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Journal of Clinical Pharmacy (1 977) 2,39-52. THE IMPLICATIONS FOR PHARMACY OF RESTRICTIVE PRACTICES IN RELEVANCE THE DISTRIBUTION OF MEDICINES-11. ISSUES OF PHARMACEUTICAL M. Feather, T. G. Booth and I. F. Jones The Pharmacy Practice Research Unit, Postgraduate School of Studies in Pharmacy, University of Bradford, Bradford, West Yorkshire, BD 7 IDP INTRODUCTION In Part I of this series the evolution of legislation to control monopolies and mergers and to prevent restrictive practices and the enforcement of minimum resale prices has been traced. Part I1 is an examination of the inquiries that have been ordered under the provisions of the statute and whch have had a direct influence upon the distribution of medicines and tradi- tional chemists’ goods. MONOPOLIES, RESTRICTIVE PRACTICES AND RESALE PRICES (a) Insulin An early referral [I ] to the Monopolies and Restrictive Practices Commission concerned the supply of Insulin. The whole of the UK supply, except for a very small quantity which was imported for research purposes, was in the hands of four firms which comprised the British Insulin Manufacturers (BIM). This association had been formed in 1941 to consider common problems arising out of wartime conditions. The Commission found that the arrangements made by the manufacturers, both individually and collectively, for distribution through wholesalers to retail chemists (to whom the retail sale of insulin was confined by law), and arrangements with regard to resale prices did not operate against the public interest, nor could it be expected to do so in the future. Even though costs of raw materials had in- creased, the exchange of technical information between BIM members had enabled better yields to be obtained and prices had been kept down. Prices appertaining at that time were lower than in other countries, with the possible exception of Scandinavia. Despite this, it was recommended that to ensure that prices and profits remained satisfactory they should be supervised in the future and that this should be done by the Ministry of Health, since 95 % of all insulin was supplied through the NHS. A price regulation scheme was introduced and the reports of the Board of Trade reviewed the situation annually [2]. When the Restrictive Trade Practices Act (1956) was introduced, the BIM agreement became registrable, even though the Commission had found that it did not operate against the public interest. Since a common pricing arrangement applied, it would only be allowed to continue if the Restrictive Practices Court was satisfied that it passed through one of the ‘gateways’ laid down in the Act. In the event, the companies themselves terminated the prices agreement [3], but individually were still able to maintain resale prices, since this was allowed under Section 25 of the 1956 Act. 39

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Page 1: THE IMPLICATIONS FOR PHARMACY OF RESTRICTIVE PRACTICES IN THE DISTRIBUTION OF MEDICINES-II. ISSUES OF PHARMACEUTICAL RELEVANCE

Journal of Clinical Pharmacy (1 977) 2,39-52.

THE IMPLICATIONS FOR PHARMACY OF RESTRICTIVE PRACTICES IN

RELEVANCE THE DISTRIBUTION OF MEDICINES-11. ISSUES OF PHARMACEUTICAL

M. Feather, T. G . Booth and I. F. Jones The Pharmacy Practice Research Unit, Postgraduate School of Studies in Pharmacy,

University of Bradford, Bradford, West Yorkshire, BD 7 IDP

INTRODUCTION

In Part I of this series the evolution of legislation to control monopolies and mergers and to prevent restrictive practices and the enforcement of minimum resale prices has been traced. Part I1 is an examination of the inquiries that have been ordered under the provisions of the statute and whch have had a direct influence upon the distribution of medicines and tradi- tional chemists’ goods.

MONOPOLIES, RESTRICTIVE PRACTICES AND RESALE PRICES

(a) Insulin An early referral [ I ] to the Monopolies and Restrictive Practices Commission concerned

the supply of Insulin. The whole of the UK supply, except for a very small quantity which was imported for research purposes, was in the hands of four firms which comprised the British Insulin Manufacturers (BIM). This association had been formed in 1941 to consider common problems arising out of wartime conditions. The Commission found that the arrangements made by the manufacturers, both individually and collectively, for distribution through wholesalers to retail chemists (to whom the retail sale of insulin was confined by law), and arrangements with regard to resale prices did not operate against the public interest, nor could it be expected to do so in the future. Even though costs of raw materials had in- creased, the exchange of technical information between BIM members had enabled better yields to be obtained and prices had been kept down. Prices appertaining at that time were lower than in other countries, with the possible exception of Scandinavia. Despite this, it was recommended that to ensure that prices and profits remained satisfactory they should be supervised in the future and that this should be done by the Ministry of Health, since 95 % of all insulin was supplied through the NHS. A price regulation scheme was introduced and the reports of the Board of Trade reviewed the situation annually [2].

When the Restrictive Trade Practices Act (1956) was introduced, the BIM agreement became registrable, even though the Commission had found that it did not operate against the public interest. Since a common pricing arrangement applied, it would only be allowed to continue if the Restrictive Practices Court was satisfied that it passed through one of the ‘gateways’ laid down in the Act. In the event, the companies themselves terminated the prices agreement [3] , but individually were still able to maintain resale prices, since this was allowed under Section 25 of the 1956 Act.

