Petition — Eli Lilly & Co. v. Smithkline Corp.

Supreme Court brief1978

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et ity

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Supreme Court, U.S,

FILED

JUN 80 1978

eitpitniiieniaiitsneadiaibttai dataset

{_ MICHAEL RODAK, JR., CLERK

In THE

Supreme Court of the United States

OCTOBER TERM, 1977

ELI LILLY AND COMPANY,

¢7-1869

Petitioner,

SMITHKLINE CORPORATION,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE THIRD CIRCUIT

Epwarp N. SHERRY

Attorney for Petitioner

Eli Lilly and Company

140 Broadway

New York, New York 10005

Of Counsel:

JacK KauFMANN

J. Jay Raxow

Dewey, Ballantine, Bushby, Palmer & Wood

Joun G. Harkins, JR.

Pepper, Hamilton & Scheetz

INDEX

PAGE

eric kasccncccee 1

PS ea ae 2

A ae 2

Statutory Provision Involved ..................... 2

UIE GE te I ta Webware s oo ccc sc csc cceee. 3

Reasons for Granting the Writ ................... 12

I. The Lawful Boundaries of Business Conduct

by a Holder of a Legally Acquired Monopoly

- Is a Substantial Federal Question Requiring

Decision by This Court .................. 12

A. No Adequate Standard of Conduct Under

Section 2 of the Sherman Act Has Been

EE OE 12

B. The Revised CSP Is Not an Illegal Act

ESET ERPS 15

II. The Third Cireuit Adopted a New Stand-

ard in Conflict With the Standards Set by

This Court in Defining the Relevant Market

to Include Only Cephalosporins .......... 23

A. The Applicable Standards for Determin-

ing Relevant Market .................. 24

B. The Third Cirenit’s Error in Relying

Upon the Alleged Lack of Price Sensitiv-

BR 27

C. The Erroneous Equal Interchangeability

Standard Applied by the Courts Below 30

EE I 36

ii TABLE OF CONTENTS

Appendix A, Table I—Physician Selection of Anti-

Infectives by Diagnosis .........+-seeeeeeeees

Appendix A, Table II—Physician Selection of Anti-

Infectives by Pathogen ..........--sseeeeeeee

Appendix A, Table I1I—Physician Use of Anti-Infec-

tives Without a Culture Test ............--++--

Appendix B, Trend in Purchases of Selected Anti-

biota WAN onc cick ccc ck cesestescasautede

Appendix C, Opinion and Judgment of the Court of

Appeals ......ccccccccsescccccccsvesccsccce

Appendix D, Opinion and Orders of the District

Caiat kad bib ou wad cee eee eh Ranke nee

PAGE

Sikes shah Pes cha): A A ere a

TaBLE OF AUTHORITIES iii

A. Cases: PAGE

Berkey Photo, Inc. v. Eastman Kodak Company,

No. 73 Civ. 424 (S.D.N.Y., filed January 29,1973) 13

Brown Shoe Co. v. United States, 370 U.S. 294

OE 45 5 suena iw ENG Nes oo se Aiea Ras oo 23, 26

GAF Corp. v. Eastman Kodak Company, No. 73 Civ.

1893 (S.D.N.Y., filed April 30, 1973) .......... 13

IBM Peripheral EDP Devices Antitrust Litigation,

FOR, ee A RIED he 5600 bb 6 dnd Kes cenedes 14

In re Kellogg Company, F.T.C. Docket No. 8883 (filed

FE a sockin 4658 neds 00% och ama ases 14

Lorain Journal Co. v. United States, 342 U.S. 143

NE cl Hi Gas. ch iG paula deakabake Kanak adel wx 13

Northern Pacific Ry. v. United States, 356 U.S. 1

EE Ln de hac acetawanewariunenasesaiwse uss 14

Otter Tail Power Co. v. United States, 410 U.S. 366

EPA eer ror EN Eo oak: eer, Sere ee 13

SCM Corporation v. Xerox Corporation, No. 15807

(D. Conn., filed July 31, 1973) .......:........ 14

Standard Oil Co. of N.J. v. United States, 221 U.S. 1

SAME SRR we da wakad bards 07 kad dakee os x ons 12

Telex Corp. v. International Business Machines Corp.,

510 F.2d 894 (10th Cir.), cert. dismissed, 423 U.S.

I eee nad ia titon bi nakns. 6% Oe 13, 15, 21, 22

United States v. American Tel. & Tel. Co., No. 74-1698

(D.D.C., filed November 20, 1974) ............. 14

United States v. American Tobacco Co., 221 U.S. 106

PRD UD EGA a il @s 644 ned Ree USS eb ts bate ces 12

United States v. E.I. du Pont de Nemours & Co., 351

Jf St a: GaSe eS Sse eee ore eed oe See 23-27, 30, 31, 35

United States v. Everest & Jennings International,

No. 77-1648-R (C.D. Cal, filed May 6, 1977) ..... 14

iv TABLE OF AUTHORITIES

PAGE

United States v. Griffith, 334 U.S. 100 (1948) .....--. 13

United States v. Grinnell Corp., 384 US. vel "1

(19GB)... care ceccercccccnccceesccccosess , 15,

United States v. International Business Machines

Corp., 69 Civ. 200 (S.D.N.Y., filed January 17, -

WOGD) onc c ce cccccnccvccccccsccessscesccacsess

} 110

United States v. United Shoe Machinery Corp.,

F.Supp. 295 (D. Mass. 1953), aff'd per curtam,

347 US. 521 (1954) ... 2. e eee ee eee eee eee 15

U.S. Steel Corp. v. Fortner Enterprises, Inc., 429 US. a

GIO (1977) 20... cece cence eee e eee cesccecceeces

Walker Process Equipment, Inc. v. Food Machinery &

Chemical Corp., 382 U.S. 172 (1965) .....-++-- 20

B. Statutes: |

15 UB. B81 on cccvcccccccsccnccccsvcenscsssaes ibe

WS UGC. $B 2c. cccccceccncnsccssscsoseserssase passim

1 USC. $8 nc. cccccvccccccccccsccsuasenpeeenes *

1B U.S.C. $14 2... ccccccccccccececcccccesscosens passim

1 USC. $18. .....cccccccccccccscccccssccseseces 24

WW U.S.C. 1254(1) 2... eee cece eee eee cece eee eeeees 2

98 U.S.C. 1292(a)(1) ....- ee ee eee eee rete ee eeees 4

OB UBC. WRT ..wccccccccescccccssenatscesesesss 3

C. Miscellaneous:

Areeda & Turner, Predatory Pricing and Related

Practices under Section 2 of the Sherman Act,

88 Harv. L. Rev. 697 (1975) .......---++---++: 21

L. Sullivan, Antitrust (West 1977) ........---- 20

Note, Telex v. IBM: Monopoly Pricing under

Section 2 of the Sherman Act, 84 Yale L.J, 558

(1975)... ccccncscccccccesscasuesasnaeeeaeens 21

ODN! Wh a TL est od i Neb ANE Oh el a

In THE

Supreme Court of the United States

OCTOBER TERM, 1977

ELI LILLY AND COMPANY,

Petitioner,

SMITHKLINE CORPORATION,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE THIRD CIRCUIT

The petitioner Eli Lilly and Company (“Lilly”) respect-

fully prays that a writ of certiorari issue to review the

judgment and opinion entered on April 3, 1978, by the

United States Court of Appeals for the Third Circuit in

SmithKline Corporation v. Eli Lilly and Company, No.

77-1232.

Opinions Below

The opinion of the Court of Appeals is reported at 5

Trade Reg. Rep. (CCH) { 62,007, and appears in Appendix

C to this petition. The opinion of the District Court is re-

ported at 427 F. Supp. 1089 and appears in Appendix D to

this petition.

Jurisdiction

_ The judgment of the Court of Appeals for the Third Cir-

cuit was entered on April 3, 1978, and this petition for

certiorari was filed within 90 days of that date. This Court’s

jurisdiction is invoked under 28 U.S.C. § 1254(1).

Questions Presented

1(a) What conduct by the holder of a lawful monopoly,

not otherwise violative of the antitrust laws, consti-

tutes an unlawful act of monopolization in violation

of section 2 of the Sherman Act?

(b) Did the Court of Appeals for the Third Circuit err

in concluding that Lilly’s marketing plan known as

the Revised CSP, which admittedly did not violate

section 1 of the Sherman Act or section 3 of the

Clayton Act, was an unlawful act of monopolization

in violation of section 2 of the Sherman Act?

2(a) Are findings of price sensitivity and equal inter-

changeability among different products necessary to

include them in the same relevant market?

