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you have with you another gentleman. Before you give your statement, would you give us your full name and address and that of the gentleman who is at the committee table with you?

TESTIMONY OF CHARLES B. MCDERMOTT, SENIOR VICE PRESIDENT OF MARKETING AND SALES, WINTHROP LABORATORIES, ACCOMPANIED BY JAMES H. LUTHER, COUNSEL

Mr. MCDERMOTT. Mr. Chairman, gentlemen, my name is Charles B. McDermott. I have been employed in various sales and marketing capacities for Winthrop Laboratories for more than 41 years and am presently senior vice president-marketing and sales. My office is located at 90 Park Avenue in New York City, which is also the principal office of Winthrop Laboratories. My colleague on my right is Mr. James H. Luther, counsel of Winthrop Laboratories.

On behalf of Winthrop Laboratories I would like to say that we welcome this invitation to appear before the subcommittee in connection with your current study relating to "Small Business Problems. in the Drug Industry." Your chairman, through the Pharmaceutical Manufacturers Association, has advised us that the subcommittee desires testimony from us describing our distribution policies and practices, particularly as they affect the community pharmacist.

Winthrop Laboratories has been engaged in the development, manufacture, and sale of pharmaceutical specialties and diagnostic agents throughout the United States since 1919. We presently market more than 99 products. Our line totals more than 343 individual items, such as packages. All of our products are "ethically" promoted-meaning, as you know, that they are promoted primarily to the physician and pharmacist.

Winthrop's distribution system is designed to achieve one basic objective in the most advantageous way possible given all the circumstances in which we operate, for example, available trade channels, the characteristics and usages of our products as well as our plant and warehouse location and capacity. That basic objective is to assure that our products are available in sufficient quantities whenever and wherever they are needed. To this end we have developed a balanced system of distribution in which we ship from five warehouses located at key transportation centers across the country. We sell and ship directly to wholesalers, retailers, hospitals, and various governmental agencies. Since the subcommittee is focusing on the role of the community pharmacist in the distribution of pharmaceutical products I would like to state that Winthrop has always appreciated the vital role that the community pharmacist plays in delivering health care to all the citizens of the United States. We have always relied on the community pharmacist and feel that his function is essential.

As of the end of 1967 Winthrop Laboratories had 485 wholesale customers. We have no franchise or other agreements with our wholesalers. Any wholesale organization with appropriate credit rating and legal qualifications to handle our line of products will be accepted as a Winthrop customer. All shipments must total at least $50 at net. Any assortment of items totaling $50 is acceptable. Our wholesalers all receive a discount of 1623 percent and 3 percent on all items except. one line of over-the-counter preparations on which the discount is

162/3 percent. All discounts, except cash discounts, that are referred to in this statement are taken from the suggested wholesale selling price. Our wholesalers receive no discounts based upon the quantity of a given order.

As of the end of 1967 Winthrop Laboratories had 10,800 retail customers. We have no franchise or promotion or other agreements with our retailers. To be eligible to purchase from Winthrop a re tailer must have appropriate credit and be legally qualified to handle our line of products. In addition, he must purchase at least $500 net a year. Each order must total at least $50 at net. So long as each purchase totals $50 there are no requirements regarding product assort ment. Our retailers receive a discount of 15 percent on our entire line. Retailers receive no quantity discounts. That is to say, no discount dependent upon the total amount of an order.

Winthrop has no "push money" arrangement or any advertising contracts with the trade. From time to time, with respect to our over-thecounter items only, Winthrop does have special promotions featuring so-called "free goods." All of these promotions are available to all retailers either directly from us or through their wholesaler with the amount of "free goods" being the same in each case.

As of the end of 1967 Winthrop had 6,917 hospital accounts, including diagnostic clinics. As is the case with all our customers, to be eligible such an account must have appropriate credit and be legally qualified to handle our line of products. The discount is the same as that for our retail customers; that is, 15 percent.

discount month-is the same for wholesalers, retailers, and hospitals Our cash discount policy-2 percent, 10th proximo, net at end of Even though we have many items-particularly injectible analgesics and anesthetics as well as diagnostic agents which are almost ex clusively used only in hospitals, we do not have special hospital sizes or packs except for several over-the-counter items. Our total business in these hospitals packs and sizes is relatively small.

