Mr. MANDELL. Yes. I have never seen it. I am aware that it exists or it did exist in which one of the points was that members would refrain from the practice of diversion.

Mr. DINGELL. What is the practice of diversion?

Mr. MANDELL. That is a very interesting subject. "Diversion" is a word I believe coined by the manufacturers and it has a very bad connotation throughout the industry now. If someone is known as a diverter or someone who practices diversion, he seems to be an untouchable. So that most people who practice diversion or divert would be useless to talk about. Diversion is the practice of taking or buying a line or a particular product from any particular manufacturer and then reselling it generally to another wholesaler who the manufacturer does not choose to sell to. Actually, there is nothing wrong with it.

Mr. DINGELL. You mean, in other words, giving a short-line wholesaler an opportunity to be served more broadly then he is with the lines he could directly acquire himself?

Mr. MANDELL. Yes, sir.

Mr. DINGELL. Are you a diverter?

Mr. MANDELL. We are. In the sense of the way we use it.

Mr. DINGELL. Are there other diverters in the wholesale drug industry?

Mr. MANDELL. There are many diverters in the wholesale drug industry.

Mr. WILLIAMS. Do you mean that you divert or you benefit by diversion? As a short-line wholesaler I take it that you would be buying lines from other wholesalers that you cannot obtain directly and that would be your activity in the field of diversion?

Mr. MANDELL. We did buy from time to time lines from other wholesalers. However, we set down one day and figured out that our profit, our net profit was far less than 2 percent, and I never came across anyone who would sell a line and make less than a 2-percent profit on it or sell a product and make less than 2-percent profit on it. So we felt that if we stocked any particular line and we had to bring it in, buy it from another wholesaler and had to pay 3 and 4 and more percent above what it would normally cost us to buy it from the manufacturer and then had to go out on the open market and compete with wholesalers who were purchasing the product in our area at the direct cost, we just

were

Mr. DINGELL. You are saying it was not profitable for you, sir? Mr. MANDELL. We were going to lose money if we tried to stock all the lines. If we try to become a full-line wholesaler by purchasing, if we were successful enough to purchase these lines from different wholesalers who have them and we were never too successful in even doing that, but if we were able to buy them we could not buy them reasonably enough to stay in business.

Mr. WILLIAMS. What is the advantage to anyone else of diverting from the short-line wholesaler? Why can't they deal directly with the manufacturer, just as you do?

Mr. MANDELL. I am sorry, Mr. Counsel, I do not follow you.

Mr. WILLIAMS. You have said that you divert to another wholesaler. If he is a short-line wholesaler, why can't he deal directly with the manufacturer?

Mr. MANDELL. Let us get back to the point, I want you to first understand that when you say that you divert it is a sell and nothing more. Any account we sell is licensed to handle the product we sell to them. So, I would want to make you understand that completely first. When we divert we make a legitimate sale to another wholesaler or anyone else whom we might want to sell to who is licensed to handle that particular product.

it.

Mr. WILLIAMS. This is not unethical or unlawful?

Mr. MANDELL. Nothing of the sort. There is nothing unlawful about

Mr. DINGELL. You sell actually only to licensed persons who are authorized under State and Federal statutes to handle the item?

Mr. MANDELL. Yes, sir. What we-Mr. Counsel, I will try and answer your question now-when we make a sale or "divert," as the common phrase is, to a short-line wholesaler, the merchandise we sell to him he does not have the right to purchase that from the manufac turer, that particular merchandise. The manufacturer will not sell it to him so he buys it from us.

Mr. WILLIAMS. Thank you.

Mr. POTVIN. Mr. Mandell, from your experience and observations of the industry, can you tell us whether full-line wholesalers on the whole engage in price competition over a period of time? I am not asking for an absolute statement on that, but, in a general way, is price competition prevalent?

Mr. MANDELL. Price competition among full-line wholesalers is only prevalent from my knowledge of the entire industry in several large metropolitan centers

Mr. POTVIN. We can cover the details on that later.

Mr. MANDELL. In large cities, but not in the suburban areas, and price competition only comes into effect and has come into effect to some degree when the full-line wholesaler is forced into it by his competitors taking some of the volume away from small companies. Mr. POTVIN. But in those areas where there are only full-line wholesalers, is it not a fact, sir, that price competition is regarded by most observers to be totally absent?