(b) Did the Court of Appeals for the Third Circuit err

in concluding that cephalosporin antibiotics alone,

and not cephalosporins and other antibiotics used

interchangeably with cephalosporins, form the rele-

vant product market in this action?

Statutory Provision Involved

Section 2 of the Sherman Act, 15 U.S.C. § 2 (1976):

“Every person who shall monopolize, or attempt to

monopolize, or combine or conspire with any other per-

son or persons, to monopolize any part of the trade or

——— me

ee a a ee

commerce among the several States, or with foreign

nations, shall be deemed guilty of a felony, and, on con-

viction thereof, shall be punished by fine not exceeding

one million dollars if a corporation, or, if any other

person, one hundred thousand dollars or by imprison-

ment not exceeding three years, or by both said punish-

ments, in the discretion of the court.”

Statement of the Case

A. Proceedings Below. On April 1, 1975, petitioner

Lilly instituted a marketing program, described more fully

below, known as the Revised Cephalosporin Savings Plan

(“Revised CSP”), for its cephalosporin antibiotics. (FF

90 at 60a-6la.)* Two weeks later, respondent SmithKline

Corporation (“SmithKline’’) commenced this action in the

United States District Court for the Eastern District of

Pennsylvania attacking the legality of the Revised CSP. In

its Complaint, SmithKline alleged that the Revised CSP

constituted:

(i) a tying arrangement in violation of sections 1

= 3 of the Sherman Act and section 3 of the Clayton

ct;

(ii) an act of monopolization in violation of section

2 of the Sherman Act; and

(iii) an abuse and misuse of Lilly’s lawfully obtained

patents in violation of sections 1, 2 and 3 of the Sher-

man Act.

The jurisdiction of the District Court was invoked under

28 U.S.C. § 1337.

_ *“FF” refers to the District Court’s Findings of Fact;

citations identified by the letter “x” refer to the pl io this

Petition, Portions of the record other than those appearing in the

Appendix to this petition are identified by references to the Joint

oe ( Cag Mage in mys! mtg of Appeals, which will be

ourt as part of t d

pg ays e ah p e record below, or by references

SmithKline requested that the District Court prelim-

inarily and permanently enjoin Lilly from selling or offer-

ing to sell its cephalosporin antibiotics to any hospital

pursuant to any plan under which a hospital received a

quantity purchase rebate for Lilly cephalosporin antibiotics

on other than a product-by-product basis. SmithKline also

requested that the District Court award it three times an

unspecified amount of the profits which SmithKline claimed

it lost as a result of the Revised CSP. (The Complaint

is set forth in full at JA 8 JA 17.)

The District Court refused to grant SmithKline’s request

for a preliminary injunction. Pre-trial discovery was limited

to liability issues and a non-jury trial on liability con-

eluded on January 6, 1976. Final oral argument in the

matter was held on March 19, 1976. (30a-31a.)

On November 2, 1976, the District Court filed its opinion.

The Court concluded that the Revised CSP was neither a

tying arrangement nor an abuse or misuse of Lilly’s patents

on cephalosporin antibiotics. The Court, however, agreed

with SmithKline’s contentions that cephalosporins alone

form a relevant product market and that the Revised CSP

constituted an illegal act of monopolization of that narrow

market. In accordance with its opinion, the District Court

on December 28, 1976, issued an order (amended on Decem-

ber 29, 1976), which, among other things, permanently en-

joins Lilly from selling or offering to sell any of its cephalo-

sporin antibiotics to any hospital pursuant to any plan

under which a hospital would receive a quantity purchase

rebate for Lilly cephalosporin antibiotics on other than

a product-by-product basis. (The Order and Amended

Order are set forth in full at 116a-118a.)

A timely interlocutory appeal from the District Court’s

order pursuant to 28 U.S.C. § 1292(a)(1) was taken to the

United States Court of Appeals for the Third Circuit. In

an opinion and order dated April 3, 1978, the Court of Ap-

peals affirmed the judgment of the District Court in its en-

ee ee ny

tirety, on substantially the same grounds as those expressed

in the District Court’s opinion.

Lilly now-seeks review of the judgment below in this

Court.

B. The Parties. Plaintiff SmithKline, a Pennsylvania

corporation with its principal place of business in Phila-

delphia, and defendant Lilly, an Indiana corporation with

its principal place of business in Indianapolis, are major

manufacturers of human ethical pharmaceutical products,

including antibiotics, which they sell in interstate and for-

eign commerce. (FF 1-5, 26 at 36a-37a, 40a.)

C. Antibiotics. Antibiotics are one type of anti-infective

drug used by physicians in the treatment of infectious dis-

eases in humans. They include ampicillins, carbenicillins,

cephalosporins, chloramphenicol, erythromycins, gentamy-

cins, penicillins, tetracyclines, and nitrofurantoins. Other

anti-infectives, such as sulfa drugs, are non-antibiotics.*

Antibioties are available in parenteral (injectable, whether

intravenous or intramuscular) and oral forms. (FF 26-27 at

40a-41a; JA 1094, JA 795-JA 796.)

Physicians treating hospitalized patients determine which

antibioties should be used. The principal factors involved

in that determination are efficacy and safety. Cost is not a

significant factor in the choice of an anti-infective drug by

a prescribing physician. As the Third Circuit stated,

[p]rescribing physicians are not cost-conscious in their

choice of an antibiotic for a hospitalized patient, and so

do not opt for a less expensive over a more costly medica-

tion.” (18a-19a.)

* Antibioties are substances produced by microorganisms

are active ag: st other microorganisms. The satan tos pater

are not antibivtics, as they are chemicals not produced by living

organisms. (JA 1240. ) For convenience, however, the term anti-

biotics as used herein includes non-antibioties such as sulfa drugs.

D. The Introduction of Cephalosporin Antibiotics.®

For over forty years, from the advent of the antibiotic

pharm.ceutical industry, Lilly has been one of, if not the

leading, developer and marketer of such drugs. (JA 673-

JA 675.) Lilly continued this history by introducing the

first cephalosporin antibiotic, Keflin (cephalothin),** into

the United States market in 1964. Subsequently, it added

four additional cephalosporin antibiotics: Keflex (cepha-

lexin), Loridine {cephaloridine), Kafocin (cephaloglycin),

and Kefzol (cefazolin). As a result of its innovative re-

search and development, Lilly has United States patents on

all of its cephalosporin antibiotics except Kefzol (cefazolin).

(FF 52-55, 57, 61 at 50a-dla.)

In October, 1973, following the proven success of cephalo-

sporin antibiotics (JA 132), SmithKline introduced its first

cephalosporin, Ancef (the generic equivalent of Lilly’s

cefazolin product Kefzol). In doing so, SmithKline

deliberately determined to position Ancef in direct com-

petition with Keflin as well as Kefzol, among other drugs.

(FF 56 at 50a-5la; FF 73-75 at 54a-55a; JA 1020.)

Thereafter, in May, 1974, Bristol-Myers Co. introduced

Cefadyl (cephapirin), an injectable antibiotic. Subse-

quently, in August, 1974, E. R. Squibb & Sons introduced

Velosef (cephradine), which it markets in oral and inject-

able form. Then, in October, 1974, SmithKline began market-

ing Anspor, the generic equivalent of Squibb’s Velosef in

oral form. As a result, seven cephalosporin antibiotics

marketed under nine brand names are presently commer-

* Cephalosporins are

“ . | gemisynthetie antibacterial agents that are closely

related chemically to the penicillins and, like them contain a

beta lactam ring as part of the nucleus.” {[A.M.A. Drug

Evaluations 523 (2d Ed. 1973).] (FF 33 at 42a-43a.)

** Products are identified by their brand name first and then,

in parentheses, by their generic or chemical name.

sits Rand | bliin thas hen iss Wo Og linden Li fh

oo ey ee

cially available from four separate American manu-

facturers.* (FF 58-60 at 51a, FF 72 at 54a-5da. )

As indicated, some of the cephalosporins currently

marketed are generic** equivalents. The District Court

found, and no one has disputed, that all cephalosporins may

pe ae interchangeably with one another. (FF 35 at 43a-

Moreover, as shown below, the undisputed evidence in

this case shows that (1) no cephalosporin antibiotic is the

drug of choice*** for treatment of any given infection;

and (2) there is no infection which can be treated by a

cephalosporin antibiotic which in actual practice is not also

treated by a wide variety of other antibiotics. Rather, the

evidence shows that a wide variety of antibiotics have in

fact been used interchangeably with cephalosporins for

treatment of infectious diseases or infectious agents.

