Mr. SHAFFER. I would say they are under the counter. Just before I came down yesterday I was interviewing an A. H. Robins salesman, and I asked the salesman if he had different price policies to hospitals as opposed to retail pharmacies and he said, "Of course, we don't." Every company says this.

I said, "Do you have a catalog showing this price discrimination policy? He said, "Absolutely not." But the hospitals receive about 15 to 20 percent discounts over those prices of the community pharmacist. It is virtually impossible to see it in writing, but it is existing.

Mr. DINGELL. Let us take a promotional plan that the company might be going into for purposes of increasing its sales among retailers where you buy five and get five free. Would this kind of program be advertised widely so that retailers would all know of it, or would it be kept rather close? Would this be done quietly so that it would go only to chains or people of this sort?

Mr. SHAFFER. In some instances it would be quiet, and in some instances it would be open. It would depend on the thinking of the manufacturers. Sometimes they do this openly because they want to capture the market, and they are willing to spend all kinds of money to do this.

But, in most instances, I would say that it is quiet. To illustrate to you-not so much with the pharmaceutical manufacturers, but on the over-the-counter preparations, health and beauty aids, such as Colgate, Procter & Gamble, these companies are notorious.

Years ago the community pharmacist filled most of the needs, as I told you, of the health and beauty aids and over-the-counter preparations to the community. The pharmacists were instrumental in making these brand-named products known virtually all over the country and the world. They were initiated in the community pharmacy. As years went along, these manufacturers began to snub the community pharmacists because they felt it would be much better to sell to chains that have many stores than to a small, one-pharmacy operation, to the community pharmacy, or even to small businesses and other types of outlets.

Now, these people years ago used to have minimum orders, say, of $50 and then went to $75, $100, $200. They have actually raised their minimum order on buying direct to so high an amount that it is virtually impossible for the small business retail pharmacist to purchase.

I have not seen a Procter & Gamble salesman for 8 years, nor have I seen a Colgate salesman. But prior to this I used to see them every 3 months. Now, they don't even want to call on the community pharmacy. So if they have any promotional deals, display allowances, they are not coming into the community pharmacy. They are going to the big outlets, the big discounters, and chains.

Mr. DINGELL. This means that you have to buy these commodities from the wholesalers?

Mr. SHAFFER. We buy them from the wholesaler, and where they are getting 50 percent markup, the community pharmacist is working on a 25-percent markup and, as you can see, it is well below the prices, even cost price. It is below our cost.

Mr. DINGELL. This means that you have to pay, in addition to your standard markup, your wholesaler's markup. Mr. SHAFFER. Absolutely.

Mr. DINGELL. Which would be an additional markup of what?
Mr. SHAFFER. Fifteen percent.

Mr. DINGELL. Let us go a little further. On this business of being a direct account-this is quite important; is it not?

Mr. SHAFFER. It is quite important if you can move the merchandise. Mr. DINGELL. Let us say you can order a given volume of a commodity. Do you have a problem in becoming a direct account of the manufacturer?

Mr. SHAFFER. Yes.

Mr. DINGELL. Would another person similarly situated who might be in a chain have difficulty also in becoming a direct account? Mr. SHAFFER. Absolutely not.

Mr. DINGELL. Are there instances that you could cite to this Committee where manufacturers pick and choose those who will be their direct accounts as opposed to taking anyone in on a direct account basis who can use a certain given amount of commodities in a certain period of time?

Mr. SHAFFER. Well, all I could say is, if I wrote to Procter & Gamble and Colgate and asked them if I could become a direct account, my answer would be that they have no more direct accounts with pharmacies and are not putting on any additional accounts with pharmacies.

But if I were a chainstore, such as CVS or Zayre, and told them that we are a large discount chain consisting of a number of stores, I am sure that I would have a salesman down tomorrow.

x

Mr. DINGELL. Can you give this committee any information as to how manufacturers pick and choose who will be their direct accounts? I think this would be quite important.

Mr. SHAFFER. I can't give you any material right now because as I told you, I haven't seen some of these manufacturers. I haven't seen the salesmen representing these manufacturers in 8 years or even longer. They just do not come into the pharmacy and I could assure you, in our questionnaire, if this is one of the questions, I would venture to say that probably 1 percent or less than 1 percent of all our pharmacy members are on direct with Procter & Gamble or Colgate or any of the others.

