legitimately excluded from regulatory action because they are in paragraph 14 of Judge Bryant's order, which permits the manufacturer to have some extra time for testing, so there is a legitimate amount of research being done on a number of them. I think the kind of document, or the kind of message that you are talking about to the doctors would be unfair for some of those. They should be considered as in scientific limbo. On the other hand, there are some others that really are kind of egregious problems, and I think we have all been intrigued with seeing this advertising, which common sense tells you that if it is profitable for a manufacturer to advertise with that message in his ad, that somehow the right message is not getting across. So we have been disturbed by that, too, and would be delighted to have your suggestions.

I might say we are in the midst of drafting some new regulations for drug advertising, and anybody's ideas on how to change the regulations to correct that problem we would welcome.

Mr. HUTT. Mr. Gordon, the way, perhaps, to distinguish between the drugs that, I agree with Dr. Crout, should not be castigated because they are medically important and good sound research is ongoing at the moment, as opposed to those where there is no evidence and where the kind of message you would like to see would make very good sense, would be to do it when we raise a notice of opportunity for a hearing. We have not issued a notice of opportunity for a hearing to withdraw the new application for the drugs to which Dr. Crout referred. Thus, at that point, when the Government makes a decision that there is no evidence, and no reason not to remove that drug from the market, then perhaps you are correct. That message should be accurately and adequately conveyed throughout the country.

Mr. GORDON. Thank you very much, gentlemen. Thank you for coming.

The hearings are recessed until tomorrow morning at 10:00 o'clock, in the same room.

[Whereupon, at 11:50 a.m., the subcommittee recessed, to reconvene at 10 a.m., Friday, April 25, 1975.]

COMPETITIVE PROBLEMS IN THE DRUG INDUSTRY

(Present Status of Competition in the Pharmaceutical Industry)

FRIDAY, APRIL 25, 1975

U.S. SENATE,

SUBCOMMITTEE ON MONOPOLY OF THE
SELECT COMMITTEE ON SMALL BUSINESS,

Washington, D.C.

The subcommittee met, pursuant to notice, at 10:05 a.m., in room 318, Russell Senate Office Building, Senator Gaylord Nelson, (chairman of the full committee) presiding.

Present: Senator Nelson.

Also Present: Benjamin Gordon, staff economist, and Kay Klatt, research assistant.

The CHAIRMAN. Our first witness this morning is Dr. Lyndon Lee, Jr., Assistant Chief Medical Director for Professional Services, Department of Medicine and Surgery of the Veterans' Administration. The committee is pleased to have you here today, Dr. Lee. Your statement will be printed in full in the record, and you may present it however you desire.1

If you would, please identify your associates so that the reporter will have the record correct.

STATEMENT OF LYNDON E. LEE, JR., M.D., ASSISTANT CHIEF MEDICAL DIRECTOR FOR PROFESSIONAL SERVICES, DEPARTMENT OF MEDICINE AND SURGERY, VETERANS' ADMINISTRATION, ACCOMPANIED BY ROLAND F. HARDING, DIRECTOR, PHARMACY SERVICE; DONALD P. WHITWORTH, DIRECTOR, SUPPLY SERVICE; JOHN T. MANNING, ASSISTANT GENERAL COUNSEL; EUGENE M. CAFFEY, JR., M.D., DEPUTY FOR CLINICAL SUPPORT SERVICES; RICHARD PARKER, M.D., CHIEF OF INFECTIOUS DISEASE; ROBERT G. ROSE, MANAGER, VA MARKETING CENTER; EARL BERKSHIRE, CHIEF, MARKETING DIVISION FOR DRUGS AND CHEMICALS, VA MARKETING CENTER; AND JAMES FRANCESE, CHIEF PHARMACIST, VA MARKETING CENTER Dr. LEE. Thank you, Mr. Chairman. We welcome the opportunity to appear before you here today. I would like to identify the people. On my immediate right is Mr. Donald Whitworth, who is Director 1 See prepared statement, page 11881.

(11749)

of the Department of Medicine and Surgery Supply Service in the Veterans' Administration, to my left, Mr. Roland Harding who is Director of our Pharmacy Service; to his left, Mr. John Manning, who is our Assistant General Counsel. We also have available, if you wish, for specific areas, Dr. Eugene Caffey, who is Deputy for Clinical Support Services in my program. He is a psychiatrist and can give you what you wish on the problems of the various drugs in psychiatry. Dr. Richard Parker from our VA hospital is Chief of Infectious Diseases there; and Robert Rose is Manager of our VA Marketing Center, which you are well aware is in Hines, Ill. He has with him Earl Berkshire, the Chief of the Marketing Division for Drugs and Chemicals of the Marketing Center; and also James Francese, who is their Chief Pharmacist.