*The names of the cephalosporin antibiotics in

: : : current

in the United States are listed below. As shown below, Kefzol ai

a ee gp rye ya same generic drug cefazolin

rand Velosef are different brands of th ie

drug cephradine. (FF 72 at 54a.) rece ee

Injectable

Generic Name

cephalothin— (1964)

cephaloridine—( 1967)

eefazolin—( 1973)

Brand Name

Keflin (Lilly)

Loridine (Lilly)

Kefzol (Lilly) and Ancef

(SmithKline)

Cefadyl (Bristol)

Velosef (Squibb)

Keflex (Lilly)

Kafocin (Lilly)

Anspor (SmithKline) and

Velosef (Squibb)

** Generic equivalents are drugs th re identi i

structures. (FF 31 at 42a.) gs that have identical chemical

*** The term “drug of choice” identifies the preferred

pet ype. = ar emg ye various therapeutic corp, tery

nsiderations are en into ( 493-.

SI6JA 517, JA 1008) account. (JA 493-JA 494 JA

cephapirin—( 1974)

cephradine—( 1974)

cephalexin—(1972)

cephaloglycin— (1971)

cephradine—(1974)

E. Marketing Programs. In October, 1972, Lilly adopted

a marketing program known as the Cephalosporin Savings

Plan (“CSP”). At the time the CSP was adopted, no com-

petitor of Lilly marketed cephalosporin antibiotics and none

would do so for about a year. Lilly’s cephalosporins were

competing with other antibiotics and, as the Third Circuit

specifically found, the CSP was adopted in order to make

Lilly cephalosporin antibiotics more competitive on a price

basis with other antibiotics and to expand sales of cephalo-

sporins at the expense of other antibiotics. (lla; FF 79 at

56a-57a; JA 1232 at 37.)

The CSP was simply a form of quantity discount. Es-

sentially, it provided for a rebate to be paid to participating

not-for-profit hospitals in the form of certain Lilly mer-

chandise of the hospital’s choice at an established rate based

solely upon the total number of grams of Lilly cephalo-

sporins purchased by the hospital. (FF 80 at 57a.) The CSP

was not challenged by SmithKline in this case and is not in

issue here.

Competition from other antibiotics, including additional

cephalosporins manufactured by Bristol, Squibb, and Smith-

Kline, began to increase, and Lilly increased its efforts

to find ways to make its cephalosporin antibiotics more

competitive in the antibiotic market. (FF 79 at 56a-57a.)

Consequently, in the second half of 1974, Lilly organized a

“Cephalosporin Task Force” to consider possible revisions

of the original CSP. The Cephalosporin Task Force

recommended a Revised Cephalosporin Savings Plan (“Re-

vised CSP”) which Lilly adopted in April, 1975. (FF 90 at

60a-61a.)

The Revised CSP essentially involved the addition of

a package pricing component to the quantity discount com-

ponent of the original CSP. Thus, the Revised CSP, like

the original CSP, provided for a rebate (“base dividend”)

to be paid to participating not-for-profit hospitals in the

Te ee ered

form of certain Lilly merchandise of the hospital’s choice

at an established rate based upon the total number of

grams of Lilly cephalosporins purchased by the hospital.*

However, in addition the Revised CSP provided for an

additional 3% rebate (‘‘bonus dividend’’) to be paid upon

the hospital’s total cephalosporin purchases if the hos-

pital bought established minimum quantities of each of

any three of Lilly’s five cephalosporin antibiotics. (FF

90 at 60a-6la.) Those minimum quantities represented a

very small percentage of the hospital’s total cephalosporin

purchases. **

Thus if, for example, a hospital purchased a total of

15,000 grams of Lilly cephalosporin antibiotics in a given

quarter, it would be entitled to a base dividend of 2%. In

addition, if its purchases included at least 400 grams of

each of any three of Lilly’s five cephalosporin antibiotics,

it was entitled to a bonus dividend of 3%. (FF 91 at 61a.)

* The rates at which rebates were paid upon a given number

of grams of Lilly cephalosporins purchased were somewhat lower

than the rates at which rebates were paid for the purchase of

the same number of grams under the original CSP.

** The base dividend and bonus dividend schedul i

follows (FF 91 at 61a): ee. fe

Base Base Dividend Bonus Bonus Dividend

Dividend Qtr. Purchase Dividend Qtr. Purchase

Level (Total Grams) Level (Total Grams)

0% 0- 7,999 3% 150

1% ~— 8,000-10,999 3% 300

2% 11,000-16,999 3% 400

3% 17,000-22,999 3% 500

4% 23,000-29,999 3% 750

5% 30,000-38,999 3% 1,000

6% 39,000-47,999 3% 1,250

7% . 48,000-71,999 3% 1,500

8% 72,060-95,999 3% 1,750

9% 96,000-or more 3% 2,000

It is this bonus dividend of 3% which is the subject of this

action.*

As the District Court found (FF 95 at 62a-63a), es ye

Third Cireuit agreed (14a, n.3), the Revised CSP, a

adopted and implemented, did not contain:

(i) any provision requiring that any hospital =

chase any Lilly product in order to obtain any other

Lilly product; |

(ii) any provision requiring that any hospital re-

frain from purchasing any product from any source in

order to obtain any Lilly product; or

(iii) any provis'on which conditions the anagpe of

any rebate on the purchase of any Lilly product, other-

wise unavailable to the purchaser, upon an agreement

that a hospital shall refrain from purchasing any prod-

uct from any source.

Rather, all of Lilly’s cephalosporin antibioties er

separately available for purchase, at reasonable ae 7

any hospital in the United States, whether or oe ss

participated in the Revised CSP, and whether or ¥ 4.

purchased any other Lilly cephalosporin or any other illy

product. For example, both before and after the adoption

of the Revised CSP, hospitals purchased substantial

volumes of Lilly’s patented cephalosporin antibiotics Keflin

and Keflex without participating in either the CSP or the

Revised CSP. (Ex. D-1143.)

"a , ed

* SmithKline never contended in its pleadings or present

any pe arm that the original CSP, identical to the a

volume rebate aspect of the Revised CSP but a: ae

rebates, was an antitrust Romy “oye Re mae Hagen or _—

imilar marketing plans for its cephalospo i . Mo

pay District Genet specifically held that price ss

existed when the original CSP was in effect | (110a), = : _

its finding of monopolization to the period since April 1, ,

the date of the institution of the Revised CSP.” (31a.)

Lilly was not alone in instituting marketing programs in

order to make cephalosporin antibiotics more competitive

with other antibiotics. SmithKline, for example, adopted

several programs under which it, too, offered price dis-

counts or rebates of pharmaceutical products to hospitals

based on the quantity of SmithKline cephalosporins pur-

chased by a hospital. Under one of these programs, known

as the Price Insurance Plan (“PIP”), SmithKline initially

granted to hospitals a rebate equal to 5% of their Ancef

purchases if those purchases exceeded 500 grams of Ancef

per quarter, and also provided an additional 5% rebate for

each individual order of 500 vials or more of Ancef. After

SmithKline introduced Anspor and began marketing both

it and Ancef in direct competition with Lilly’s leading

cephalosporin antibiotics, Keflin, Keflex, and Kefzol, among

other antibiotics, the PIP was revised so that hospitals

were eligible for rebates in an amount equal to 5% of their

combined Ancef-Anspor purchases if those combined pur-

chases exceeded 500 grams per quarter. Moreover, the ad-

ditional 5% rebate for each individual order of 500 vials or

more of Ancef remained available. (FF 79 at 56a-57a.) In

April, 1975, just prior to the commencement of this law-

suit, SmithKline again modified its PIP so that hospitals

were no longer eligible for a 5% rebate based on a com-

bined Ancef-Anspor purchase of 500 grams or more.

Rather, although hospitals were still eligible for their

regular Ancef rebate, they were required to purchase 500

grams of Anspor within a quarter to qualify for a 5%

Anspor rebate. (FF 96 at 63a-6Aa. )

Following the introduction of the Revised CSP,

SmithKline’s sales of cephalosporins continued to increase.

Monthly sales of Ancef for every month in 1975 through

August, the most recent figures available af the time of

trial, exceeded sales in the corresponding months in 1974,

and sales of Anspor in the second quarter of 1975 almost

doubled those in the first quarter of 1975. Moreover, sales

of Ancef following the introduction of the Revised CSP

were made at substantially the same net prices as those

prior to its introduction. (JA 1250; SmithKline Response to

Lilly Interrogatory No. 79.)

