 275 are prescription drugs.

Abbott Laboratories has followed with interest the hearings of this Subcommittee on Small Business Problems in the Drug Industry. Abbott is aware, as is this subcommittee, that the economic well-being and continued existence of the community pharmacist in our drug distribution system is essential to the health needs of the citizens of our country. We commend this subcommittee for its interest and its work in exploring these problems and giving them the study they deserve.

I would like to describe briefly some of Abbott's programs which aid the retail pharmacist. In 1966, we instituted the Abbott drug welfare assistance program. Under this program, Abbott reimburses State governments 15 percent of the average cost of our product to the retailer when that drug has been dispensed to a welfare recipient and paid for by the State under one of its various welfare programs. One of the basic purposes of this program is to allow and encourage the States to have drugs dispensed to welfare recipients by community pharmacies rather than by a governmental facility. These reimbursements apply only to drugs dispensed by retail pharmacies. Our written agreement with the States specifically provides "Abbott and the State desire to *** continue the traditional distribution of drugs through retail pharmacies."

Mr. PoTVIN. This would include programs under medicaid, such as medi-Cal?

Mr. CAIN. Yes, it does, Mr. Potvin.

Mr. POTVIN. I would certainly like to warmly commend Abbott for this. I think that your industry finds itself at a crossroads in a very real sense here and certainly this type of response which encourages and, more importantly, compensates the independent retailer, or for that matter, assists the retailers to continue on in their traditional role, is certainly both gratifying and, I am sure, very, very helpful to these small businesses, and I think it is a very fine thing that you have

done.

Mr. CAIN. Thank you very much.

Mr. DINGELL. Proceed, sir.

Mr. CAIN. Abbott is also active in supporting the pharmacists professional associations. We give direct grants to many pharmaceutical associations to assist in the expense of their professional meetings. We also rent exhibit space at many of these meetings and our employees, many of whom are pharmacists, often participate in the programs. We support pharmaceutical association journals by purchasing advertisements. In addition, Abbott's representatives are continuously discussing the problems of the retailers with the pharmacists themselves.

We have a very liberal returned-goods policy. A retailer may return unopened pharmaceuticals and receive full credit or a cash refund up until the time the product is 8 years of age. This may be done even though the expiration date of the products has long since passed or the product is no longer marketed by us. Our returned-goods policy, therefore, assures the retailer that he can purchase any new Abbott product, or a new size or dosage form, and return it to us for a full refund if there is no demand for it. In the event of certain natural disasters such as floods and hurricanes, we will replace without charge uninsured Abbott products that have been lost or damaged.

I would now like to comment on several of the matters concerning distribution and pricing policies in which the subcommittee has indicated an interest. I will be speaking here basically of our pharmaceuti cal products and not of the foods, rubber products, bulk chemicals, animal products, and biologicals handled by different divisions of our

company.

We

Abbott is primarily a direct selling pharmaceutical company. have as direct customers more than 42,000 of the approximately 51,000 retail drugstores in the United States. We sell to these customers through our 21 distribution centers located throughout the country.

Our only criteria for accepting a retail pharmacy as a direct cus tomer is that it be licensed to dispense prescription drugs. For the retail pharmacy, we have no minimum order requirements, no annual or other purchase requirements, and no limitations on the number of orders. We do have a $1 service charge on an order of less than $15. The purchase of this minimal charge is to encourage orderly buying by the retailer in order to effect economies for both him and Abbott. We have no franchise agreements with our retailers. There are no package sizes available to other customers that are not available to the retailer.

Although most of our pharmaceutical sales are made direct, we had, in 1967, approximately 456 wholesalers as customers. In 1964, we had 415 wholesale customers. We have no franchise agreements with our wholesalers. We do require a minimum of $5,000 in purchases per year and a minimum opening order of $2,500 from a new customer, wholesale customer. The minimum order from a wholesaler is $60. We do not code our products in any special manner to indicate that they were sold to a wholesaler. We make no attempt to determine or control what the wholesaler does with our products.

Despite the fact that Abbott started as a company selling directly to physicians, today we have less than 1,500 of the Nation's more than 308,000 physicians as our direct customers. All physicians are charged