39

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40 (b) The Chemists’ Federation Agreement

Manufacturers and wholesalers who were members of the Chemists’ Federation (CF) sup- plied goods covered by the agreement only to retailers who employed a registered pharma- cist on the premises. This agreement was the first [4] to be considered by the Restrictive Practices Court. The test to be applied was whether the agreement operated contrary to the public interest. It would be deemed so to do unless the respondents could prove that it passed through one or more of the ‘gateways’ laid down in Section 21 of the Restrictive Trade Practices Act (1956). The CF pleaded that the restriction was reasonably necessary, having regard to the character of the goods to which it applied, to protect the public against injury. The Court considered that many of the goods included in the list were ‘not very dangerous’ (e.g. cod liver oil) and others were ‘hardly even medicines’ (e.g. barrier creams) and since the public was already protected by legislation from obtaining dangerous medicines without a doctor’s prescription, the risk of injury was negligible. If the public had needed protection, the agreement was not appropriate to ensure this as there was no requirement that persons buying the listed products should be served by the pharmacist. By not being able to buy the commodities it wanted from any retailer, the general public was inevitably caused inconvenience.

The Federation had also claimed that the agreement helped pharmacists in country areas to keep in business; if they closed the National Health Service would suffer. Mr Justice (later Lord) Devlin stated that there was ‘no satisfactory evidence’ to show how many such chem- ists should be preserved in business in order to benefit the public; the point was within ‘the realm of speculation’. He dismissed as being ‘too nebulous’ the evidence offered by the CF to support the contention that the restrictions imposed by the agreement helped these chemists [5] , The Court gave judgment against the agreement in November 1958. Although the Court had indicated that the Federation could continue if its rules were amended, its members decided upon liquidation as from December 3 1 st, 1958 [6] .

The effect of the judgment upon retail pharmacy was to cause widespread despondency, a feeling which was exacerbated by the difficulties being encountered at that time with NHS remuneration negotiations [7] .

(c) Colour film The Monopolies Commission reported [8] on the supply and processing of colour film in

1966. It found that the sale of Kodak substantive reversal film at a price which included processing resulted in a monopoly situation with regard to the processing. It was recom- mended that processing should not be included in the retail price and that the manufacturers of colour film should give technical advice to help other firms who wished to undertake such work. The profits made from colour film by Kodak were considered to be too high and the Commission recommended that prices should be reduced. A tariff which applied to imported film should be abolished to encourage competition from foreign manufacturers. The Board of Trade, having regard to the country’s balance of payments at that particular time, did not reduce the duty, but Kodak itself decided to reduce its prices to dealers by 12%% and sug- gested a 20% reduction in retailers’ selling prices. Processing is now available as an optional separate charge.

(d) Infant milk foods A report [9] on the supply of infant milk foods was published in 1967. The practice

whereby the distribution of these products was mainly confined to retail chemists was found

M . Feather, T. G . Booth and I. F. Jones

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Restrictive practices in medicine distribution -N 41 to operate against the public interest since inconvenience could result in areas where there was no pharmacy. The Monopolies Commission considered, however, that it would not be advantageous for these foods to be available through any type of retailer in all areas because higher prices might ensue. T h s view would appear somewhat paradoxical; an increase in the number of outlets is generally considered to encourage price reductions.

Despite the Commission’s conclusions, infant mdk foods have since become more widely available through supermarkets and other non-pharmacy outlets [ 101 . One leading manufac- turer has claimed that as a result of its adopting a wider distribution policy ‘the interests of the public would be best served’ [ 1 I ] .

Another development which could have a serious effect upon the viability of retail phar- macies is the recent (1976) decision of the DHSS that proprietary brands of modified baby milk are to be sold by all maternity and child health clinics and by welfare food distribution centres at cost price plus 10 % [ I 21. The Department had been considering for some time previously the anomalous situation whereby mothers could purchase a much wider range of milk foods and baby requisites in some clinics than in others [ 131 . In reply to a House of Commons question, drawing attention to the inconvenience which might arise in some areas where certain brands of milk foods were not available, the Under-Secretary of State for Health and Social Security had expressed concern that any extension of such sales ‘some- times regarded as unfair competition’, might ‘injure or threaten the viability of certain chem- ists’. If, as a consequence, those shops had to close down, it would not be in the best inter- ests of the community. There would also be increased administration costs in the clinics if more brands had to be stocked and distributed; mothers should be encouraged to buy National Dried Milk whch was already available at all clinics at ‘only 20p for a 20 oz. pack’ and ‘equal in nutritional value to Proprietary brands’.

The Department’s eventual directive, however, was precipitated by the discovery that un- modified cows’ milk such as National Dried Milk could be unsuitable for infants under 6 months of age [14]. Area Health Authorities were instructed to obtain supplies of well- known brands [ 121 despite representations which were made to the DHSS by the National Pharmaceutical Union Executive and the Pharmaceutical Society’s Council that the addi- tional supplies of alternative foods should be handled by pharmacy outlets. Friction could occur if cut-price competition from clinics increased, especially in view of the fact that pharmacists were often called upon to supply a service to customers when those other sources of supply were closed [IS]. In a letter to the pharmaceutical bodies concerned, the Under-Secretary of State said the urgency of the matter left him no alternative course of action but he did offer to talk to them about their suggested proposals for distribution which might be given consideration ‘for the longer term’ [ 121 .