Reasons for Granting the Writ

Il. The Lawful Boundaries of Business Conduct by a

Holder of a Legally Acquired Monopoly Is a Sub-

stantial Federal Question Requiring Decision by

This Court.

A. No Adequate Standard of Conduct Under Section 2

of the Sherman Act Has Been Established.

Since the Sherman Act was enacted in 1890, this Court

has of course had many occasions to determine the types of

eonduct which violate section 1 of that Act. Moreover, it

was early concluded that conduct which violates section 1 of

the Act would also violate section 2 of the Act if done by the

holder of a monopoly or in an attempt to monopolize a par-

ticular market. E.g., Standard Oil Co. of NJ. v. United

States, 221 U.S. 1 (1911); United States v. American To-

bacco Co., 221 US. 106 (1911).

Although this Court has frequently stated in general

terms that anticompetitive conduct by a monopolist will

violate section 2,* it has decided only a handful of cases

dealing with allegations that conduct not involving viola-

tions of section 1 was unlawful under section 2, and most of

those cases have dealt with instances where a monopoly was

* For example, perhaps the most frequently cited statement of

this Court declares that “the willful acquisition or maintenance

of [monopoly] power as distinguished from growth or development

as a consequence of a superior product, business acumen, or his-

torie accident” violates section 2. United States v. Grinnell Corp.,

384 U.S. 563, 570-71 (1966). However, Grinnell involved a classic

conspiracy in restraint of trade by four defendants which was

found to be a per se violation of section 1 as well as section 2.

cesta tw re Mall

‘neers

;

alleged to have been illegally attempted or attained. In only

three cases* has this Court considered any aspect of the

issue presented by this case: what acts by a holder of a le-

gally acquired monopoly, nut otherwise violative of sec-

tion 1 of the Sherman Act, constitute illegal monopolization

under section 2 of the Sherman Act. Each of those cases,

however, involved refusals to deal by a monopolist, and

provide no guidance in the present case, which does not in-

volve refusals to deal but rather Lilly’s marketing practices

under the Revised CSP.

Nor has any clear authority been established by the lower

federal courts to determine what course of conduct is avail-

able to the holder of a legal monopoly. Apart from cases

involving predatory pricing (usually defined to mean sales

below cost) no clear pattern of acceptable conduct emerges.

Indeed, only in Telex Corp. v. International Business Ma-

chines Corp., 510 F.2d 894 (10th Cir.), cert. dismissed,**

423 U.S. 802 (1975), was the issue squarely presented, and

in that case, in a holding directly contrary to the present

case, the Tenth Circuit held that a monopolist is not fore-

closed from engaging in non-predatory price competition.

The question of what scope of competitive conduct is

available to the holder of a lawful monopoly has assumed

even greater importance since in recent years a number

of significant private and public section 2 actions dealing

with that issue have been brought and are pending in the

lower courts.*** The increasing number of section 2 cases

* Otter Tail Power Co. v. United States, 410 U.S. 366 (1973):

Lorain Journal Co. v. United States, 342 U.S. 143 (1951); and

United States v. Griffith, 334 U.S. 100 (1948).

** Although a petition for certiorari was filed wi i

; hou, , th th

it was dismissed on stipulation of the parties. seb

*** E.g., Berkey Photo, Inc. v. Eastman Kodak C v

73 Civ. 424 (S.D.N.Y., filed January 29, 1973); GAF ia g

man Kodak Company, No. 73 Civ. 1893 (S.D.N.Y., filed April 30,

(footnote continued on following page)

underscores the need for this Court to establish what con-

duct the holder of a legally acquired monopoly may engage

in.

In the present case, Lilly’s monopoly (assuming

arguendo that the relevant market consists only of

cephalosporin antibiotics) was concededly legally acquired

and maintained prior to the introduction of the Revised

CSP.* The only new element contained in the Revised

CSP was a package pricing plan, similar to those re-

peatedly upheld by this Court in such cases as Northern

Pacific Ry. v. United States, 356 U.S. 1, 6 n. 4 (1958) and

U.S. Steel Corp. v. Fortner Enterprises, Inc., 429 US. 610

(1977) (‘‘Fortner II’’), which both the District Court and

the Third Circuit conceded did.not violate section 1 of the

Sherman Act or section 3 of the Clayton Act. No issue of

predatory or below-cost pricing was even raised. Neverthe-

less, the Third Circuit concluded, in a single paragraph,

without meaningful discussion and without citation to a

single authority, that Lilly’s Revised CSP violated section

2 of the Sherman Act. (22a.)

In the absence of any meaningful guidance from this

Court as to what conduct by the holder of a legally acquired

monopoly is permitted under section 2 of the Sherman

(footnote continued from preceding page)

: Peripheral EDP Devices Antitrust Litigation, No.

16) COPMDL 1976). SCM Corporation v. Xerox Corporation,

No. 15807 (D. Conn., filed July 31, 1973); United States v. Amert-

can Tel. & Tel. Co., No. 74-1698 (D.D.C., filed November 20, 1974) ;

United States v. Everest & Jennings International, No. 77-1648-R

(C.D. Cal, filed May 6, 1977); United States v. International

Business Machines Corp., No. 69 Civ. 200 (S.D.N.Y., filed January

17, 1969); In re Kellogg Company, F.T.C. Docket No. 8883 (filed

April 26, 1972).

* For example, the Third Circuit r= - “Although ory, Y

enjoyed the status of a legal monopolist when it was engage

the aeatir acc and sale of its original patented products, that

status changed when it instituted the Revised CSP.” (23a.)

}

;

Act, the decision of the Third Circuit, if allowed to stand,

will result in confusion and a lessening of competition by

prohibiting, or at least leaving open to question, virtually

any conduct by the holder of a lawful monopoly, even where,

as shown below, such conduct is otherwise legal and results

in price competition to the benefit of consumers.

B. The Revised CSP Is Not an Illegal Act of Monopo-

lization.

This Court has stated that the offense of monopoly under

section 2 of the Sherman Act requires not only the pos-

session of monopoly power in the relevant market but also

‘‘the willful acquisition or maintenance of that power as

distinguished from growth or development as a con-

sequence of a superior product, business acumen, or his-

toric accident.’’? United States v. Grinnell Corp., 384 U.S.

563, 570-71 (1966). In other words, the existence of the

power to control prices and exclude competition does not,

by itself, constitute unlawful monopolization. Rather,

where, as here, a monopoly has been legally obtained, there

must be proof that competitors were foreclosed from the

market by predatory or exclusionary acts other than

normal competitive practices. E.g., Telex Corp. v. Inter-

national Business Machines Corp., supra, 510 F.2d 894

(10th Cir.), cert. dismissed, 423 U.S. 802 (1975); United

States v. United Shoe Machinery Corp., 110 F. Supp. 295

(D. Mass. 1953), aff’d per curiam, 347 U.S. 521 (1954).

In finding that the Revised CSP constituted an ex-

clusionary act of monopolization, the Third Circuit did not

discuss the issue or cite any authority, apparently relying

on the analysis of the District Court. The District Court,

for its part, misconstrued the operation and effect of the

Revised CSP by ignoring its own findings as to the competi-

tion among cephalosporins, and misapplied the law with

regard to acts of monopolization.

As illustrated earlier, supra, pp. 8-9, the Revised CSP

was a modification of Lilly’s previous CSP* whose only

new feature was a package pricing plan. Under the Re-

vised CSP, in addition to receiving specified quantity dis-

counts when their combined total purchases of any or all

Lilly cephalosporins exceeded a specified amount of grams,

as with the original CSP, purchasers received an addi-

tional discount when they bought a “package”, consisting

of any three of Lilly’s five cephalosporins in excess of

certain minimum quantities.

The District Court found, and the Third Circuit agreed,

that the Revised CSP did not constitute a tying arrange-

ment or any other type of conduct violative of section 1

of the Sherman Act or section 3 of the Clayton Act be-

cause, as stated by the Third Circuit:

“The district court found, and it is not disputed,

that Lilly did not condition the availability of any of

its products on the purchase of any other of its prod-

ucts or on the refusal of purchasing hospitals to deal

with its competitors. Thus, Lilly did not ‘tie’ pur-

chases of Kefzol to purchases of Keflin or Keflex.”

(14a. )

The Third Circuit necessarily also found, as a corollary

to its finding that cephalosporins comprise a relevant prod-

uct market, that all cephalosporin drug products were

interchangeable. Moreover, the District Court found, and

neither SmithKline nor the Third Circuit disputed, that

SmithKline positioned Ancef directly against Keflin, and

indeed 80% of SmithKline’s sales of Ancef were at the

expense of Lilly’s Keflin, rather than Kefzol. (FF 73, 75,

77 at 54a-56a; FF 88 at 60a.) In addition, it is undisputed

that SmithKline’s Anspor competed directly with Lilly’s

Keflex.

