TESTIMONY OF JAMES D. McNITT, PRESIDENT, BRISTOL LABORATORIES DIVISION OF BRISTOL-MYERS CO., ACCOMPANIED BY MERRELL E. CLARK, JR., COUNSEL Mr. McNITT. My name is James D. McNitt. I am president of Bristol Laboratories Division of Bristol-Myers Co. I am accompanied by Mr. Merrell E. Clark, Jr., of Winthrop, Stimson, Putnam, and Roberts, counsel to the company. Bristol Laboratories recognizes the significance of these hearings and the importance of this subcommittee's objectives to preserve the vitality of the individual small business man engaged in the distribution of drug products. I hope that our statement here today will help the committee in furthering this objective. Bristol Laboratories started in March of 1943 as a very small business with about 30 employees. Our business has grown considerably in the 25 years since its organization and the economic vitality of the large and small businesses which comprise our distribution system are of the utmost importance to us. At present Bristol provides employment to 2,734 people. I mention this growth because it bears directly on the success of our customers and on our distribution policies. In the early years of our business we were confronted with what seemed to be an impossible dilemma because we did not have specialty products and it was extremely difficult for us to obtain distribution. We could not get wholesalers and retailers to stock our products because physicians were not regularly prescribing them. On the other hand, physicians did not want to prescribe products which were not readily and continuously available to their patients. The eventual solution came as a result of the development of new drugs of special benefit to the public health. The value of these drugs in the treatment of patients has been recognized by both the medical community and the trade. About 83 percent of our sales today are of products that were not available 10 years ago. Also of particular importance is the nature of the Bristol product line. Since its beginning, Bristol Laboratories has been a leader in the development and marketing of antibiotics. We were one of the companies who became involved in the joint Government-industry crash program to manufacture penicillin vitally needed for the war effort in World War II. All of our products are prescription drugs and antibiotic products amount to 90 percent of our annual sales. This is to say that to the wholesaler and retailer-Bristol Laboratories is a specialty house. The manufacturing, research, and administrative facilities for the division are located in Syracuse, N.Y. We have six distribution centers located in Syracuse, N.Y.; Englewood, N.J.; Atlanta, Ga.; Chicago, Ill.; Dallas, Tex.; and Brisbane, Calif. Trade sales: Bristol Laboratories does not sell to retail pharmacies or physicians. We rely solely upon our 487 wholesalers to perform this function. We sell on a net basis to wholesale accounts with a 2percent cash discount if payment is mailed by the 10th of the month following billing. We require a minimum order of $50, but we place no limitation on the number of orders a wholesaler may place in a month or a year. Bristol pays all shipping charges on orders amounting to $75 net or more. We do not offer free goods or deals to wholesalers. We have no wholesaler agreement but sell to each on an open account basis on the same terms and conditions. Mr. POTVIN. Mr. Chairman. Mr. DINGELL. Mr. Potvin. Mr. POTVIN. Mr. McNitt, you sell on a net basis, I guess you would say, to the wholesaler; have you changed your pricing structure recently? Mr. McNITT. We did make a change last summer in a small amount. Prior to that time, we had sold some few accounts on a direct retail. basis. And at that time, we decided to not sell any longer to dire retail accounts, but to sell solely through the wholesaler. And at this time, we reestablished our prices for a small number of our products perhaps 15 percent that we had been selling on a 16% plus and minus figure to a standard 16% for the entire line. Mr. DINGELL. You say it has been changed from what? Mr. McNITT. There were varying discounts at that time. Some were 16% percent and some were 20 and some were 16% plus 5, and there was a little bit of a hodgepodge. Mr. PoTvIN. According to the information we received from the industry, about 15 percent of your total volume was changed from a 20-percent discount down to a 1623-percent discount. Is that sub stantially correct? Mr. McNITT. This is substantially correct, although there were also some that were raised from under 162% to 162%. But I think this p salers, we put out a suggested list price, and this discount is taken committee understands, of course, that when we sell only to wholefrom that suggested list price. And, of course, this is in no sense binding on the wholesaler to honor in any respect. It is a convenient form in figuring his own discounts, if he chooses to use it. Mr. POTVIN. Do you have a suggested price list which you suppr to your wholesaler? Mr. McNITT. We have a price list to wholesalers, and we