(e) Proprietary medicines The Prices and Incomes Board, in August 1968, reported [ 161 on distributors’ margins on

proprietary medicines. The practice of selling only at a manufacturer’s recommended price was not considered since the Restrictive Practices Court had not completed its hearing of the Resale Price Maintenance case on medicines. As a result of its enquiries, the Board found that two-thirds of sales were through retail pharmacies, which numbered about 13,500 and the remainder, ‘confined to only a few popular brands’, were sold through 65,000 grocers, supermarkets and other non-pharmaceutical outlets*. On average, sales of proprietary medi- cines accounted for about 10% of the total sales* of retail chemists. The contribution of

* There are other estimates of these parameters which might not support these figures exactly(”)(l8).

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42 M . Feather, T. G . Booth and I . F. Jones

these products to the growth in chemists’ income in the years 1961 -66 had been less than from other commodities such as toiletries and cosmetics, NHS dispensing being the major source of increase. Actual profit margins on proprietary medicines were between 15 and 20% (net of purchase tax) for popular, nationally advertised brands and 20 -27% for unadvertised and slow-moving products. With discounts, a maximum margin of 28% was possible. The Pharmaceutical Society had expressed concern to the Board at the rapid reduction occurring in the number of retail pharmacies. The Board considered that there was no significant differ- ence from the closure rate occurring amongst retailers in general. On the evidence at its dis- posal, the Board was unable to conclude that margins were excessive and no price reduction was recommended. Consideration of the report shows that the Board did not define precise- ly the reasons for its decision.

( f ) Toilet preparations Manufacturers’ prices of toilet preparations also came under the scrutiny of the Prices and

Incomes Board [ 191 . With the exception of some products such as toothpaste which could be described as household necessities, most toilet preparations were considered to be luxury or semi-luxury items. The consumer did not regard price as an over-riding factor, the repu- tation and image of the product playing an important part. This was borne out by the fact that the cheapest products had only a small share of the market. Manufacturers spent more than half of their costs on packaging, advertising and other sales promotion activities to compete with other manufacturers in establishing and maintaining a brand or household name. In the three years preceding the issue of the Report [19], prices had risen less than costs and manufacturers’ profits as percentage of turnover had decreased from 18% (in 1965) to 13% (in 1968) but there was considerable variation in profit levels between differ- ent companies. The Board stated that the only conclusion it could reach was that profits remained high enough to enable manufacturers to absorb some further cost increases with- out increasing prices, ‘granted that the Government has already made considerable use of the principal instrument that is open to it to use in a situation where the nature of the market makes for high profits-namely purchase tax’.

( g ) Recommended resale prices In 1967 the Monopolies Commission was asked to report [20] on the general effect upon

the public interest of the practice of recommending or otherwise suggesting prices to be charged for goods on their resale. It should be noted here that the recommendation of a price is not to be confused with maintenance of that price. The former was the matter to be considered by the Monopolies Commission, the latter falling under the jurisdiction of the Restrictive Practices Court.

During its investigations, the Commission consulted trade associations, manufacturers and retailers of selected products, including toiletries, and also invited individuals and national bodies such as the Consumer Council and the Distributive Trades’ Little Neddy to submit evidence. Manufacturers who followed the practice of recommending prices claimed that it helped the consumer to compare prices and ‘shop around’ for bargains amongst retailers offering identical products at different prices. The Commission considered that, for this purpose, the recommending of prices was of little value since the consumer would still have to go to the trouble of visiting a number of retailers to be sure of getting the best price. In some cases a recommended price could be positively misleading as a basis for judging prices; where the recommended price was one which was seldom if ever charged by any

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Restrictive practices in medicine distribution -11 43 retailer, the purchaser might be led to think that he was getting a better bargain than he really was from a particular shop. It was conceded however that the recommending of prices could assist the consumer to compare the merits of rival products without having to visit a number of retailers to compare prices being charged but it was felt that this was only of real value where expensive items such as motor cars and electrical goods were involved. The Commission refuted the suggestion that manufacturers’ recommended prices helped the con- sumer to differentiate between the quality of apparently similar products; there was not necessarily a relationship between quality and the price which a manufacturer suggested his goods were worth.

Some manufacturers argued that recommended prices were also of value to retailers who, by not having to price goods themselves, could operate more efficiently. It was further stated that several manufacturers who had previously discontinued the marking of prices on on their goods had re-introduced the practice for the benefit of retailers who were concerned that in handling products temporarily reduced in price during a manufacturer’s sales promo- tion campaign they might otherwise infringe the provisions of the Trade Descriptions Act 1968 [21] .

The Commission considered that whilst some retailers might find it convenient to have goods marked by the manufacturer with recommended prices, any benefit which accrued to the customer was likely to be of little significance. They had been told that supermarkets usually marked all goods with their own price labels whether or not they already bore a manufacturer’s recommended price, and whether or not that price was to be followed; other retailers’ time would only be saved where they intended to sell at the recommended price. If, however, dealers looked upon the manufacturer’s recommended price as ‘the proper or normal’ price, there was a potential danger of restraint of competition, keeping prices up. Conversely, the public might benefit if, as had been claimed, recommended prices were re- garded as maximum selling prices and therefore rarely exceeded.