*Both the District Court and the Third Circuit. of course,

recognized that the original CSP did not violate section 2. (See

22a-23a; 31a; 110a.)

;

‘

The significance of these findings is this: since hospitals

were concededly not required to accept the Lilly package,

all hospitals were free to purchase SmithKline’s Ancef

and/or Anspor in place of any three, or all five, Lilly

cephalosporins at prices less than Lilly’s even under the

Revised CSP. In other words, a hospital could purchase

its full range of cephalosporin requirements from Smith-

Kline cheaper than from Lilly. In light of this crucial

fact, the errors of the courts below become apparent.

1. The Operation and Effect of the Revised CSP. In

assessing the competitive impact of the Revised CSP on

SmithKline, the District Court, and hence the Third Cir-

cuit, relied entirely on a report prepared on behalf of

SmithKline by the Boston Consulting Group which was

based upon the assumption that, contrary to the court’s

own findings enumerated above, SmithKline’s Ancef com-

peted only against Lilly’s Kefzol, its generic equivalent,

and not against Keflin, and that SmithKline’s Anspor did

not compete against Lilly’s Keflex. As a result of this

erroneous assumption, the entire bonus rebate earned by

a hospital on all of its Lilly cephalosporins was attributed

to Kefzol to reduce its effective price, and that artificially

constructed low price was the price the Boston Consulting

Group and the District Court used to assess whether

SmithKline could compete with the Revised CSP. (See

FF 109 at 67a-68a; 100a-101a.)

Had the District Court adhered to its own findings that

Ancef competes with Keflin rather than just Kefzol (FF 73,

75, 77 at 54a-56a; FF 88 at 60a), and that cephalosporins

are interchangeable, it would have realized that there was

no justification for attributing all bonus rebates earned on

purchases of Lilly cephalosporins to Kefzol in analyzing

the effect of the Revised CSP on SmithKline. The bonus

rebate can only be used once in analyzing its impact. If the

entire bonus rebate of 3%, earned on all of a hospital’s pur-

chases of cephalosporins, including its purchases of Keflin,

is applied to a single cephalosporin, Kefzol, to lower its ef-

fective price, then no part of that rebate could be attributed

to Keflin, and Keflin would be increasingly subject to price

competition from and replacement by Ancef, which Smith-

Kline priced 7% below Keflin. (FF 74 at 55a.) Similarly,

Keflex would be subjected to price competition from and

replacement by Anspor.

In view of the competition between SmithKline’s and

Lilly’s cephalosporins, the bonus rebate must be allocated

on a product by product basis, with the result that the aver-

age effective price of each Lilly cephalosporin purchased by

a hospital under the Revised CSP will be lowered by 4%.

(JA 1042, JA 782.) On the other hand, SmithKline’s aver-

age rebate under its PIP plan was 714%. (JA 1248 at p. 16.)

It is obvious, therefore, that a hospital could purchase all of

its cephalosporin requirements from SmithKline at a lower

cost than if it purchased those requirements from Lilly.*

In light of its undisputed findings that cephalosporins are

interchangeable with ne another and that Ancef and An-

spor compete with Keflin and Keflex, the District Court’s

assumption that the entire bonus rebate under the Revised

CSP may be attributed to Kefzol, and its resulting conclu-

sion that SmithKline will suffer negative returns of

-10.2% of Ancef sales to average hospitals and -3.4% of

Ancef sales to large hospitals (FF 109 at 67a48a), ignore

the realities of the market and merely serve to illustrate the

general confusion and internal inconsistencies which char-

acterize the opinions of the District Court and the Third

Circuit.**

* Lilly was able to compete with SmithKline’s lower average

net prices in part because of its reputation with physicians (par-

ticularly surgeons) (FF 100 at 64a) and SmithKline’s inexperi-

ence in selling antibiotics (FF 62 at 51a; FF 68 at 53a) and in

selling to hospitals. (FF 71 at 53a.)

** For the same reasons, the District Court’s finding that “hos-

pital-consumers have been damaged by their inability to obtain

(footnote continued on following page)

10 ae nme endian ser naan tlalil

)

;

{

2. Lilly’s “monopoly power” over Keflin and Keflez.

Having failed to find a tie-in or any other conduct violative

of section 1 of the Sherman Act or section 3 of the Clayton

Act, both the Third Circuit and the District Court pro-

ceeded to base their findings of illegal monopolization on

the theory that Keflin and Keflex allegedly faced no

competition.

For example, the Third Circuit held that “the act of

willful acquisition and maintenance of monopoly power

was brought about by linking products on which Lilly

faced no competition—Keflin and Keflex—with a com-

petitive product, Kefzol.’’ (22a.)

Similarly, the District Court held that Lilly “used its

monopoly power in Keflin and Keflex to stifle competition

posed by a less favorably situated competitor (Smith-

Kline) in the cephalosporin marketplace.” (96a. )

However, the conclusion that Keflin and Keflex faced

no competition is clearly erroneous. Since both courts

found that all cephalosporins were interchangeable (since

they were found to be in the same relevant market), and

that 80% of Ancef sales were at the expense of Keflin

rather than Kefzol, it is utterly absurd, in the context of a

relevant market consisting of (at least) all cephalosporins,

to speak of “monopoly power” in a single product within

that relevant market.

Keflin and Keflex were patented, as the courts below

recognized. (10a, 22a-23a; FF 61 at 51a; 95a-96a, 111a.)

However, it does not follow that Lilly faced no competition

(footnote continued from preceding page)

lower Keflin prices which would have resulted from a one-on-one

price competition between Ancef and Keflin in the absence of the

Revised CSP” (FF 122 at 71a) is also clearly erroneous. As

shown above, nothing contained in the Revised CSP prevented

competition between Ancef and Keflin; the District Court specif-

ically found that such competition in fact existed (FF 88 at 60a) ;

and hospitals did obtain lower Keflin prices in the form of rebates

under the Revised CSP.

in those products. As one commentator has stated:

“A patent, although creating a legal monopoly of the

patented art, does not do away with the need to show

possession or intent to acquire that degree of market

power called monopoly. The existence of monopoly

power cannot be inferred merely from the possession

of one or more patents. The protected invention or

process may be very narrow. By excluding others from

it the patentee may attain very little market power, for

there may be numerous other products or processes not

covered by the patent which are cciumercially feasible

substitutes...” L. Sullivan, Antitrust 507 (West

1977) (emphasis added).

This Court reached the same conclusion in Walker

Process Equipment, Inc. v. Food Machinery & Chemical

Corp., 382 U.S. 172, 177-78 (1965). In that case, this Court

held that conduct alleged to constitute an act of monopoliza-

tion must be evaluated in the coucext of the relevant market

as defined for section 2 purposes, and the existence of a

patent does not prove monopoly power in that relevant

market, because there may be substitutes for that patented

product. Thus, one may speak of “monopoly power” in a

single product for section 2 purposes only if that product

forms its own relevant market, not where it is one of sev-

eral products in a relevant market.

In short, either cephalosporins are interchangeable or

they are not interchangeable. Both the Third Circuit and

the District Court found that they are interchangeable, and

the effect of such a finding is to render meaningless the find-

ing of an act of monopolization consisting of the use of

“monopoly power” in individual products within the

relevant market whether or not they are patented.

3. The price eompetition resulting from the Revised

CSP, Finally, even if, contrary to the District Court’s

own findings, Ancef did not compete with Keflin, and

nein, lial

)

Anspor did not compete with Keflex, the Revised CSP

would still not be an act of monopolization, but simply

a form of price competition.

Price competition is, of course, encouraged by the anti-

trust laws, and even a monopolist may lower his prices

to be competitive, at least so long as he receives a reason-

able rate of return on his sales. Telex Corp. v. Interna-

tional Business Machines Corp., supra, 510 F.2d 894 (10th

Cir.), cert. dismissed, 423 U.S. 802 (1975); see Areeda

& Turner, Predatory Pricing and Related Practices under

Section 2 of the Sherman Act, 88 Harv. L. Rev. 697 (1975) ;

Note, Telex v. IBM: Monopoly Pricing under Section 2

of the Sherman Act, 84 Yale L. J. 558 (1975).

