Mr. POTVIN. In not ascribing cost to this or that class of business, would not the necessary corollary to the policy you have just explained be, then, that you don't really know whether this 40 or 50 percent is represented by economies in scale, and so forth?

Mr. McNITT. I think that from a strictly accounting sense that we cannot say that it is represented by a certain economy. But we can do the reverse looking at it. We can look at it, where would our business be if we didn't have this volume. And if we didn't have this total income, and we have the continued expenses of people during the summertime, and our plant during the summertime, and our sales and marketing expenses, and our research expenses, where would we be if we didn't have this added volume?

And looking at it that way, we are convinced that this is business that we should take. And, therefore, of course, we do take it. I guess in a sense it is like the airlines which let a student ride at half fare. They seem to feel that this is good business.

Mr. POTVIN. Well, they have a rather detailed accounting procedure, and they know precisely what their break-even factor and so forth is on a given run. What you are saying is that you can measure the benefits but not the cost, is that right?

Mr. McNITT. We cannot attribute cost item by item and come up to a total cost that says, "this is the net cost of this business and this is the net profitability of this business." This seems to be a practical impossibility. But we can see where the total income of this business, in addition to our other business, and the total expenses of our business net out to a net profit.

Mr. POTVIN. Here is the situation. There are a number of small businessmen who have expressed themselves quite vehemently really on this subject. They say, that it is only because of the relatively high prices we are paying that the manufacturer is able to sell at these relatively low prices to the Government, to the hospitals, and so on. In other words, we and our customers are subsidizing these sales. So in an attempt to ascertain whether this is in fact correct, we have asked a number of manufacturers, "When you sell at 40 or 50 percent less, is this cost justifiable, or isn't it?" If I understand your answer to the small businessman, it is that you don't really know.

Mr. MCNITT. I say that it is impossible to cost this out in this sense, I think that our position is probably, you know, similar to most other people. On large bids like this, for example, the Federal Government, people that sell all kinds of products to the Federal Government look for this incremental business which is not in competition with their other business, and they go through the same thing, and they come up with things like clinical thermometers or elastic bandages or hotwater bottles, all this type of thing runs apparently about 50 to 60 or 70 percent discount to the Federal Government.

Mr. POTVIN. I don't mean to say, sir, for the moment that there is a Robinson-Patman kind of competition between the small businessman and the people that are getting these 40 or 50 percent prices. But when you are engaged in differential pricing as your entire industry is, don't you concede that since the small businessman is always charged the highest of the differential prices? I think it can be said without

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exception that he has a right to ask of you, the manufacturer, that
there be some logical relationship of these prices.

Mr. McNITT. Well, if it would help the committee in considering
this problem, I could give you a listing of the things that we consider to

be economies.

Mr. POTVIN. It would be helpful.

Mr. McNITT. I cannot label these things in terms of how much each one of these is an economy, but I can tell you the items that we see involved. And I think No. 1 is the fact that it is added volume to the business over and above that which the wholesaler or retailer serves. Secondly, we have this seasonal situation, which means that it is important to us to keep our people employed and our equipment

busy.

We don't have the same amount of either sales force or advertising costs in this, which is very necessary to build this volume for the

wholesaler.

We don't have the same amount of costing, accounting, and recordkeeping, and so forth, whereas the transaction for the Federal Government might be on the same sheet of paper, or it might involve a stack of paper like this for the wholesaler.

Our research costs must be made whether we win a bid or not. And we cannot run research on a 7- or 10-year program basis on a maybeget-a-bid volume basis. We have no returns from the Federal Gov ernment. And this is quite an expense for the wholesale market and

retail market.

We have no shelf stock adjustments. It cost us $440,000 last fall to adjust stock for one price cut to the wholesaler and retailer.

We have no disaster costs. We don't have to make up the lost prod

ucts that are lost in a disaster to the Federal Government.