The Monopolies Commission carried out an extensive survey to investigate the effects of manufacturer’s recommendations upon prices charged by dealers but were unable to deduce whether average prices would be higher or lower in the absence of a recommendation. It was concluded that the effect upon the public interest of recommending resale prices was likely to be beneficial in some cases but harmful in others.

In deciding what action should be taken, the situation in other countries where control existed was examined. As a result, it was considered that one possible approach would be to ban the practice in general but to provide for exceptions putting the onus of proof as to the benefit of recommending a price on the supplier as was the case with price maintenance under the Resale Prices Act, 1964. The alternative, which the Commission favoured, was to allow the recommendation of resale prices except where cases, after specific investigation, indicated otherwise. The Board of Trade should be empowered to prohibit the practice where it had been shown on examination that it may operate against the public interest. These recommendations were implemented in the Fair Trading Act, 1973 [ 2 2 ] , by making such price arrangements subject to the jurisdiction of the Restrictive Practices Court.

(h) Refusal To supply In July 1970, the Monopolies Commission reported [23] upon the refusal to supply

goods of any description to any person or class of person for use in their business, and upon entering into exclusive agreements where the supplier accepted restrictions which may require him to refuse to supply other persons.

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44 M . Feather, T. G. Booth and I. F. Jones

The referral to the Commission was made as a result of concern being expressed that the provisions of Section 2 (4) of the Resale Prices Act were being used to withhold supplies without justification. This section allowed a supplier to refuse to supply ‘on other grounds which, standing alone, wouM have led him to refuse those supplies’ [24] . Many of the cases of refusal to supply concerned pharmaceutical products, cosmetics and toilet preparations. Although the Restrictive Practices Court had not completed its hearing of the case for Resale Price Maintenance on medicines, RPM for cosmetics and toiletries had not been permitted since May 1968 [25].

Medicine manufacturers, in evidence given to the commission, stated that potent medi- cines should be distributed through qualified persons ‘to avoid mistakes’. They thought that there was a danger of legally controlled medicines being inadvertently sold through unauthor- ized channels if non-pharmacies were supplied. Manufacturers who distributed proprietary medicines through wholesalers and did not supply direct to retailers considered that this ensured that the wholesalers’ turnover was sufficient to enable them to maintain adequate stocks of ‘ethicals’ for NHS dispensing.

Many supermarkets and discount stores had found difficulty in obtaining supplies of cosmetics and toiletries. Manufacturers often distributed their products through franchized outlets only. In order to justify their policy of restricting supplies to retailers who were will- ing to stock a complete range of preparations, cosmetic houses claimed that the public would suffer if retailers were permitted to stock a few popular, fast-selling lines only. The system needed to be retained to enable sales personnel to be properly trained, to maintain quality in all price ranges and to promote exports [26].

The Commission thought that the manufacturers’ arguments were untenable ; their reasons for restricting supplies were too weak and were being given exaggerated importance to dis- courage legal proceedings. It was recommended that such practices should be brought within the jurisdiction of the Restrictive Practices Court. The Fair Trading Act, 1973 [ 2 2 ] imple- mented this recommendation.

(i) Professional services Pharmacy was included in a Report [27] issued in October 1970 on the effect on the

public interest of certain restrictive practices relating to the supply of professional services. Although no particular profession was singled out in these findings of the Monopolies Com- mission, certain practices were considered likely to operate contrary to the public interest.

The Commission felt that, in general, price competition in the provision of professional services was likely to stimulate greater efficiency and that the disadvantages to the public must be shown to be substantial if such competition were not to be allowed. Where it was necessary to protect the public against some exceptional risk, practice by the unqualified either was, or should be, prohibited; the risk involved was not necessarily also a reason for prohibiting or restricting price competition amongst the qualified. Although there was a possibility that price competition might lead to inferior services being offered to, and accepted by, the public ‘such a case wouM be likely to be exceptional’. The Commission sug- gested that for some services where currently charges were made according to a fixed scale of fees, payment by results might be preferable. Advertising of professional services might, in some circumstances, be in the public interest, although at present many professional bodies banned completely or severely restricted advertising by their members.

The Monopolies Commission recommended that the professions should examine their restrictive practices with a view to abolishing or changing them and suggested the establish-

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Restrictive practices in medicine distribution -II 45

ment by each profession of a body comprised of representatives of its own members and representatives appointed by the State, to adjudicate upon complaints and abuses. Particular professional services where restrictive practices were known to prevail should be subject to more detailed examination than had been possible in the inquiry being reported [27], and legislation should be enacted to give the Government power to make Orders controlling prac- tices whch were found to be contrary to the public interest.