In Telez, supra, the Tenth Cireuit confronted the un-

resolved issue of what pricing actions the holder of a law-

fully acquired monopoly may take under section 2 of the

Sherman Act. Telex Corporation alleged that IBM, by

selectively reducing its prices on products competing with

Telex, while increasing its prices on other products, en-

gaged in illegal acts of monopolization in violation of

section 2. The trial court characterized IBM’s acts as

predatory and ruled in favor of Telex. The Tenth Circuit

reversed.

The Tenth Circuit assumed, for purposes of discussing

the alleged acts of monopolization, that IBM possessed

monopoly power in the relevant market. The Court then

asked whether a monopolist can ‘‘reduce prices not below

a point where they will derive a reasonable profit,’’? 510

F.2d at 926, and answered the question affirmatively:

‘‘There must be some room to move for a defendant

who sees his market share acquired by research and

technical innovations being eroded by those who mar-

ket copies of its products. It would seem that tech-

nical attainments were not intended to be inhibited

or penalized by a construction of section 2 of the

Sherman Act to prohibit the adoption of legal and

ordinary marketing methods already used by others

in the market, or to prohibit price changes which are

within the ‘reasonable’ range, up or down.’’ 510 F.2d

at 927.

In the present ease, it is undisputed that, far from pric-

ing below its costs, Lilly was selling its cephalosporins

at an adequate profit. (FF 107-108 at 67a.) The Revised

CSP was a competitive pricing practice—package pricing—

which arose out of the realization that Lilly faced com-

petition not only from other antibiotics but from Smith-

Kline’s cephalosporins as well. The plan merely repre-

sented an effort to make each individual Lilly product

more competitive on a price basis. Indeed, even assuming,

as the District Court erroneously did, that the Lilly re-

bates on all of its cephalosporins should be attributed

entirely to Kefzol in assessing the impact of the Revised

CSP on SmithKline, the only effect would be to reduce

the net price on Kefzol, and SmithKline has never con-

tended that sales of Kefzol at such resulting net prices,

whether done directly or by means of rebates from what-

ever source,* would be too low to provide a reasonable

return to Lilly,** or are lower than those expressly per-

mitted in Telex.

In short, the Third Cirenit condemned the Revised CSP

as an act of monopolization despite the fact that the Re-

vised CSP was a form of normal price competition—

* Of course, to differentiate between rebates on the one hand

and direct price reductions on the other, as the District Court

attempted to do in discussing Telex (106a-110a), would be to

exait form over substance.

** Insofar as the District Court suggested (FF 107, 109 at 67a-

68a; 107a-109a) that Lilly may not lower its effective price on

Kefzol to a point where Lilly is still earning an adequate return,

but SmithKline, in order to meet that price, cannot earn an ade-

quate return because of its higher costs, the District Court’s find-

ings seek to protect competitors rather than competition and are

at variance with the purposes of the antitrust laws.

package pricing—which did not violate section 1 of the

Sherman Act or section 3 of the Clayton Act. In doing

so, it confused the concept of monopolization of a relevant

market with a monopoly over the art represented by a

patented product. This Court should grant the writ of

certiorari to review the judgment of the Third Circuit,

both because of the errors committed by the Third Circuit

and to establish the range of competitive conduct permitted

a monopolist with a lawfully acquired monopoly under

section 2 of the Sherman Act.

II. The Third Circuit Adopted a New Standard in

Conflict With the Standards Set by This Court in

Defining the Relevant Market to Include Only

Cephalosporins.

This Court has on a number of occasions enunciated the

standards to be applied in determining the appropriate

relevant market in cases brought under section 2 of the

Sherman Act. The leading case, of course, is United States

v. EJ. du Pont de Nemours & Co., 351 U.S. 377 (1956)

(“the Cellophane case”), which established a test of rea-

sonable interchangeability of use in determining relevant

market.

As shown below, in the present action the Third Circuit

committed plain error by adopting a new and different

standard in conflict with the standards of the Cellophane

ease. Among other things, it held that, contrary to the

specific holdings of both the Cellophane case and Brown

Shoe Co. v. United States, 370 U.S. 294 (1962), price sen-

sitivity is an essential element in determining relevant

market, despite the fact that it was undisputed that cost

is not a significant factor in selecting antibiotics, and de-

spite the fact that undisputed evidence showed substantial

actual interchangeability among all antibiotics.

If the Third Circuit’s decision that a demonstration of

price sensitivity is necessary to define relevant market is

allowed to stand, in direct conflict with the decisiors of

this Court, it will cause considerable uncertainty as to the

correct definition of relevant market in all cases brought

under section 2 of the Sherman Act or section 7 of the

Clayton Act. Thus, the question of the correct standard

to be applied in relevant market cases, particularly with

regard to the issue of price sensitivity, is an important

federal questicn which this Court should clarify.

As shown below, when the correct standard is applied

to the present action, the proper relevant market will nec-

essarily be found to consist of all antibiotics and not

cephalosporins alone.

A. The Applicable Standards for Determining Rele-

vant Market.

In United States v. E. I. du Pont de Nemours € Co.,

supra, this Court enunciated the now classic test for deter-

mining the relevant market in actions brought pursuant to

section 2 of the Sherman Act:

“Tn considering what is the relevant market for deter-

mining the control of price and competition, no more

definite rule can be declared than that commodities

reasonably interchangeable by consumers for the same

purposes make up that ‘part of the trade or com-

merce,’ monopolization of which may be illegal.” 351

U.S. at 395.

In the Cellophane case, the Court considered whether

sales of cellophane, manufactured by du Pont and others

under patented processes, constituted a relevant market

for purposes of determining whether a violation of section

2 of the Sherman Act had occurred. The District Court had

determined that such sales did not, in fact, form the rele-

vant product market and that du Pont, which produced

almost 75% of the cellophane sold in the United States,

had not violated section 2 of the Sherman Act. This

Court agreed and affirmed, holding that sales of “flexible

packaging” materials constituted the relevant product

market.

In reaching that conclusion, this Court expressly re-

jected a relevant product market test proposed by the Gov-

ernment to the effect that only “substantially fungible”

and ‘‘like priced” products should be included in the rele-

vant market. 351 U.S. at 380.* As the Court pointed out:

“. . . where there are market alternatives that buyers

may readily use for their purposes, illegal monopoly

does not exist merely because the product said to be

monopolized differs from others. If it were not so,

only physically identical products would be a part of

the market.” 351 U.S. at 394.

Rather, the Court emphasized:

“In determining the market under the Sherman Act,

it is the use or uses to which the commodity is put

that control.” 351 U.S. at 395-96.

The Court then found that although cellophane differed

in many ways, including price and possible end uses, from

other flexible packaging materials, and was superior to

some and inferior to others with regard to its qualities

and uses, nevertheless, it had to meet competition from

other flexible packaging materials in each of its uses, and

thus, did not alone comprise a relevant product market.

Numerous subsequent decisions reaffirm that the rea-

sonable interchangeability of use test set forth in the

Cellophane case is the proper standard for determining

relevant market for antitrust purposes. For example, in

Umited States v. Grinnell Corp., 384 U.S. 563 (1966), an

* As demonstrated below, the District Court in this action

applied a test that results in a market limited to substantially

fungible and like-priced products such as that rejected in the

Cellophane case.

action brought pursuant to §2 of the Sherman Act, this

Court, citing the Cellophane case approvingly, held

that various different types of central station property

protection services, including automatic fire alarm, water-

flow alarm and sprinkler supervision, and watchman’s re-

porting and manual fire alarm services formed the relevant

product market. In so holding, the Court noted:

“We see no barrier to combining in a single market

a number of different products or services where that

combination reflects commercial realities.” 384 U.S.

at 572.

Similarly, in Brown Shoe Co. v. United States, 370 U.S.

294 (1962), an action brought pursuant to §7 of the Clay-

ton Act, this Court held that men’s women’s and children’s

shoes each formed a relevant line of commerce for anti-

trust purposes. The Court noted, among other things,

that men’s, women’s and children’s shoes each have char-

acteristics peculiar to themselves rendering them “gen-

erally noncompetitive with the others” and that “each is,

of course, directed toward a distinct class of customers.”

370 U.S. at 326. The Court refused, however, to further

subdivide these markets on the basis of “ ‘price/quality’

. distinctions” on the ground that such subdivision

“would be unrealistic” and “would be equivalent to holding

that medium-priced shoes do not compete with low-priced

shoes.” 370 U.S. at 326. As the Court noted:

“ . . the boundaries of the relevant market must be.

drawn with sufficient breadth to include the competing

products of each of the merging companies and to rec-

ognize competition where, in fact, competition exists.”