have s suggested retailer price list. Mr. POTVIN. Did the retailer suggested list reflect any increase correlative to this decrease in your discount? Mr. McNITT. I am sorry, I didn't understand that question. Mr. POTVIN. What I am trying to establish here is whether, in effect, you raised your price to the wholesaler; that is, did you reduce your discount? Mr. McNITT. That is correct. On this small number of items we did raise the price to the wholesaler. Mr. POTVIN. Did your suggested retail price list reflect that increase? Mr. McNITT. Did we raise the suggested retail price? Mr. PorvIN. Yes; on an item for which I now pay 3 percent more, would the suggested retail list reflect the 33-percent increase! I would have ended up at 162%. And therefore the whole line would Mr. McNITT. If it had been, you see, at 162% plus the increase, it have been on 162% from this suggested retail price. it assumed that the wholesaler woud absorb it? Mr. POTVIN. Did your suggested retail price also reflect this, or was 1 Mr. McNÖTT. I guess maybe I can clarify the point by saying that the suggested retail price remained the same. As far as absorbing is concerned, the wholesaler could absorb it or pass it on as he saw fit. because we are not in competition with him. He is completely free to set his own price in the market. Mr. POTVIN. That is true, sir. The point I am trying to make is that a number of manufacturers have been reducing their discount structure. They also said in their testimony before the other body, I understand, that they are not raising prices. It seems to me, at a time when the independent wholesaler is only making 12 percent, that when you raise his price on the order of twice that amount, it is simply not realistic to assume that he, in turn, wouldn't have to raise if he is to survive. Would you not agree with that? his price Mr. McNITT. I would comment on that perhaps in this way, Mr. Potvin, that in the course of the last few years, Bristol Laboratories' volume to the wholesale druggists has grown by a factor of about 3.4 times. The volume of business which Bristol has created for the wholesaler has made our line very attractive to the wholesaler. It has become a rapidly moving specialty line which can be handled, frankly, much more economically than could our line back in the early days, as I pointed out, when we had trouble getting distribution because we had no recognition by the physician. So I think if one were to take the whole picture of Bristol's relationship with the wholesaler, we would find that he is really delighted with our line, that it is a profitable line for him, that it moves well, and that he is not at all discouraged by this-what it could be called-an apparent change in the price of his discount. But actually it is not a change in his discount-because he is free to charge what he wants toany more than to say that when a few months later we reduced the price of our product by, first, 15 percent, and then an additional 6 percent, that it changed his margin; because he was free to do as he chose in selling out. In other words, we made one minor increase and a major decrease. Mr. POTVIN. I didn't mean to single out Bristol. There is an entire sheetful of companies here that have had similar changes. Mr. McNITT. I was quite seriously trying to point out that really in no sense do we consider that the wholesaler was injured in any way by this. We are very much for the wholesaler, he is very important to us. Mr. POTVIN. And, indeed, yours is one of the most desired lines, unlike Pfizer, which reports that they have not had requests for some years to pick up their line. I presume that at any given moment in time you have a large number of wholesalers who are aggressively seeking your line; do you not? Mr. McNITT. I can't say how long the list is of people who might like to handle our line. We have 487 wholesalers which pretty thoroughly cover the country. We added four wholesalers in 1967, and I think four dropped out in 1967, through mergers and closings, and that sort of thing. So it is certainly not static. Mr. POTVIN. IS D. Kaltman one of your wholesalers? Mr. McNITT. Yes, sir. Mr. POTVIN. I understand from the trade that he is leaving the industry. Mr. McNITT. I was not aware that he was leaving it. If he is, we have not heard it yet; but your information may well be in advance of ours. If he is, we may be looking for another wholesaler in New York. Mr. POTVIN. I noticed in the trade press that one of the main Manhattan wholesalers was leaving. I thought it was Mr. Kaltman; if not. I will extend my apology. If that were the case, would you not then replace this company with another wholesaler? Mr. McNITT. What we would do in that case, Mr. Potvin, is to examine the distribution of our products in that area and see how badly we needed an additional distribution. Kaltman does a pretty fair volume with us. So I would assume that we would have to replace his service by somebody else. But it would depend on the fact of the need of the retailer for distribution to service