The Council of the Pharmaceutical Society has held fast to its view that the terms ‘chem- ist’ and ‘pharmacy’ should not be used in any advertising [28]. It has been successful in persuading Independent Chemists Marketing Ltd [29] and the Coaperative Wholesale Society [30] not to use such descriptions in theh publicity material, and was recently reported to be investigating the possibility of taking action with regard to a ‘chemist gift- tokens’ scheme promoted by a pharmaceutical wholesaler [3 1, 321 . A particularly difficult problem has been posed in the case of advertising by the Boots Company Ltd of its proprie- tary medicines to the public through the medium of television [33]. Whilst advertising by manufacturers of products regarded as household remedies is an accepted procedure, restric- tions which the Pharmaceutical Society might seek to impose on this Company, having regard to the association of the name ‘Boots’ with dispensing of medicines in its chain of retail phar- macies, could result in the firm being placed at a disadvantage in comparison with other medicine manufacturers.

Four reports on the advertising of the services of particular professions have recently been published by the Monopolies and Mergers Commission and these could have an important bearing upon the ‘watchdog’ powers whch the Pharmaceutical Society has hitherto exercised over its own members with respect to such activities. The reports, which relate to the supply of the services of solicitors [34] , veterinarians, stockbrokers and accountants [35], are the outcome of references made to the Commission consequential upon the publication of the 1970 Report on restrictive practices in the supply of professional services generally [27]. In each of the four cases, the findings were broadly similar, that restrictions on advertising oper- ated against the public interest and that in future advertising should be allowed subject to certain safeguards; no claims should be made which implied superiority of one practice over another and the form of advertising should not be of a character likely to bring the profes- sion into disrepute [34, 351. The Government has accepted the reports and has called upon the Director General of Fair Trading to meet with the regulatory bodies for the professions concerned to discuss with them changes in their rules [35 ,36] . The Royal College of Veter- inary Surgeons has announced its decision to prepare a memorandum opposing the Commis- sion’s recommendations with regard to its own profession and its intention to transmit this to the Director General of Fair Trading before a meeting is held with him [36]. They apparently consider that the Commission did not comply with its terms of reference;only if it was found that the present restrictions operated or might operate against the public interest could the Commission go on to recommend changes and the College contends that no evid- ence or insufficient evidence to support such a finding was presented. Legal advice is to be sought by the College in what might prove to be a challenge to any attempt to force them to accept changes which they see as unjustified and which could be detrimental not only to the profession but to the public interest.

The outcome of the veterinarians’ proposed action and of the discussions between repre- sentatives of the professions whose advertising policies have been called into question could have important repercussions for pharmacy. It is of interest to note the Monopolies and Mergers Commission’s recommendation with regard to the content of advertising material,

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46 M . Feather, T. G. Booth and I. F. Jones

viz. that it should not imply superiority nor be likely to bring the profession into disrepute [34, 351. Difficulties are bound to arise when advertising is permitted but when simultan- eously the form of advertising is restricted. The Pharmaceutical Society’s Council in trying to ensure that advertisements do not tend to make invidious distinctions between phar- macies has encountered a problem that in drawing attention to such cases a profession may be in danger of bringing ridicule upon itself [37] with possible harm to its own public image.

6) Resale prices of medicines In 1970 the Restrictive Practices Court gave judgment in favour of the maintenance of

resale prices on both ‘ethical’ and proprietary medicines [38]. Very few other price agree- ments had been upheld by the Court, notable exceptions being books [39] and footwear [40]. Proprietary medicines succeeded on the grounds that ‘the number of establishments selling the goods would be substantially reduced’ if the practice were not allowed to con- tinue [38] . In the case of ethical products it was considered additionally that ‘the quality or variety of goods available would be substantially reduced’, unless prices were maintained. The President of the Court (Mr Justice Buckley) stated that the removal of RPM from pro- prietary medicines would result in more chemists going out of business more quickly, with a loss of outlets for not only proprietary products but also for prescribed medicines. (This view contrasts strongly with that of Lord Devlin in the Chemists’ Federation case-vide supra-and will be discussed in Part 111.) Whilst the most popular products would be readily available, there would be a substantial reduction in the number of establishments selling the less popular ones. The choice of proprietary medicines would be reduced, although the public may benefit from cheaper prices in the case of some preparations. The possibility of lower prices for ethicals was not considered important, since the public could obtain these through the NHS and prescription charges were the same regardless of cost price. Voluntary price regulation by manufacturers ensured that the Government paid a fair price for NHS medicines. It was essential that wholesalers were able to maintain a wide range of stock of ethicals even if some of these were slow moving products. Removal of RPM would lead to a reduction of stock and a contraction of the wholesalers’ delivery service. Pharmacists would be less able to meet prescription demands from stock or at short notice which would be detrimental to the Health Service and to members of the public who wished to purchase ethical medicines.

Despite the provisionsof the law as it now stands, recent reports have indicated that price- cutting on medicines is becoming more prevalent not only at the retail [41] but also at the wholesale [42,43] stage in the distributive chain.

The Proprietary Articles Trade Association received 243 reports of pricecutting at the retail level in 1975, an increase of 82 on the previous year [41]. Although the Association had been able to persuade more than two-thirds of those concerned to adjust their prices to the correct level, 78 cases were still outstanding at the end of 1975 and action on these had to be carried over into 1976. Where traders persisted in cutting prices even when the legal position was explained to them, and action had to be taken under the provisions of the Restrictive Trade Practices Act 1956 [44], it was the experience of the PATA that proceed- ings were often protracted and complicated [41]. The association considered that, should the trend towards an increasing incidence of price-cutting continue, all its members, parti- cularly those in general practice, would need to exercise constant vigilance to combat the threat.

