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NORTHWESTERN's SUIT AGAINST FIVE MFRS. ALLEGING CONSPIRACY IN TERMINATING BUSINESS SET FOR FEBRUARY TRIAL; INTERIM ARRANGEMENT BEING DISCUSSED WITH MFRS.

Executive Summary

Northwestern Drug will get its day in court next February to press Sherman Act and Robinson-Patman Act claims that five mfrs. conspired to cut off business with the whslr. At a May 11 status conference, Seattle Federal Court Judge Rothstein set February 25 as the start of a two week trial in the case. Northwestern alleges that Lilly, SmithKline Beckman, Pfizer, American Home Products, and Sandoz violated both the Sherman Antitrust Act and the Robinson-Patman Act by refusing to supply the whslr. after it was purchased by the Pay'n Save drug chain in February. Judge Rothstein denied Northwestern's request for a temporary restraining order against the five mfrs. on April 3. While denying Northwestern's motion for a temporary restraining order, Rothstein recommended that the whslr. work out "an interim agreement" with the individual mrfs. while the litigation was pending relating to the whslr.'s hospital "chargeback" business. Reportedly, several of the mfrs. are separately discussing such an arrangement with the whslr., but no interim agreement has yet been signed. Under a chargeback program, the whslr. supplies drug products to a hospital at a prearranged price determined by the hospital and the mfr. The whslr., designated by the hospital from a list of regional whslrs. determined by the mfr., then passes on the cost difference between the mfr.'s hospital price and the whslr. price -- i.e., the "chargeback" -- to the mfr. for reimbursement. Hospital chargebacks can result in a 40%-50% reduction in the price ultimately paid for the products. Northwestern's Purchases From Five Mfrs. in 1984 Would Have Reached Approximately $33 Mil. In 1983, Northwestern's contract with the Velocity Hospital Group, which provides "virtually all" pharmaceuticals to 105 hospitals through Northwestern, accounted for approximately $30 mil. of the whslr.'s $130 mil. in sales. In a court affidavit, Velocity said that it would be put out of business by the mfrs.' termination of their business with Northwestern. Hospital chargebacks from Lilly and SmithKline "amount to approximately $100,000 per month and any denial of a chargeback will not be tolerated by hospital beneficiaries of the chargeback system who will immediately seek another supplier," Northwestern President Joseph Christy said in a separate affidavit. Christy further noted in the affidavit that in 1983 the whslr. purchased a combined total of over $26 mil. in products from the five mfrs. Christy said that the purchases included: $8.5 mil. in products from SmithKline; $8 mil. from Lilly; $4.6 mil. from Pfizer; $3.6 mil. from Ayerst; and $1.43 mil. from Sandoz. The whslr. predicted that purchases would have icnreased "by an average of 25%" in 1984 for a total of approximately $33 mil. "While goods supplied by defendants are otherwise available to Northwestern by means of purchase from another whslrs., the increased cost to obtain those goods would render continuation of Northwestern's business impossible," Christy maintained in the affidavit. "If purchased at the retail price established by the whslr., Northwestern's cost of goods would be icnreased by an average of more than 3% (5% each for the products by defendants Ayerst and Pfizer)." In addition, Christy suggested in the affidavit that the mfrs. that terminated Northwestern were not being consistent in applying the whsle.-only policies since several of the mfrs. sell to retail-affiliated co-ops or companies. Among the "retail-owned or affiliated co-ops or companies" cited by Christy were Minneapolis-based Northwestern Drug; Ellicot in Buffalo, NY; Drug Guild in Secaucus, NJ; H. L. Moore in New Britain, Conn., which is affiliated with the Mall Drug chain; Rochester Co-op in Rochester, NY; North Carolina Mutual in Raleigh, NC; Providence Whsle. Drug in Providence, RI; and Associated Pharmacies in Little Rock, Ark.

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