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ROSS AND MEAD JOHNSON SUED IN TEXAS INFANT FORMULA ANTITRUST CASE

Executive Summary

ROSS AND MEAD JOHNSON SUED IN TEXAS INFANT FORMULA ANTITRUST CASE filed by State Attorney General Dan Morales on Sept. 17 in Travis County (Austin) federal court. The suit maintains that infant formula makers Abbott (Ross Labs) and Bristol-Myers Squibb (Mead Johnson) were joined by the American Academy of Pediatricians (AAP) "in restraining, suppressing, and eliminating potential competition in the infant formula industry and in the promotion and advertising of infant formula." The attorney general has requested a jury trial. The suit asserts that AAP and the companies, along with their subsidiaries Ross and Mead Johnson, attempted to bar other competitors from gaining larger market shares of infant formula sales in Texas by opposing direct-to-consumer advertising and sustaining a detailing system that supplies physicians with free samples to give to parents of infants. Ross' (Similac) and Mead Johnson (Enfamil) together control 80% to 95% of the infant formula market, 50%-55% and 30%-40% respectively, the suit claims, while "Wyeth-Ayerst [SMA] is a distant third with a 5%-10% share." Carnation (Good Nature), Gerber and Nutricia-Loma Linda share the remaining less than 10% of the market. The suit cites AAP's policy adopted in 1981 opposing direct- to-consumer advertising of infant formula and favoring instead advertising in medical publications. The policy, supported by Ross and Mead Johnson, led the academy membership to boycott Carnation when it began direct-to-consumer ads for Good Nature in November 1988. The objective of AAP and the companies was "to prevent Carnation from using direct advertising to inject competition into the infant formula market, to deprive parents of potentially valuable and truthful information about infant formula, and to maintain the position of AAP and its members as the exclusive means of promoting and advertising infant formula," the suit maintains. As a result of the boycott, Carnation's market share fell from 3.7% to 2.6%, the complaint contends. The Ross and Mead Johnson detailing systems, sanctioned by AAP, have established "an artificial barrier to entry" into the market by other competitors, the suit alleges. That barrier has "led to artificially high and noncompetitive prices for infant formula." When medical providers give free samples of infant formula to parents leaving the hospital, the parents "often incorrectly perceive the provision of samples as a prescription or medical advice," the complaint maintains. "The prescription illusion stabilizes market shares by enabling Ross and Mead Johnson to limit effective competition between themselves while increasing the relative cost for any other competitor to compete effectively." The suit also alleges that other infant formula manufacturers' efforts at detailing have been thwarted by Ross and Mead Johnson. "Detailing efforts by Wyeth and Carnation have been stalled by threats directed at hospitals that considered using their infant formula." Ross and Mead Johnson wield "significant influence" with physicians and hospitals through contributions to AAP, all-expense paid trips, donations of medical equipment and research grants, the suit alleges. Otherwise, there is "no valid medical reason to favor one brand of federally regulated infant formula over another, and medical providers view the infant formula brands as interchangeable" for most infants, the suit asserts. This is the second antitrust suit to be brought by a state against Ross and Mead Johnson and their parent companies. It is the first to add AAP among the defendants. Florida filed a complaint against the two companies and Wyeth-Ayerst parent American Home Products in January alleging that the infant formula manufacturers rigged rebate bids for the states' Women, Infants and Children (WIC) supplemental nutrition program ("The Pink Sheet" Jan. 7, T&G-3). In addition, the Federal Trade Commission is conducting an inquiry into anticompetitive activity by the three companies. That inquiry has been ongoing for at least a year. FTC testified at a congressional hearing in June 1990 that it was looking into the matter ("The Pink Sheet" June 4, 1990, T&G-8). The companies and AAP have denied all the allegations. The Texas Attorney General further alleged that Ross and Mead Johnson rigged bids to the state's WIC program in such a way that each company would retain their respective market shares. For example, in April 1990, Mead Johnson won the Texas contract with a per-can rebate of $ 1.25, while Ross submitted a noncomplying bid of 50" per can. The companies "conspired to avoid competition between them by arranging that, in each state requesting a competitive bid, one or both would bid 75" or less," the suit states. "Thus they allocated state WIC bids between them and ensured that for any given state, one or the other would bid against other bidders, but they would never bid against each other." The state is requesting that Abbott and Ross be fined $ 1 mil. for each of seven violations of the Texas Free Enterprise and Antitrust Act. The state is also asking that the companies pay three times the damages "suffered by the Texas WIC Program in its purchases of infant formula at retail prices before mid-1988, when the state's competitively bid WIC contract became effective." Mead Johnson should also pay three-fold damages incurred by the WIC program under 1988 and 1990 contracts with the company, the suit states. The attorney general has requested that the companies be enjoined from: contributing more than $ 15,000 annually to the AAP; expending more than $ 10,000 to sponsor AAP events; giving, either directly or indirectly, to any physician a contribution of greater than $ 250 per year; and giving contributions for infant formula research without first reporting to the Texas Attorney General's Office. AAP should be enjoined "from interfering with the right of any entity to provide Texas citizens with nondeceptive information through the direct advertising of infant formula."

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