Recognizing the value of having our products used in hospitals as well as the economic savings in volume purchases by volume users we do offer quantity discounts on many of our products for volume pur chases of such products by hospitals for their own use. Although these discounts vary from product to product, as a general rule the quan tity discount range is from 5 to 15 percent, depending on the actual

amount and item involved.

Winthrop does not sell directly to physicians. Orders for our prod through the retailer of the physician's choice. On prescription items which are administered by the physician such as injectible anesthetics we occasionally make available to the physician through the trade an either on the basis of competitive bidding or through General Services Winthrop's business with the Federal Government is conducted Administration contracts. Winthrop's products are also purchased by bidding basis. All competitive bids are at net prices; that is, no cash dis count as such is given because it is included in the price quoted. The bid prices are determined in each case on the basis of all the factors

offer of "free goods" for his own use.

various State and local governments on open order or on a

competitive

involved, for example, size of the order, delivery period, our own inventories, prior purchases, et cetera.

In broad outline, this is the distribution system which Winthrop Laboratories has found best achieves our goal of making our products available when, as and where needed, taking into consideration the channels of distribution presently available to us as well as our own resources and the special characteristics and uses of the major items in our present product line. Of course, I would be pleased to expand on this statement in answer to any questions which the subcommittee or staff may wish to pose.

In closing, I would like to reiterate that we recognize the essential role that the community pharmacist plays in the distribution of our products. We have always tried to be appreciative and fair to the community pharmacist as well as to every one of our customers. Thus, we would approve of appropriate measures to curtail anticompetitive practices that are shown to impede the community pharmacist's ability to compete fairly and constructively in our private enterprise free market system.

Thank you.

Mr. DINGELL. Mr. McDermott, you have given a very fine statement to the committee. The Chair is curious about one fact that appears in your statement. On page 2 in the last paragraph you indicate that you have no franchise or other agreements with wholesalers. You go on and say that any wholesale organization with appropriate credit rating and legal qualifications to handle your line of products will be accepted as a Winthrop customer.

Do you find that this practice of accepting any wholesaler who chooses to do business with Winthrop and to handle the Winthrop line in any way hurts your distribution?

Mr. MCDERMOTT. No. sir, I cannot say that we do.

Mr. DINGELL. Have you ever scrutinized to see whether or not this practice hurts the Winthrop line of products or your distribution practices?

Mr. MCDERMOTT. We are not aware of any such factor that would be involved in your question.

Mr. DINGELL. Do you receive complaints from any of your wholesalers on the ground that you will receive any person, any duly qualified wholesaler of good character, as a wholesaler?

Mr. MCDERMOTT. No, sir.

Mr. DINGELL. Have you ever had any problems or conflicts with wholesalers or within the industry as a result of your practice of accepting

Mr. MCDERMOTT. Not that I am aware of, sir.

Mr. DINGELL. No problems at all?

Mr. MCDERMOTT. No, sir.

Mr. DINGELL. Is it your opinion that this helps provide orderly marketing and distribution of Winthrop products?

Mr. MCDERMOTT. We think it does, yes, sir.

Mr. DINGELL. Thank you.

Mr. Potvin?

Mr. POTVIN. Mr. Chairman. Mr. McDermott, on page 3 you say wholesalers receive a discount of 162% percent and 3 percent. I seem

not to quite follow what you are saying there. What is the "and 3 percent"?

Mr. MCDERMOTT. Well, you take, say, a dollar, you take off 162. He gets that net and you take off another 3, sir.

Mr. POTVIN. Then, that is in addition to the cash discount?

Mr. MCDERMOTT. Cash discount is 2 percent, comes after the 123 and 3, then 2 for cash.

Mr. POTVIN. So that for openers, so to speak, the difference between the discount to your retailer and the wholesaler is 12% percent plus, is it 3 percent of what is left or 3 percent

Mr. MCDERMOTT. Mr. Potvin, say if your resale price, I am taking about the wholesaler, you take off 16%, get that net, and then take off another 3, get that net, and then the cash is another 2.

Mr. POTVIN. The 3 percent is a function of the original dollar. So that it would be a difference of 42% percent.

Mr. MCDERMOTT. Roughly, if you want to go back to the base, I think it runs about, we calculate it out, I think around 20 percent, something like that.