It has also been alleged that some wholesalers have been illegally offering discounts on

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Restrictive practices in medicine distribution -11 47

medicines so as to induce pharmacists to trade with them [42]. For goods sold by retail, instances of pricecutting can be detected comparatively easily but greater difficulty is en- countered when ethical products are involved. The latter are rarely sold over the counter, but may be subject to price-cutting at the wholesale level. Since the judgment of the Restric- tive Practices Court in favour of Resale Price Maintenance on medicines [38] no offer may be made by a wholesaler which links discount to the level or volume of price-controlled goods purchased nor may discount be offered for payment by a certain date or by a parti- cular method in respect of accounts for such goods [42]. There is, however, a great tempta- tion for the wholesaler not to adhere strictly to the law or to find some means of circumvent- ing it in an attempt to increase his financial gain through greater turnover of ethicals.

The removal or relaxation of price restrictions on medicines of any kind could have serious repercussions for pharmacy. Pressure has been growing for the abolition of RPM on General Sale Lists proprietary products [45] ; these would be likely to be subjected to the widespread price-cutting which has cost retail pharmacists much of their toiletries and cosmetics trade [25, 261. If all wholesalers should offer discounts on ethicals none would benefit in the long run; margins would be reduced and they would be unable to maintain the standard of service which the Restrictive Practices Court judged essential for the National Health Service [42, 431. A complex situation would also arise with regard to the remunera- tion in respect of ethicals supplied to the NHS if there was no uniform, fixed price level; the Department of Health would be likely to apply an on-cost reduction which reflected the level of discounts available to pharmacists regardless of whether or not these were actually being received [42]. Abolition of RPM on ethicals would probably result in a reduction of NHS drug costs and therefore constitute a saving to the taxpayer. Such a situation might well prove sufficient incentive for the Government to move towards the total abolition of RPM on medicines at all levels in the distributive chain.

(k) Chlordiazepoxide and diazepam In April 1973, the Monopolies Commission reported [46] on the supply of chlordiaze-

poxide and diazepam. They found that a monopoly situation existed, Roche Products Limited having ‘remained up to the present responsible for about 99 per cent of the supply of each o f these two classes of goods (‘Librium’ and ‘Valium’), even though compulsory licences had been granted to DDSA Pharmaceuticals Limited and Berk Pharmaceuticals Limited’. It was considered that the fact that Roche supplied drugs to hospitals and the armed forces free of charge, or at low cost, was undesirable as it tended to keep competitors from that part of the market. The prices charged, in general, were regarded as being too high, the levels of profit being made unjustified, and operating against the public interest. The Commission recommended considerable reductions in the prices of Librium and Valium and that differentiation between customers, including hospitals and the armed forces, should cease. A Government Order, in the form of a Statutory Instrument, was introduced and approved by resolution of both Houses of Parliament [47]. It reduced the prices of Valium and Librium to 40 and 25%, respectively, of the 1970 level, that being the base line from which the Monopolies Commission inquiry had started.

Roche contested the validity of the Order and threatened to increase prices to those being charged before it was made. Later, however, the Company gave an undertaking not to do so pending legal settlement, but contended that any losses sustained from the lower prices being charged should be made good if their action succeeded [48]. The Department of Trade and Industry was refused an injunction restraining Roche from returning to the pre-

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48 M . Feather, T. G. Booth and I. F. Jones

Order prices [49], but, on Appeal, the High Court’s decision was reversed [50] . The Appeal Court also ruled that no undertaking from the Crown with respect to compensation need be given and this was upheld by the House of Lords [5 1 ] . Following this decision Government lawyers sought to have the whole action struck out but they failed [52] and the case con- tinued with Roche seeking declarations in the High Court that the Commission’s proceedings and its report were unfair and contrary to the rules of natural justice, and that the price cuts Order was therefore invalid [53]. The Company applied to the High Court for an order to be granted for the disclosure of documents which it claimed were required in the preparation of its case. Access to communications between Ministers and officials of the Department of Trade and Industry and the Department of Health and Social Services as well as documents used in the Monopolies Commission investigation was refused, but the Court granted leave to appeal against the decision [54]. Roche did appeal but whilst the case was still pending the Company and the Government agreed upon a settlement, having negotiated price arrange- ments which both sides regarded as satisfactory [52].

The basis of the agreement was that the Company would reenter the VPRS for all its ‘ethical’ products and be allowed to charge prices of ‘approximately half the 1970 level’ for Librium and Valium, as soon as the price regulating Order [47] could be revoked [55] . Hoffman La-Roche would repay the Government ‘approximately E3%m’ which took into account the €1 2m ‘excessive profits’ made between 1 January 1970 and 23 April 1973 (the date of the Order), offset by the sum of U.25m which was due to the Company ‘under normal V.P.R.S. guidelines’ as the prices set by the Order had become ‘unduly low’. The settlement was announced in the House of Commons on 12 November 1975 and the Company increased its prices of Valium and Librium to the maximum permitted under the agreement as from 17 December 1975 [56].