Mr. DINGELL. How about the pharmaceutical suppliers, manufacturers of prescription drugs?

Mr. SHAFFER. That depends on the pharmacy. I would have to really get you material to see how many pharmacies do a volume of a number of business, and so forth. If you are able to buy the minimum quantity that they request, and the area is not overly concentrated to hurt either of the parties and they have an opening, manufacturers will put you on direct.

Mr. DINGELL. You say if they have openings. In other words, the test in becoming a direct account, even with the prescription pharmaceuticals manufacturers, is not volume?

Mr. SHAFFER. It is the volume.

Mr. DINGELL. Might it also be whether there are other persons who are also direct accounts in the area?

Mr. SHAFFER. Yes; it would depend upon pharmacies that are direct accounts, but they would not play a role in it. In other words, if they objected to the manufacturer, this would not persuade the

manufacturer from opening up someone direct. If they feel there is probably a need for more distribution of their products and that they have available a direct opening, they will put that individual phar

macy on.

Mr. PorvIN. Mr. Chairman.

Mr. Shaffer, could you give us some specific examples with names of manufacturers of the minimum volume required to become a direct account?

Mr. SHAFFER. Yes; I will try to do this in a clear and precise manner. But the committee would have to understand that there are several types of direct accounts. I believe there are three in essence.

There are manufacturers, pharmaceutical manufacturers who also play the role of a wholesaler, such as Squibb, Merck Sharp & Dohme, Wyeth, Parke-Davis, Lederle, and probably a few others. These people manufacture the drug. They have wholesale distribution outlets throughout the country-probably in different States. We in Massachusetts have these particular outlets in our State. If you buy from those from that particular company-I believe Squibb has a minimum of $25.

Mr. POTVIN. That would be per item?

Mr. SHAFFER. $25 in total purchases in order for them to ship you something. You receive their regular fee schedule which is available to any pharmacist and open to every pharmacist who is going to purchase $25 or more in merchandise.

Now, they also sell to the legitimate full-line wholesale druggists at the same price that they will sell to the direct pharmacy. So in turn, if a pharmacist runs a product and can't make a $25 minimum order, he has to purchase it from the full-line wholesale druggist, and in turn he marks the same product up because he has to live, has the operating expenses, et cetera, approximately 15 to 17 percent. So this manufacturer in essence is saying you buy from us and forget about the full-line wholesale druggist who has been our friend for years and whom we need. But it is keeping up the price.

We then have a pharmaceutical manufacturer who has a direct purchasing franchise. This is a contractual agreement where the individual pharmacist must purchase a minimum. There are certain companies that have a two-price discount. In other words, you take a company such as Lederle or Merck Sharp & Dohme. If you purchase $50 worth of medication, you will receive 72 percent. If you purchase $100 or more you will receive 15 percent.

Mr. POTVIN. Is there any annual or monthly volume required?

Mr. SHAFFER. With Merck Sharpe & Dolime there is no annual volume. Originally I am a Lederle account which is American Cyanamid, the parent company-you had to be a franchise dealer before with Lederle. I think they might have opened up this to everybody now; I am not sure. It may still be under contractual agreement in order to get the 712 percent or the 15 percent.

Hoffman-La Roche has a franchise agreement that is not open to everyone. They have a minimum of $125 per order.

Mr. POTVIN. That could be for a combination of items?

Mr. SHAFFER. Combination of any type of medication they make. It is $125 per minimum and they allow 12 percent on certain products, they allow 15 percent on certain products and 20 percent on certain

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products. This was just changed I think several months back. Originally it was a straight 15 percent discount but now they have changed their policy where they give 12 percent on the very, very fast moving items and as high as 20 percent on some of the smaller items-slower moving items.

But probably it will work out to about 15 percent in general.

There are other companies such as Merrell that have franchise distributorships and their minimum order is $75 and it is 15 percent and Ciba is $75 and they have 15 percent, also. Those are franchise distributorships.

Ciba-I have tried to get on direct, but they just don't have an opening at the moment.

Mr. POTVIN. Have they explained to you what their criteria are? Mr. SHAFFER. I haven't seen their agreement, but I imagine it would be similar to other companies.