Mr. POTVIN. Now, as a result, then, your direct customers are going to get their product a bit cheaper than those being serviced by wholesalers; is that correct?

Mr. MCDERMOTT. If the wholesaler sells at the suggested resale price, there would be a difference because the direct account gets that price less 15 percent.

Mr. POTVIN. What would the approximate difference be, typically! Mr. MCDERMOTT. Well, it would be 15 percent, sir.

Mr. POTVIN. So that there is a 15 percent price break by buying direct.

Mr. MCDERMOTT. Versus if the wholesaler sells at the suggested resale price.

Mr. POTVIN. Do you agree with the remarks of the witness preced ing you that in general, it can be said that the very smallest retailers tend to buy through wholesalers?

Mr. MCDERMOTT. Yes, they do, Mr. Potvin. It is a matter of return on inventory capital. I think that many retailers prefer to buy in smal quantity in some areas they can get one or two deliveries a day and they take advantage of that, sir.

feel

Mr. POTVIN. Do I gather from your closing remarks that you that the continuing existence of community pharmacists is of fairly basic importance to your industry.

Mr. MCDERMOTT. I do personally feel that and I know our company essentially fells that way. The community pharmacist is very vita. to the health care.

Mr. POTVIN. As you know, sir, this committee has the distinct honor of having as a member Congressman Wright Patman, the author of the Robinson-Patman bill, who has indicated that he feels one of the central questions involved here is this: If all corner drugstores closed in the futher, could this not cause prices to be raised and a monopol created? In line with this, I would like to ask you a series of questions. if I may.

Do you feel that it would be unhealthy for the American economy. the consumer, and the vitality of the drug industry if the 50-odd-thou

sand retail druggists of America no longer served the prescription needs of American communities and neighborhoods?

Mr. MCDERMOTT. I will answer this personally. I am a pharmacist, but that does not tincture my thinking. I think the community pharmacist in America is an institution. It is where the American public likes to go, not only for purchase of, say, nondrug items, but I think the credence, the feeling they have for the community pharmacist is very definite. I personally would regret to see the demise of the community pharmacist.

Mr. PorVIN. Would you feel that their elimination would result in greater concentration of economic power in the hands of a few buyers similar to that situation currently found in the food industry as a result of some of the relatively huge grocery chainstores?

Mr. MCDERMOTT. I should think that would be a possibility, Mr. Potvin: yes, sir.

Mr. POTVIN. Does it seem to you that the service functions of convenience and accessibility would suffer thereby?

Mr. MCDERMOTT. I answer you very generally, sir. I think the community pharmacist burns his oil late at night. He is ready and willing to answer the phone any time of the night to render good medical service to the people who come to him as prospective customers.

Mr. POTVIN. Would you concur that the likelihood of prescription price competition at the retail level is much greater with a large number of retail druggists than with a fewer number?

Mr. MCDERMOTT. Would you state that again, please, sir? I do not quite

Mr. POTVIN. In other words, is there not a greater likelihood of keen prescription price competition at the retail level with a large number of retailers than with a small number?

Mr. MCDERMOTT. I would think so, yes. I would think that would be an economic thing you might expect.

Mr. POTVIN. If the retail druggists of America were to disappear, that is to say, in large number, would you not agree that the wholesaler would soon follow?

Mr. MCDERMOTT. He might in a degree. I do not think it would be total because of the service the wholesaler renders to the-not only to the community pharmacists but other pharmacists, multiunit organizations. He does render them a very definite service.

Mr. POTVIN. Would there not be an overpowering temptation to convert exclusively to direct sales, though, if there were just a relatively small number of very large purchasing units?

Mr. MCDERMOTT. Perhaps there would be.

Mr. POTVIN. Has Winthrop fashioned any response to the problems imposed by medicaid similar to those discussed by the preceding

witness?

Mr. MCDERMOTT. We have not, sir.

Mr. POTVIN. Do you not concede that this is a fairly vital issue in terms of the continuing viability of community pharmacists?

Mr. MCDERMOTT. Indeed, I do.

Mr. POTVIN. Is Winthrop studying this problem?

Mr. MCDERMOTT. We have looked at it rather seriously. At the moment I would say that the 13 or 14 States that are involved in this

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