(1) Contraceptive sheaths The Monopolies Commission found [57] that at least 90% of these products supplied in

the UK were manufactured by LR Industries Ltd. Profit margins of over 200% could be made by distributors, although not all took full advantage of them. Total sales were over €4m per annum in the years 1972 and 1973 and the Company estimated that about 26% of their products were sold through pharmacies. The National Pharmaceutical Union said that many retail pharmacists charged less than the recommended prices, but the Commission found little evidence to support this claim. It was noted that only since 1970 had the Pharmaceu- tical Society permitted direct advertising ‘provided that it did not detract from the profes- sional appearance of the pharmacy’. Previously, only an indirect reference in the form of a ‘family planning requisites’ notice was allowed, and before 1953 all forms of advertising had been unacceptable [58]. A 40% reduction in selling prices was recommended by the Com- mission which considered the Company’s return on capital was excessive and even if their recommended price reduction had been in operation a return of at least 20% would have been made for 1972-73. LRC International Ltd (the parent company) have challenged the Commission’s findings but these have been accepted by the Minister for Prices and Con- sumer Protection [57].

MERGERS (a) Glaxo -Beecham-Boots

A Report [59] on the proposed mergers which were initiated in December 1971 between

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Restrictive practices in medicine distribution -11 49 Glaxo Group Ltd and either Beecham Group Ltd or The Boots Co. Ltd concluded that either would be likely to operate against the public interest and should not be permitted. One of the factors considered by the Monopolies Commission was the possible effect of a merger between Boots and Glaxo upon the Vestric wholesaling subsidiary of Glaxo. In corres- pondence with the Commission, the view had been expressed that Boots would acquire privi- leged information regarding the product turnover and distribution patterns of suppliers of Vestric. It was also alleged that by controlling Vestric, Boots would acquire a dominant posi- tion in wholesaling in addition to its manufacturing and retailing interests which would be detrimental to private retail pharmacy and to the public. The Commission did not, however, regard the retention of Vestric in the event of a Boots-Glaxo merger taking place as likely to operate contrary to the public interest. It considered the possible effects upon research and development to be most important in deciding whether Boots should be allowed to merge with either of the other groups of companies. Reteqtion of the competitive element between companies was regarded as likely to generate more new ideas for research projects; the forma- tion of a larger company would not necessarily produce more successful results. Beecham’s anticipated gains in the event of a merger were thought to be exaggerated and forecasts of increased sales from a larger company size were not regarded by the Commission as signifi- cant. With regard to the effect upon exports, whilst more efficient marketing might be advantageous to the balance of payments, this would be likely to be more than outweighed by the adverse effects of loss of productivity resulting from reduced competiton in the field of research and development.

In the event, the offers made to stockholders of Glaxo by Beecham and by Boots were both allowed to lapse although each stated that their interest in merging with Glaxo had not diminished.

(b) Boots-Fraser The proposed merger [60] of House of Fraser Ltd with The Boots Co. Ltd in 1973 was

referred to the Monopolies and Mergers Commission on the basis that the assets to be ac- quired by Boots exceeded .€5 million [22], Fraser’s assets being shown at E147.6m. It was foreseen that the merger might lead to pharmacies and chemists’ goods departments being introduced in Fraser stores [61]. During the investigation representations were made to the Commission that this would be contrary to the public interest. The Scottish Wholesale Drug- gists Association submitted that there would be an increasing tendency to a monopoly with regard to the supply of toiletries resulting in decreased viability of independent retail phar- macies and dispensing would suffer. The Scottish Pharmaceutical Federation contended that the status of pharmacy would be reduced, in the mind of the public, if additional dispensing outlets were established in stores dealing with goods which were not ‘known chemists’lines’. There was likely to be a deterioration in service to the public as a result of Boots obtaining a monopoly position. Non-Boots members of the Company Chemists’ Association supported the merger and presented an opposite viewpoint. They contended that competition would be stimulated since other pharmacy retailers endeavoured to match Boots’ performance in price and service and ’went out of their way to obtain Boots’ trained staff. It may appear some- what surprising that other company chemists should adopt this attitude of support for Boots’ proposals.

In putting his case for the merger, Sir Hugh Fraser stated that his organization was too large to continue to be managed as a family business. The merger would expedite reorganiza- tion since Fraser could take advantage of the existing managerial expertise and computer

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50 M . Feather, T. G . Booth and I. F. Jones

services of Boots rather than having to develop these itself. Benefits in the field of shop development were also claimed but these were discounted by the Commission, which did however concede the value to Fraser of Boots’ marketing techniques. It was concerned at the loss of competition which would result from combination of the two enterprises. Although Fraser’s goods might become cheaper overall, the variety sold was likely to be reduced. Boots’ customers would not be likely to benefit in the way of lower prices, since that organi- zation was unllkely to gain in efficiency if the merger took place.