Mr. POTVIN. What do you mean when you say they did not have an opening?

Mr. SHAFFER. Well, as I stated before, they only have so many franchise distributors-not distributors, franchise direct accounts. This is a direct account which will enable you to purchase this medication in the quantity that they specify as a minimum for a 15-percent reduction.

Mr. POTVIN. Did they explain to you how they decided that x is the right number of franchises for the Boston area ?

Mr. SHAFFER. No, they just say they have no openings and we always accept that. This brings out a good point. I have asked our legal counsel about this and asked him if this was fair, and was this discriminatory in any form, shape, or manner, so I could present it to the committee, and his remarks were very enlightening and I would like to convey them to you.

I brought out an interesting point. I said to him, I would like to get on direct with some of the perfume houses such as Chanel, White Shoulders, et cetera. I said I think there is a discriminatory policy there. If I am able to buy the perfume, why can't I get on as a direct account? His answer was, that they have a product which is a prestige item and you have to have certain restrictions in order to maintain the prestige and distribution of it which I tend to go along with.

But he pointed out that with pharmaceuticals he thought that it may be an area of being discriminatory because the manufacturers developed medicines which are vital to the sick and are needed, and sometimes lifesaving medications cannot be purchased by the average consumer unless he has a doctor's prescription. Therefore, if the individual goes to the physician for that prescription he must bring it to the pharmacy and have it filled. Therefore, this drug should be made available to everyone, and it should also be made available to everyone at the same price.

But here we get into an area where I do believe that if an individual is capable of purchasing in larger quantities, that the price would be a reduction if it were made available to everybody.

Now, if these pharmaceutical houses that are all on direct franchise bases make it available and the individual can purchase the minimum quantity, then he should receive the same discount allowed such as I pointed out to you. I personally can buy Ciba's merchandise

in the minimum quantities that they specify but I just can't get on direct.

Mr. POTVIN. So you have to buy it at a higher price from the wholesaler?

Mr. SHAFFER. From the wholesaler, yes, which is 15 percent more. I hope that explains it.

Mr. DINGELL. How many drug supply houses have you sought to get on direct that you have been able to get on, and how many have you not been able to get on?

Mr. SHAFFER. Took 6 years to get on direct with Merrell, and I got on with them because I have two pharmacies. I have not written to Ciba since I opened up my second pharmacy. I have not seen the Ciba salesman in about 4 years because I am not a direct account with him. It took me 2 years to get on direct with Hoffman-La Roche, and I believe I am on direct with most all the other companies with which there was no problem.

Mr. DINGELL. Are you able to meet the minimum purchase requirements of those houses which you are not on as a direct account?

Mr. SHAFFER. Yes, I just stated that a short while ago, that I could meet the requirements of Ciba.

Mr. DINGELL. Can you circularize the Massachusetts association and assist this committee in securing some information on direct accounts-on persons who are able to meet the minimum purchase requirements for being on direct accounts but who are not authorized to purchase direct?

Mr. SHAFFER. I could do that for you.

Mr. DINGELL. I think that would be very helpful to the committee. Mr. SHAFFER. In other words, you want information pertaining to pharmacies that are able to meet the direct requirement to purchase but are not able to secure a franchise.

Mr. DINGELL. Yes.

Mr. CONTE. You are also going to get for the record the prices that patients pay for prescriptions at the hospital as compared to those at regular pharmacies.

Mr.SHAFFER. I will try to get that, Congressman Conte.

Mr. CONTE. You said that if you would have more time, you would give us some samples.

Mr. SHAFFER. Sometimes even though we have the time it is difficult to obtain the information. I will try.

Mr. CONTE. Do your best.

Also submit for the record the document that you read from here this morning.

Mr. SHAFFER. Yes.

(The material referred to appears at p. 62.)

Mr. SHAFFER. I would humbly ask the committee if it would be kind enough to send me a copy of this particular hearing so I could make it available.

Mr. CONTE. That is normal procedure.

You did not give us the third category, though.

Mr. SHAFFER. The first, as I pointed out, is a direct-no minimum. There is a minimum direct. A minimum direct of $25, $50, and so forth. And then a franchise contractual agreement for direct purchase.