TEN PHARMACY CHAINS FILE PRIVATE ANTITRUST SUIT CHARGING SEVEN DRUG COMPANIES AND MEDCO WITH PRICE DISCRIMINATION; WAL-MART LOSES PREDATORY PRICING SUIT

Ten retail pharmacy chains led by Rite Aid and Revco filed a private antitrust suit Oct. 14 in Harrisburg, Penn. federal court charging seven pharmaceutical manufacturers with antitrust violations which include price discrimination and illegal price fixing. The suit, brought under the Clayton Act and alleging violations of the Sherman Antitrust Act and the Robinson-Patman Act, names Pfizer, SmithKline Beecham, Schering-Plough, Searle, Ciba-Geigy, American Home Products and Glaxo. Medco Containment Services and Medco subsidiaries National Pharmacies, Inc. and PAID Prescriptions are also named as defendants in the suit, under conspiracy and unfair competition charges. The pharmacy complaint cites manufacturers' pricing practices with regard to both mail-order companies and staff model HMOs. The plaintiffs also allege that Medco's "practice of inducing and/or receiving from manufacturers" prices that are below those paid by the plaintiff pharmacies is illegal. The six count complaint seeks orders permanently enjoining the named companies from "refusing to sell brand name, maintenance prescription drugs to plaintiffs (and/or to wholesale distributors that supply drugs to plaintiffs) at the same prices at which the manufacturer defendants sell the same drugs to mail order pharmacies"; and "refusing to sell brand name prescription drugs to plaintiffs (and/or to wholesale distributors that supply drugs to plaintiffs) at the same prices at which the manufacturer defendants make the same drugs available to staff model HMOs," and other preferred providers, such as hospitals and nursing homes. Most of the companies named in the suit have not yet commented on the charges beyond asserting that they have not broken the law. Glaxo stated that "we believe our pricing structures are fully within the law." Pfizer said "all our products are priced in conformity with all legal requirements and we have not engaged in any price fixing of any kind." Similarly, Schering-Plough said that "we are confident of the legality of our pricing practices," noting that "the charge that Schering-Plough has violated antitrust laws is both reckless and groundless, and we will vigorously defend ourselves in this lawsuit." Schering-Plough President and Chief Operating Officer Richard Kogan is a member of Rite Aid's board of directors. The lawsuit parallels a series of suits filed in August in San Francisco state and federal court by California pharmacists, which charged certain manufacturers and wholesalers with price discrimination ("The Pink Sheet" Aug. 16, T&G-3). While the named plaintiffs in those suits are from California, the plaintiffs in the Oct. 14 suit form a broad geographic base in support of retail pharmacies" allegations of widespread price discrimination. In addition to Rite Aid (based in Harrisburg) and Revco (based in Twinsburg, Ohio), the chain stores represented are Thrifty Corp. of Los Angeles; Perry Drug Stores of Pontiac, Michigan; K&B Inc. of New Orleans; Kerr Drug of Raleigh, N.C.; Snyder's Drug Stores and Thrifty Drug Stores of Minnesota; the Bartell Company of Seattle; and Taylor Drug Stores of Louisville. Ten independent pharmacies are also among the plaintiffs, filling out a group which operates about 10% of the retail drug stores nationwide. Medco and Schering-Plough are the only companies which are defendants in both the Pennsylvania and California suits. The other drug manufacturers named in California were Bristol-Myers Squibb, Forest Labs and Rhone-Poulenc Rorer. The Pennsylvania suit also differs from the earlier suits in that no wholesalers have been named as defendants, while Bergen Brunswig and McKesson were named in California. Two counts of the Oct. 14 complaint specifically address the prices manufacturers provide mail-order pharmacy. The plaintiffs charge that the drug companies have sold maintenance drugs to mail-order pharmacies "at substantial discounts (and/or with substantial rebates) from the price contemporaneously charged" to the plaintiffs for the same drugs, without being justified "by any differing methods or quantities in which such drugs are sold." The plaintiffs have incurred substantial damage because they have "lost sales to consumers and/or have had to cut their margins in response to the unfair competitive advantage enjoyed by the mail-order pharmacies"; mail-order firms "have been able to underbid plaintiffs in the competition for selection as the sole provider of maintenance drugs to third-party plans"; and where third-party plans offer participants a