370 U.S. at 326.

In sum, the reasonable interchangeability of use test set

forth in the Cellophane case is the test for determining

relevant market for antitrust purposes. Indeed, the Dis-

trict Court conceded this. (83a, JA 394-JA 395.) Never-

a ES eee) = eee

theless, in the present case, the courts below committed

two errors in defining the relevant market, each of which,

standing alone, is sufficient ground for reversal.

First, after finding that cost is an insignificant factor

in the selection of an antibiotic by a physician, the Third

Cireuit gave controlling weight to the alleged lack of price

sensitivity between cephalosporins and other antibiotics

in determining that cephalosporins alone comprise the

relevant product market.

Second, the courts below applied an erroneous test of

equal interchangeability which resulted in a market limited

to substantially fungible and like-priced products notwith-

standing the rejection of such a standard by this Court in

the Cellophane case.

B. The Third Circuit’s Error in Relying Upon the

Alleged Lack of Price Sensitivity.

SmithKline contended, and the District Court found,

that cost is an insignificant factor in the choice of an anti-

biotic by a physician. (FF 39 at 45a.) Notwithstanding

this finding, the Third Circuit placed substantial, if not

controlling emphasis on the District Court’s finding of a

lack of price sensitivity* between cephalosporins and other

antibiotics in concluding that cephalosporins alone com-

prise the relevant market.

Indeed, the Court of Appeals devoted a significant por-

tion of its opinion to a discussion concerning the lack of

price sensitivity. (18a-19a.) This was plain error be-

cause, obviously, significant price sensitivity between

products will not be found where cost is not a factor in

the choice between those products.

* Lilly does not here concede that the District Court’s finding

of a lack of price sensitivity was correct, since the evidence estab-

lished that there was indeed price sensitivity between cephalo-

sporins and other antibiotics. (JA 414-JA 417; JA 467-JA 470,

JA 477-JA 478, JA 795-JA 796, JA 847, JA 877.)

As previously noted, in the Cellophane case, supra, this

Court stated that interchangeability of use was the test

for determining the relevant market, and that in “deter-

mining the market under the Sherman Act, it is the use

or uses to which the commodity is put that control.” 351

U.S. at 396. That price sensitivity is merely one factor

which may be looked to in determining relevant market

was made clear in Cellophane, 351 U.S. at 400, and in

Brown Shoe Co. v. United States, supra, 370 U.S. at 325.

The Third Circuit’s error results from a misunderstand-

ing of this Court’s use of the term “cross-elasticity of de-

mand” in the Cellophane and Brown Shoe decisions. In

those cases, this Court used the term “cross-elasticity of de-

mand” to mean the same thing as interchangeability of use.

Thus, in Cellophane, this Court stated:

“An element for consideration as to cross-elasticity of

demand between products is the responsiveness of the

sales of one product to price changes of the other.’’ 351

USS. at 400.

Similarly, in Brown Shoe, the Court stated:

“The outer boundaries of a product market are de-

termined by the reasonable interchangeability of use or

the cross-elasticity of demand between the product it-

self and substitutes for it.” 370 U.S. at 325.

The Court then specified that “sensitivity to price changes”

was but one of seven “practical indicia” which might be

evaluated in making that determination. Id.

However, the term “cross-elasticity of demand” is some-

times used by economists in a narrower sense tu be

synonymous vot with reasonable interchangeability of use,

as used by this Court in the Cellophane and Brown Shoe

eases, but rather with price sensitivity. Thus, the Court of

Appeals in the present case read the term “cross-elasticity

of demand” in the narrower sense rather than in the sense

ee. ee

the term was used by this Court and stated:

“Elasticity of demand for a product has been defined.

as the degree by which the amount of a product pur-

chased will change in response to changes in its price.”

(18a.)

As a result of its reading of the term “cross-elasticity” to

be synonymous with price sensitivity rather than inter-

changeability of use, the Third Circuit held that unless price

sensitivity between different products is demonstrated those

products cannot be in the same relevant market. That hold-

ing, of course, is directly contrary to the holdings of this

Court specifying that price sensitivity is but one factor

which may be considered in determining interchangeability

of use and hence, the relevant market.

Moreover, that holding is even contrary to one of the

Third Circuit’s own findings. In its opinion, the Third

Circuit stated:

“The greater the positive cross-elasticity of demand be-

tween two products is, the closer substitutes they are.”

(18a.)

As the Third Circuit’s own finding recognizes, the ultimate

relevant market issue is substitutability, or interchange-

ability, and price sensitivity is but a means of dem-

onstrating that interchangeability.*

The present case presents an unfortunate example of

how reliance on price sensitivity can lead to an incorrect

and confusing result. It is absurd to give any significant

weight, as the Third Circuit did in this case, to a lack of

price sensitivity between products in determining whether

they may be included in the same relevant market, in

the face of a finding that cost is an insignificant factor

: * As shown below, where direct evidence of interchangeability

is available, as in this case, a finding of price sensitivity is unneces-

sary.

in the choice between those products in the marketplace.

Taken to its logical conclusion, the Third Cireuit’s hold-

ing as to price sensitivity in this case would require that

in any marketplace in which cost is not a significant fac-

tor, each product comprises its own relevant market.

Indeed, if price sensitivity were an essential factor, then

the finding here of a relevant market consisting of all

cephalosporins would still be incorrect because the record

is devoid of any meaningful evidence showing that any

one cephalosporin was responsive to price changes of any

other cephalosporin. In fact, both the District Court and

the Third Circuit found that cost is not a significant factor

in the selection of an antibiotic. (FF 39 at 45a; 18a-19a.)

Hence, if price sensitivity is a critical factor in determin-

ing relevant market, then the Third Circuit would have

had to conclude that each cephalosporin forms a separate

relevant market, which of course it could not do because

it is undisputed that, for example, Ancef competes with

Keflin, and Anspor with Keflex.

As shown in Point C below, the overwhelming evidence

in this case showed that cephalosporins, in actual practice,

are used interchangeably with other antibiotics. By ig-

noring that evidence and by giving controlling weight to

the alleged lack of price sensitivity, the Third Circuit

completely ignored the realities of the competition existing

in the antibiotic marketplace.

C. The Erroneous Equal Interchangeability Standard

Applied by the Courts Below.

The courts below applied an erroneous test of equal

interchangeability which resulted in a market limited to

substantially fungible and like-priced products, notwith-

standing the rejection of that standard by this Court in the

Cellophane case.

As shown above, in the Cellophane case, cellophane and

several other wrappings were included in the relevant mar-

Fe ee ne ee eee Saeed nt et er eerie

ket because in every one of its uses, cellophane had to

meet competition from some, but not all, of those other

wrappings. For example, as shown in this Court’s Ap-

pendix A to the Cellophane opinion, 351 U.S. at 405, 407-

10, as a fresh produce wrapping, cellophane was inter-

changeable primarily with papers and films but not foil

or glassine. As a snack wrapping cellophane was inter-

changeable primarily with glassine and papers but not foil

or films.

The facts of the present case are thus strikingly similar

to those of the Cellophane case. As shown below, the

undisputed documentary evidence in this case, contained

in the Hospital Disease and Therapeutic Index (“HDTI”),

shows that for every one of their uses, cephalosporins

compete with at least one and usually a number of other

antibiotics or families of antibiotics.

The HDTI is a nationwide study of the prescribing prac-

tices of hospital-based physicians which describes their

actual selection of antibiotics in over seven million uses

with hospitalized patients over a six month period.* Tables

I, If and III, annexed as Appendix A to this petition,

contain a distillation of the relevant data set forth in the

HDTI.

The HDTI shows that in actual practice, for virtually

every purpose for which hospital physicians use cephalo-

* The HDTI is not a study prepared for litigation. It is a

periodic report prepared for the pharmaceutical industry by an

independent market research organization. The HDTI introduced

into evidence in this case covered a six month period relevant to

or been period involved in this action and is set forth in full at

In addition, the discussion of the HDTI is equally applicable

to the NDTI—the National Disease and Therapeutic Index (set

forth at JA 1080 and described at JA 699-JA 711)—which re-

ports the actual practices of office based physicians treating hos-

pitalized patients and which confirms the HDTI by showing the

actual interchangeability of us. between cephalosporins and other

antibiotics for treating infections.

sporins they also use other antibiotics, and that for vir-

tually all purposes, cephalosporins are not even the prin-

cipal antibiotic used.

For exemple, as summarized in Table I of Appendix A

to this petition, there were over two million uses of anti-

biotices to treat respiratory diseases during the period

covered by the HDTI. Cephalosporins accounted for only

213,40 of those uses, while penicillins accounted for

1,223,000 uses and other antibiotics accounted for 730,000

uses.