We feel they can touch various specific areas if you wish to pursue them.

Now, in our pleasure presenting to the committee, we went to talk to you about the actions taken by the VA in four different areas. The first are those taken in response to recommendations by the General Accounting Office in its December 6, 1973 report. The second is by VA on recommendations from the Office of Management and Budget to develop a single system for procurement and management of pharmaceuticals. Our third area is progress made by VA to promote competition, reduce the cost of drugs, and eliminate any duplication of procurement effort. The fourth approach is to other matters of concern to the subcommittee which involve VA in our drug purchase and prescsription programs.

We at the VA have expended $107,338,218 for drugs, and from here on I will round out the dollars simply for convenience. That was in fiscal year 1974. Of that sum, 44 percent was purchased for stock in our wholesale distribution system; 51 percent from the Federal supply schedule and local purchases; and 5 percent was for the fee basis treatment of our patients. Of that 44 percent listed above, we expended for our wholesale distribution system, $45,575,000. This was issued with $4,375,000 of this sum being purchased by other Government agencies from VA as the group who acquired them. Issues to these other agencies represent an increase of some 18 percent over fiscal year 1973. After deduction of other Government agency purchases and the fee basis reimbursements, the total cost of drugs used in patient care by us in the VA for fiscal year 1974 was $97 million.

VA awarded Federal supply schedule contracts which were used by the VA, our agency, in the amount of $40,722,000, and by other agencies in the amount of $49,250,000. That is a total then of $89,900,000, roughly $90 million.

As explained in our testimony last year, we introduced an innovation to open and contracting, which is known as Schedule C of the Federal Supply Schedule on contracts. We feel this is a great stride forward in our efforts to promote competition and reduce the cost of drugs purchased from open end contracts. We will discuss this in a little bit more detail later.

On small business procurement, for all commodities which it purchases, VA has a good record of purchasing. For fiscal year 1974, 51.7 percent of all of our purchases were made from small businesses.

In the area of centrally procured drugs, the percentage is only 28 percent, far less than that for the overall, but for a very good reason. These were the competitive awards for depot stocks.

VA centrally procures 684 drugs. Of this number, 31 percent are being procured competitively; 55 percent are available from only one source, either because of patent rights or because there is only one firm holding an approved New Drug Application; 14 percent are currently under development for competitive purchasing.

At this point, I would like to note that within the 55 percent which are available from only one source, 14 percent are unit-dose items. The CHAIRMAN. May I ask a question? When you say 51 percent of all purchases were from small business, do you mean total dollar value?

Mr. WHITWORTH. Senator, that is 28 percent of all of our competitive drug purchases for depot stock only, sir.

The CHAIRMAN. That is what is confusing to me. You say 51 percent of all purchases. I would interpret that to mean all purchases that the VA makes of all drugs, total value.

Mr. WHITWORTH. That is all items, that is everything that the VA buys.

Dr. LEE. This is all-inclusive, Mr. Chairman. It is all purchases. Drugs are in this, and they are only 28 percent. But overall, our purchases in the VA run 52 percent from small business.

The CHAIRMAN. What definition are you using for small business? Mr. WHITWORTH. The reporting definition of all agencies used, if it is purchased from a distributor or a wholesaler who happens to be a small business, then it is reported as a small business purchase, sir. The CHAIRMAN. What did you say? From a wholesaler or a distributor?

Mr. WHITWORTH. The firm from whom it is purchased is the determining factor. If it is purchased from a corner drugstore, even though the item may have been manufactured by a large business manufacturer, it is still a small business purchase for Government reporting purposes, sir.

The CHAIRMAN. What percentage of your purchases of all items do you buy directly from the manufacturer?

Mr. WHITWORTH. We buy competitively, 31 percent from the manufacturers.

The CHAIRMAN. Of all purchases of all goods?

Mr. WHITWORTH. Just drugs, sir, I am talking about. Now the 51.7 percent and not only the central procurement program-is the total percentage for our entire program. Some purchasing, as you well realize, is done in the field. We could not give you an exact percentage of what is purchased from manufacturers, because we have 170 purchasing offices, and we do not get our reports that way.

Mr. GORDON. May I interrupt for just 1 second? You stated that you spent $107 million for drugs. That is in the middle of page 1. Mr. WHITWORTH. Yes, sir.

Mr. GORDON. At the bottom page 2, you state that thet total dollar value of competitive awards amounted to over $13 million. Now $13 million is only 12 percent of the $107 million. So, the way I figure it, only 12 percent of your purchases are competitive purchases.