Mr. MANDELL. For many years it was. Recently, over the past several years, I have noted a trend in our area, and I know of its existence in other areas of the large full-line wholesaler, the large full-line wholesaler, a member of the National Wholesale Drug Association, are going ahead in the metropolitan center, particularly where there is competition from the short-line wholesaler, and have given a blanket discount or reading any price competition that the short-line wholesaler would give. So, in effect, it takes the short-line wholesaler's business away and often enough and long enough so that the full-line wholesaler will be the only one to exist and it has, in fact, occurred in the New York area to a great degree.

Mr. DINGELL. How does the full-line wholesaler subsidize the cost of meeting the competition? Does he subsidize it from profits on the lines on which he meets competition or does he substitute higher profits on the lines where he has no price competition?

Mr. MANDELL. I wish I knew.

Mr. POTVIN. Competition in our present entire price economy has a way of growing up out of the pavement almost when we attempt to

suppress it. In this respect, could you tell us the identity and function of the Biddle buying group?

Mr. MANDELL. Yes, sir; I can.

Mr. POTVIN. First, are you a member?

Mr. MANDELL. We are a member of this Biddle buying group. I think the official name is Biddle Purchasing Group. Biddle has a number of members throughout the United States who pay a fee yearly for the right to belong to this organization. And this gives each member the right to purchase merchandise directly from the Biddle warehouse

or

Mr. POTVIN. This membership would be composed of both wholesalers and retailers?

Mr. MANDELL. Yes; they have a large number of retailers.

Mr. POTVIN. And, as a member, do you make sales to other Biddle members?

Mr. MANDELL. We do.

Mr. POTVIN. And this is regarded as diverting?

Mr. MANDELL. Yes, sir; diverting. It certainly is.

Mr. POTVIN. That would be without exception as to whether the sale was to a wholesaler or a retailer?

Mr. MANDELL. Well, it is regarded as diversion by the manufacturer because I believe most manufacturers take the stand that if you sell to Biddle you are selling to another wholesaler when, in fact, we have found that by selling to members of the Biddle group this has broadened our horizon and they have acted more or less as a sales agent to us. They have given us a lot of retailers which we normally would not be able to sell.

Mr. POTVIN. They send out a national brochure or flyer listing the various items that various members are offering and the price and they would deal directly with you?

Mr. MANDELL. Well, yes. They bring price competition into areas where virtually no price competition exists.

Mr. POTVIN. Those areas where there are no short-line wholesalers? Mr. MANDELL. Or very few short-line wholesalers, Short-line wholesalers who are not enough to have any significant

Mr. POTVIN. Who is H. L. Moore?

Mr. MANDELL. H. L. Moore is a national wholesaler similar to Biddle but not analogous to it, since it does not have any members. H. L. Moore is a drug wholesaler, located in Connecticut, who sells to accounts throughout the United States by mail.

Mr. POTVIN. May I assume that if he sells to someone in Wyoming he must be offering a lower price than the local Wyoming wholesaler? Mr. MANDELL. Generally, that is the case; yes.

Mr. PorvIN. So here again he is creating price competition?
Mr. MANDELL. Yes; he is.

Mr. DINGELL. Would it be fair to say, first of all, that the activities of both Biddle and H. L. Moore are lawful and they involve no sale of drugs in unauthorized or unlawful channels that are not authorized to handle that particular product?

Mr. MANDELL. Yes. I would certainly say that it would be fair to say this. I tried to tell the counsel before. They have our account and they are licensed to handle these products. If they were not we would not sell to them. So, by the very fact that we sell to them they are

legally licensed, duly authorized to buy and resell the drugs that we sell to them.

Mr. POTVIN. Can you tell us when and under what circumstances the firm of M. Sobol became a "diverter"?

Mr. MANDELL. I would say probably somewhere in the middle 1950's one of the manufacturers came to my father and asked him if he would be interested in selling some of their merchandise to Biddle. He thought we could do an excellent volume if we went ahead and did that so he suggested we go right ahead and sell to the Biddle Purchasing Group, which we did.

Mr. POTVIN. Are you at liberty to give us the name of that manufacturer, sir?

Mr. MANDELL. I do not think it has too much significance.

Mr. POTVIN. At the present time you give a discount of some 10 percent on the goods that you sell; is that correct? And I am speaking now of the retailers in the Bronx that you serve.