choice of providers, "mail- order pharmacies can and do dispense the drugs to plan participants at prices below those offered by plaintiffs." The discriminatory pricing also causes harm to the consuming public, the suit charges, because "the manufacturer defendants' exclusion of plaintiffs and other drugstores from the favorable prices enjoyed by mail-order pharmacies has insulated the mail- order pharmacies from the vigorous competition that they otherwise would face from plaintiffs and others." As a result, while mail- order pharmacies are "able to under-sell plaintiffs and others on brand name prescription drugs purchased from the manufacturer defendants," the retail prices charged by mail-order pharmacies to consumers "are higher than they would be if plaintiffs and other drugstores were able to compete on an equal footing with the mail- order pharmacies." The pharmacy group's suit also attacks the practice under which manufacturers provide a mail-order pharmacy with "further discounts or rebates" in exchange for the mail-order pharmacy's agreement to increase its percentage sales of the manufacturer's drug through a program like Medco's Prescriber's Choice. "Each of these defendants has provided, and continues to provide, special discounts and/or rebates" to mail-order pharmacy for this "conversion service," the complaint alleges. Furthermore, the suit charges, "despite demand," the manufacturers "have failed and refused, and continue to fail and refuse, to permit plaintiffs to provide conversion services in exchange for discounts or rebates and/or to provide conversion services upon the same terms as those offered to mail-order pharmacies." This failure and refusal has caused harm to the plaintiffs, the suit alleges, and "has also insulated the manufacturer defendants from vigorous competition among themselves." Because retail drugstores do not receive discounts for providing a conversion service, the plaintiffs argue, the drugstores "lack a full economic incentive to market any particular brand name drug in preference to its competitor." The plaintiffs are seeking treble damages and the cost of the suit in addition to an injunction under the counts relating to manufacturers" practices of mail-order pricing and HM0 "charge- back agreements," which the suit alleges constitutes an unreasonable restraint of trade. Lead counsel for the retail pharmacy group is Arlin Adams, a former judge in the Philadelphia federal circuit court, now of the Philadelphia law firm of Schnader, Harrison, Segal & Lewis. The antitrust litigation comes at a time when a legislative solution to price discrimination has been put forth by the Clinton Administration as a provision of its health care reform proposal. By pursuing litigation in addition to legislative action, retail pharmacy may be strengthening its hand by generating publicity in support of the Administration pricing provision and by accumulating a body of evidence to help make its case to Congress. In another instance of litigation over drugstore pricing practices, Wal-Mart's below-cost pricing of Rx and OTC pharmaceuticals and health and beauty aids was ruled "unfair" under the Arkansas Unfair Trade Practices Act in a ruling handed down by Chancery Judge David Reynolds on Oct. 11 in Conway, Ark. Reynolds ruled that the Conway Wal-Mart "advertised and sold pharmaceutical and health and beauty products below cost for the purpose of injuring competitiors and destroying competition." While the judge found that "there is no direct evidence that the purpose of Wal-Mart's pricing policy or Conway Wal-Mart's implementation of the policy is to injure competitors or to destroy competition," he ruled that "such purposes may be inferred" from Wal-Mart's "meet or beat" pricing policy, the effects of that policy, and "other circumstantial evidence." The complaint against Wal-Mart was filed in December 1991 by three independent pharmacies operating in Conway. The plaintiffs maintained that Wal-Mart "advertised, offered for sale and has sold at retail, certain items of merchandise at less than cost to the retailer as defined in and in violation of the Arkansas Unfair Trade Practices Act." The items listed in the complaint include the prescription antiulcer drug Tagamet, the prescription diuretic Dyazide, and five OTC and H&BA products: Efferdent, Listerine, Mylanta, Oil of Olay and Crest toothpaste. The plaintiffs were awarded treble damages totaling more than $289,000. Wal-Mart stated Oct. 12 that it "will immediately appeal" the decision, and claimed that the decision will lead to "higher prices -- not just for Wal-Mart customers -- but customers of every retail store, large and small, in Arkansas."