him. Mr. DINGELL. There are several questions that occur to the Chair at this time. I realize that we have not permitted you to finish your statement. You may have some other comments that would be helpful to the committee in this regard at a later time. You have indicated certain criteria on page 3. Do you impose area restrictions upon by your wholesalers? Mr. McNITT. No, sir; we do not. sales Mr. DINGELL. Do you impose any pricing restrictions on your wholesalers? Mr. McNITT. No; they are free to sell any way they choose. Mr. McNITT. That is their business. Mr. DINGELL. Do you require membership in any trade association. such as the National Wholesale Mr. McNITT. We have no such requirements. Mr. DINGELL. No such requirements. You indicate that you have four basic questions. You say, one is that he be a licensed drug wholesaler. I assume that is the sine qua non to wholesaling your line. Then you indicate, that you want to know if he has adequate finanej ing, and if he is financially responsible. I assume that these questions are of great importance, to be sure that you don't fall in the hands of the responsibility to handle products properly. any wholesaler who would not have either the financial capability or I think it is pretty clear that the Bristol line is good business, because Then you go on and you ask, if the Bristol line is good business. you do have a fine line of pharmaceuticals. The last question is: Is he a good customer for Bristol? I assume this I would be extremely important, because this would tend to indicate whether or not it would be a desirable thing, from the standpoint of Bristol, to have him. Am I correct? Mr. McNITT. That is right. Mr. DINGELL. Were there any other criteria that you would impose upon those who would like to distribute the Bristol line! Mr. McNITT. I think the criteria which we use would be ones which statement, that he does have adequate distribution in the area, he can you have heard before, and which we have somewhat expressed in this service his customers well, that he does take care of his stock propert and that he handles the paperwork properly; and that generally, he is a man who gives good service to his retail accounts. Mr. DINGELL. If he were to indicate to you that he could generate a comfortable volume for Bristol, and if he could comply with the other criteria that you have set forth both in your written and in your oral statement, assuming other things to be equal, you would naturally look with favor on his application; am I correct? Mr. McNITT. This is entirely correct, providing, of course, that we felt that that area where he served needed this kind of distribution. In other words, if our retail customers needed somebody to call on them over and above the number that are already calling on and servicing them, then we would be very interested in this man that you speak of. Mr. DINGELL. But the fact that he could generate new dollar volumes of business not presently at hand for Bristol would be a powerful, compelling circumstance; would it not? Mr. McNITT. It certainly would, if it were new volume that we never had before, because we assume normally that he would be calling on the accounts in the present area unless there had been a population shift and new drugstores were created, and this sort of thing, which happens. And that is a very good reason for adding new wholesalers, which we have done from time to time. Mr. DINGELL. I think, in fairness, the Chair should permit you to finish your prepared statement. Mr. McNITT. Our wholesaler distribution system is periodically reviewed. The first and most basic question for us is do we need more wholesaler service. If the answer is yes, we then look for additional qualified wholesale customers. In these cases we usually find that among those who have sought or are seeking to distribute the Bristol product line. In considering any particular wholesaler we ask four basic questions: First: Is he a licensed drug wholesaler? Second. Does he have adequate financing and is he financially responsible? Third. Is the Bristol line good business for him? and The first two questions are easily answered by information available from State licensing authorities and customary sources of credit information. The third question requires consideration of the scope and quality of the wholesaler's activities in the area he serves balanced against the population density and the number of other Bristol wholesalers serving the same area. Undue dilution hurts both Bristol and the wholesaler. Unless his Bristol volume is adequate, our line will not be profitable for him. If it is not profitable, he will not have the incentive to give proper attention to our products. In answering the fourth question, we look to the wholesaler's ability to provide those customer services generally sought by other members of the industry. In addition, the relative youth and the growth of our company have led us to look to the wholesaler for other services not necessarily important to some companies. Generally, the ideal Bristol |