Mr. MANDELL. With retailers in the Bronx and in Manhattan we do the major portion of our business at a 10-percent discount; yes, sir. Mr. POTVIN. If you give a customer a 10-percent discount on any merchandise would you have to give it to him on everything he buys? Mr. MANDELL. On everything he buys; right.

Mr. POTVIN. So there would be some customers who would not receive it?

Mr. MANDELL. Basically, the customers who do not receive it are not able to pay their bills on time.

Mr. PoTVIN. If they could pay on a regular 30-day basis, are they eligible for this discount and would they receive it?

Mr. MANDELL. Oh, yes.

Mr. POTVIN. Are you familiar with the total annual gross volume of the drug business in the United States?

Mr. MANDELL. Yes. I think in 1966 it was in excess of $10 billion. Mr. POTVIN. So if this 10 percent sort of price competition could be theoretically injected into that total figure, there would be a total saving available to the consumer of approximately how much a year? Mr. MANDELL. I would say 10 percent would be $1 billion.

Mr. POTVIN. We are talking about a billion dollars a year to the

consumer.

Mr. MANDELL. Just if we could reduce the price at the wholesale level.

Mr. POTVIN. We are making the assumption that retailers would be more than delighted to pass these savings along to their customers. Mr. MANDELL. Most retailers would. The competition would virtually force them to if the smaller retailer could buy as well as the larger retailer who is the competitor.

Mr. DINGELL. As a matter of fact, because of the price competition within the industry, is it not conceivable that that 10 percent might be magnified somewhat by the time it reaches the ultimate consumer? Am I correct?

Mr. MANDELL. Yes; it could be. It could very well be.

Mr. DINGELL. Because it would be a wholesale level, and then the reduced retail level might be more the level of 13?

Mr. MANDELL. Yes; correct. It might run more than that.

Mr. POTVIN. You have testified that in the main price competition is just a minimal factor in the wholesale distribution of drugs. Now,

as the late Senator Kefauver so well established, price competition between manufacturers is rather less than vibrant in your industry as well; is it not?

Mr. MANDELL. Yes; I would say that, sir.

Mr. POTVIN. In fact, as a practical matter, in most major trade market lines, there is normally none; is that correct, sir, at least according to the findings of Senator Kefauver?

Mr. MANDELL. That is true.

Mr. POTVIN. Are we not then talking about just the tip on the iceberg when we talk about this 10 percent that could result from an injection of price competition in wholesale distribution?

Mr. MANDELL. Well, yes; you are.

Mr. POTVIN. If there could be price competition between manufacturers, the cost study conducted by Senator Kefauver suggested there might be in the range of 80 percent available for competitive price purposes; is that right?

Mr. MANDELL. That could very well be.

Mr. POTVIN. So we could theoretically be talking about savings of billions of dollars a year to the consumer?

many

Mr. MANDELL. Yes, sir; we could.

Mr. POTVIN. On commodities for the health, well-being, and continuation of life in some instances?

Mr. MANDELL. Yes; we could. May I just make one comment on that. As far as the small retail pharmacist goes in the United States I think that the small retailer has taken an awful bum rap from the public as to being a crook or thief or overcharging when, in fact, he just trying to get along and make a normal legitimate profit. In fact, he has other people who are buying at a competitive advantage and able to resell at a lower price than he does, and there are manufacturers who are selling to large retailers and not to a small retailer and selling at lower prices to the large retailer and not the smaller retailer. And he, of course, could not reduce the price if he wanted to, to the consumer, in many instances. So the consumer walks into the small retailer, particularly in the Bronx, and finds out that he has to pay a percentage more for a specific item than he would if he went to the larger chain retailer or the larger independent retailer and it sort of puts the rap on the small, locked-in businessman in the neighborhood store.

Mr. POTVIN. You concur with the thought that the independent retail druggist is a victim of artificially and unnecessarily high prices which he must, of necessity, pass on to his customers who, in turn, subsidize the lower prices to the doctors, the hospitals, and so forth? Mr. MANDELL. Absolutely. I completely agree with the National Association of Retail Druggists along those lines and I think it is discriminatory practice in the drug industry, and discriminatory practices are in existence in the drug industry, and to the detriment of the small retailer. And I think here that the interest of the public, the consumer, and the small retailer are identical.

Mr. POTVIN. Would you agree further, sir, that there cannot be price competition between manufacturers unless it is allowed to happen in the marketplace, and then, of course, it has to happen in the marketplace first at the wholesale level?