The Commission was allowed five months in which to complete its report, but this period was subsequently extended to seven months. Before the investigation was completed Boots gave notice to the Panel on Take-overs and Mergers of its wish to withdraw its offer. It claimed that trading conditions had changed and the merger would be less advantageous than was previously anticipated. Fraser did not agree with Boots, but felt that the change in atti- tude of that company had prejudiced relations between them and it would now be difficult to achieve satisfactory results from the merger. Even though the Panel would not allow Boots to withdraw, the Commission noted in its report that the merger would be likely to lead to resentment within the Fraser organization and lack of enthusiasm on the part of Boots. Thus the merged group could be less efficient and this might operate against the public interest. It was recommended that the merger should not be permitted.

CONCLUSIONS

The cases described above are indicative of the increasing control of business activities which is being exercised under statutory authority. All branches of pharmacy have been affected by the outcome of the inquiries. Mergers have been prevented in both the manufacturing and distributive fields and profit margins have been closely scrutinised. Restrictive practices which might tend to give pharmacies an advantage over other retailers have been actively dis- couraged and in some instances declared illegal. In Part 111 of tlus series the influence which the legislation has had on the practice of pharmacy up to the present and the effect which it is likely to have in the future will be considered.

REFERENCES

The Monopolies and Restrictive Practices Commission 1952 Report on the supply of insulin. H.C.P. 296, H.M.S.O. Board of Trade, Monopolies and Restrictive Ractices (Inquiry and Control) Act (1948) Annual report for the period ending 31st December 1952, H.M.S.O. Chapman, H.E. (1961) The Pharmaceutical Journal, 187,269. Re Chemists’ Federation Agreement (No. 2) (1958) 3 All E.R. 448. Chemist and Druggist (1958) 170,492 and 493. Ibid. 170,623. Jones, I.F., (1974) General practice pharmacy in a national health service, PhD thesis, Sunderland Polytechnic. The Monopolies Commission (1966) Report on the supply and processing of colour film. H.C.P.l, H.M.S.O. The Monopolies Commission (1967) Report on the supply of infant milk foods, H.C.P. 319, H.M.S.O. Retail Business (1972) 176, 29. The Pharmaceuticd Journal (1975) 214, 206. Ibid. (1976) 216, 296. Ibid. (1975) 214,121.

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Restrictive practices in medicine distribution -II 5 1

Ibid. (1976) 216, 107. Ibid. (1976) 216, 192. The National Board for Prices and Incomes, (1968) Report No. 80. Cmnd. 3737. Booth, T.G., (1964) The Pharmaceutical Journal 192,250. Ibid. (1970) 204,73 and 74. National Board for Rices and Incomes (1969) Report No. 113. Cmnd. 4066, H.M.S.O. The Monopolies Commission (1969) Recommended Resale Prices. H.C.P. 100, H.M.S.O. Trade Descriptions Act (196.8) c. 29 (Section l l ) , H.M.S.O. Fair Trading Act (1973) c. 41, H.M.S.O. The Monopolies Commission (1970) Refusal to Supply. Cmnd. 4372, H.M.S.O. Feather, M., Booth, T.G., & Jones, I.F. (1977) Journal of Clinical Pharmacy, 1,216. Feather, M. & Booth, T.G. (1973) Chemist and Druggist, 199,886. Feather, M. & Booth, T.G. (1973) Ibid., 200, 19. The Monopolies Commission, (1970) A report on the general effect on the public interest of certain restrictive practices so far as they prevail in relation to the supply of professional services. Cmnd. 4463, H.M.S.O. The Pharmaceutical Journal (1975) 214,482,483 and 486. Ibid. (1975) 214, 182. Ibid. (1976) 217, 223. Ibid. (1976) 217,341 and 342. Ibid. (1976) 217, 348. Ibid. (1976) 216, 127. Ibid. (1976) 217, 111. Ibid. (1976) 217, 129 and 130. Ibid. (1976) 217,514. Ibid. (1976) 217, 165 and 166.

Re Net Book Agreement 1957 (1962). 3 All E.R. 751. Westwood, J. (1973) Chance’s principles of mercantile law, Cassel and Collier MacMillan, London. The Pharmaceutical Journal (1976) 217,16. Ibid. (1976) 216,100 and 101. Ibid. (1977) 218, 186. Restrictive Trade Practices Act (1956) 4 and 5 Eliz. 2, c. 68, H.M.S.O. The Pharmaceutical Journal (1971) 207,435, The Monopolies Commission, (1973) Chlordiazepoxide and diazepam. H.C.P. 197, H.M.S.O. The Pharmaceutical Journal (1973) 210,344-347. Ibid. (1973) 211,20. Ibid. (1973) 211,61. Ibid. (1974) 212,364. Ibid. (1974) 213,22. A.B.P.I. News (1976) 159,8. The Pharmaceutical Journal (1974) 212,160. Ibid. (1975) 214, 357. Ibid. (1975) 215,524. Ibid. (1975) 215,605. Ibid. (1975) 214,145 and 146. Ibid. (1970) 204,430. The Monopolies Commission (1972) Beecham Group Limited and Glaxo Group Limited, The Boots Company Limited and Glaxo Group Limited: A report on the proposed mergers. H.C.P. 341. H.M.S.O. The Monopolies Commission (1974) The Boots Company Limited and House of Fraser Limited: A Report on the Proposed Merger. H.C.P. 174, H.M.S.O. Retail Business (1973) 190, 1.

Ibid. (1970) 204,656-666.