We have no credit problem. We have less distribution expense. And, of course, we have no cash discount. We also get certain benefits from these hospitals in the sense that they have been expressed before of their being teaching hospitals, and a fine place for doctors to become thoroughly familiar with the best way to use our products.

So if we total these together, it is a substantial and important saving

as against the normal wholesale-retail business.

Mr. POTVIN. I didn't mean to say that they were not factors. I am sure they are. And yet the fact that you have not ascribed dollars and those who charge manufacturers as a group with using small business percentage amounts to them places you, I am afraid, in the position of dollars to subsidize these sales, and having to say, "It may well be so,

I am not sure."

Mr. McNITT. I could not more thoroughly disagree with that, Mr. Potvin. There is a substantial economy which is really existent the family plan on the airplane or the seat-by-seat one-and-a-half and which we must recognize and which is really no different from

price, it is much the same thing.

describe them in percentage of the dollar, and you have declined to Mr. POTVIN. I agree that there are valid factors. I asked you to do so. My only comment is that by declining to do so it is your policy

not to do it.

Mr. McNITT. It is not our policy, sir, it is the fact that accountingwise to assign dollar figures to each one of these things is a practical impossibility. Take our advertising expense. Our advertising expense to the trade, we can pretty well see what it is. But the benefit that we accrue from that from a bid is very difficult to see. I don't want to take your time unnecessarily on this, but it is really very difficult to figure this. Nevertheless, we do know that it is very substantial.

Mr. DINGELL. Mr. McNitt, you have been very patient with the committee. We are grateful to you for your presence this morning. Mr. POTVIN. We have the standard written questions which we will give to you to answer.

Mr. McNITT. I will be glad to do it.

Mr. DINGELL. The subcommittee is grateful to you for your presence this morning. The subcommittee will stand adjourned until the call of the Chair.

(Whereupon, at 12:20 p.m., February 27, 1968, the subcommittee adjourned, subject to the call of the Chair.)

SMALL BUSINESS PROBLEMS IN THE DRUG INDUSTRY

WEDNESDAY, MARCH 20, 1968

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON ACTIVITIES OF REGULATORY AGENCIES
OF THE SELECT COMMITTEE ON SMALL BUSINESS,

Washington, D.C.
The subcommittee met, pursuant to recess, at 10 a.m., in room 2359,
Rayburn House Office Building, Hon. Neal Smith presiding.
Present: Representatives Smith and Conte.

Also present: Representative Addabbo of the full committee, Gregg Potvin, subcommittee counsel; Justinus Gould, counsel to full committee; Myrtle Ruth Foutch, clerk; and John J. Williams, minority counsel.

Mr. SMITH. The meeting will come to order.

The hearing this morning is with regard to neighborhood health centers operated by the local CAP agencies under OEO grants. We are in a period of great change with regard to the delivery of health services. We are spending close to a billion dollars per year for research to develop medical knowledge and drugs, and now we find that a lot of people have not been able to secure the benefits of it. There will need to be a lot of changes in delivery methods, and of course it will affect businesses.

This committee is very much interested in how it affects small business. I think it is pertinent at this time that we see how the neighborhood health centers that OEO will fund do affect the small businessmen in the drug industry.

The first witness this morning is a colleague, Mr. Nichols of Alabama. Mr. Nichols has shown an interest in independent businessmen and is taking an interest in the way a proposed program in the district he represents could be changed to avoid undesired results. We are glad to have you with us and you may proceed with your statement, Congressman Nichols.

TESTIMONY OF HON. WILLIAM NICHOLS, A MEMBER OF CONGRESS FROM THE STATE OF ALABAMA

Mr. NICHOLS. Thank you, Mr. Chairman, and gentlemen of the committee.

First let me say I appreciate you letting me be on first, Mr. Chairman. I have another committee meeting.

I will be very brief. I want to say also that you are talking here this morning principally I believe about a situation in Baltimore. I understand that others will testify. But I come to the committee because I think I have a similar situation which is developing in my State.