Similarly, as shown in Table II, there were 613,000 uses

of antibiotics to treat infections caused by Escherichia

Coli, by far the most common pathogen to be treated with

antibiotics. Cephalosporins accounted for only 114,000 of

those uses, while penicillins accounted for 234,000 uses,

sulfa drugs accounted for 93,000 uses, and other antibio-

ties such as tetracyclines accounted for 127,000 uses.”

Neither SmithKline nor the courts below challenged the

accuracy or veracity of the HDTI and NDTI. Rather,

the District Court and the Third Circuit avoided the clear

showing of interchangeability in the HDTI and NDTI only

because they applied a standard of equal interchangeability,

notwithstanding the rejection of that standard by this

Court. Thus, the District Court stated:

“Generally, on an overall basis, the cephalosporins

are probably more effective for more conditions than

penicillin or other antibiotics. Thus, there is inter-

changeability for the treatment of some illnesses but

for other illnesses there is no equal interchange-

ability.” (Footnote omitted; emphasis added) (86a.)

*In addition to the HDTI and NDTI, the record is replete

with uncontroverted expert medical testimony, professional litera-

ture, independent market research publications, promotional litera-

ture from major pharmaceutical manufacturers and SmithKline’s

own internal marketing documents, all of which show that for

every one of their uses cephalosporins compete with other anti-

bioties.

a AL cD

Further examination of the District Court’s findings,

which were relied upon as dispositive by the Third Cir-

cuit, demonstrates beyond question that the District Court

was applying a standard of equal interchangeability.

For example, the District Court found (FF 36 at 44a-

45a), and the Third Circuit agreed (20a), that cephalos-

porins and penicillins are not interchangeable in treating

Klebsiella infections because penicillins are of limited

efficacy in combating Klebsiella, and erroneously concluded

that cephalosporins and penicillins are not includible in

the same relevant market. However, the District Court

erred in failing to consider the HDTI evidence showing

that for Klebsiella infections, cephalosporins and antibiotics

other than penicillins, such as Garamycin, are in fact used

interchangeably (e.g., JA 1094, p. 48; Table IT at 2a), and

that for types of infections other than Klebsiella, such as

Proteus Mirabilis and Staphylococus Aureus, cephalo-

sporins and penicillins are in fact used interchangeably.

(£.g., Table IT at 2a.)

Similarly, the Third Circuit approved the District Court’s

finding (FF 36 at 44a-45a) that cephalosporins are “active

against both staphylococci and gram negative bacilli,”

whereas no single pencillin can be relied on against both.

But as shown in the HDTI and summarized in Table II in

Appendix A to this petition (2a), cephalosporins represent

only 25% of hospital uses against all staphylococcus infec-

tions, and only 19% of uses against Escherichia Coli, a

Gram-negative pathogen which by itself accounts for 50%

of all antibiotic uses against identified pathogens. Again,

the HDTI shows conclusively that cephalosporins are in-

terchangeable and compete with other antibiotics in treat-

ing those indications.

The District Court also stated that “cephalosporins are

far less toxic than the aminoglycosides.” (FF 36 at 44a-

45a.) However, the HDTI shows that two aminoglycosides

alone, Garamycin and Kantrex, accounted for 824,000 uses

during the relevant period. (JA 1094, pp. 48, 49.) And, as

shown below, usages of Garamycin tripled in the period

1970 to 1974, with usage expanding at a faster rate than

with cephalosporins.

But of all the errors made by the District Court and em-

braced by the Third Circuit in their relentless efforts to dis-

tinguish cephalosporins from other antibiotics, the most

misleading was their limitation of price comparisons to a

comparison between all cephalosporins and one penicillin—

Penicillin G, which accounted for only 17 percent of total

penicillin uses in 1974 and only 8 percent of all antibiotic

uses in hospitals in the United States in the six months

ending in February, 1974. (HDTI, JA 1094, pp. 1, 54, 76,

121, 123, 136, 142.)

Specifically, the District Court found that “during the

period from 1966 through 1974, hospital purchases of

cephalosporins increased nearly 700 percent”, while “in the

same period hospital purchases of Penicillin G decreased

by nearly 60 percent’’. (FF 46 at 48a.) This is true. How-

ever, the very same chart (a copy of which is annexed as

Appendix B to this petition at 4a) which the District Court

relied upon for its finding also shows that ampicillin® uses

increased over 1,300 percent during the same period of time,

that uses of gentamycin (Garamycin) and carbenicillins**

each more than tripled in a shorter period of time, from

1970 to 1974, and that clindamycin (Cleocin) nearly doubled

in use in one year, 1973 to 1974. Even a glance at that

table shows that in focusing on Penicillin G the District

Court erred by selecting the one antibiotic shown whose

uses were substantially declining while ignoring all the

other antibiotics indisputably used interchangeably with

cephalosporins.

* Ampicillin is one of the penicillins. (E.g.. HDTI, JA 1094

at pp. 54-58.)

** Carbenicillins are also penicillins. (£.g., HDTI, JA 1094

at pp. 54, 117.)

In short, the District Court looked at each use of cephalo-

sporins, found that for each use, some other antibiotie was

not interchangeable and did not compete with cephalo-

sporins, and failed to consider that for the same use several

other antibiotics were in fact interchangeable and com-

peted with cephalosporins. In so doing, the District Court

applied a test of equal interchangeability of use, for only

by doing so was it able to avoid dealing with the undisputed

evidence of actual interchangeability established as a matter

of law by the HDTI and NDTI.

; The Third Circuit, in adopting the District Court’s find-

ings and conclusions, even though based on an erroneous

legal standard, chose not to address the questions raised by

the evidence of actual interchangeability of use represented

by the HDTI, preferring instead to dismiss the HDTI with

the following observation:

“Tt scarcely need be commented that [the HDTI] was

evidence presented at the trial, not a fact found by the

fact finder.” (20a; emphasis in original.)

Scarce indeed were the comments of the Third Cir-

cuit, and thus the District Court’s application of a legal

standard directly contrary to the standard enunciated by

this Court in Cellophane, and its clearly erroneous findings

of fact, were permitted to stand.

Thus, in defining the relevant market to include only

cephalosporins, the courts below misapplied the standards

set by this Court for determining relevant market by giving

controlling emphasis to the concept of price sensitivity and

by employing a standard of equal interchangeability not-

withstanding the decisions of this Court. This Court should

therefore grant the writ of certiorari to review the judg-

ment of the Third Cireuit in order to clarify and reaffirm

the standard for determining relevant market.

Conclusion

For the foregoing reasons, a writ of certiorari should

issue to review the judgment and opinion of the Third

Circuit.

Dated: June 30, 1978

Respectfully submitted,

Epwarp N. SHERRY

Attorney for Petitioner

Eli Lilly and Company

140 Broadway

New York, New York 10005

Of Counsel:

Jack KAUFMANN

J. Jay Rakow

Dewey, Ballantine, Bushby, Palmer & Wood

Joun G. Harkins, JR.

Pepper, Hamilton & Scheetz

APPENDIX

Appendix A.

TABLE I*

PuysiciaN SELECTION OF

ANTI-INFECTIVES BY DIAGNOSIS

Diagnosis Anti-Infective Selected (000)

Ceph- Ceph.

Other Strepto- Other alospo- % of

B&M* Pen? mycin Suljas Urin8 A/B+ rins Total Total

Genitourinary

DisorGars ooccsvcccess 465 729 8 309 143 7 289 1950 15%

Diseases of the — — —

Respiratory System... 730 1223 9 213-2075 15%

Digestive Disorders .... 241 172 7 _— _— 12 181 794 23%

Accidents and Poisoning 112 189 3 10 — os 157 475 33%

Diseases of the Skin

or Cellular Tissue .... 273 417 6 — — 17 123 836 15%

Mesglees. 200 sveervesns 77 — 4 8 — 15 81 185 44%

Circulatory Disorders ... 46 116 —_ 17 — 2 76 257 30%

Infective or Parasitic

EROUGRS: sccccurenseane 162 307 10 — _ _— 43 522 8%

1 Broad and Medium Spectrum Antibiotics, except for cephalosporins. In-

eludes, among others, tetracyclines, erythromycins, chloramphenicol, cleocin,

eleocin phosphate, kantrex, lincocin.

? Penicillins. Includes, among others, penicillin G, ampicillins and deriva-

tives, anti-staph penicillins, carbenicillin, geocillin, geopen.

’ Urinary Antibacterials.

* Other Antibiotics. Includes, among others, bacitracin, neomycin and gara-

mycin.

* This and the following two tables contain a distillation of certain data set

forth in the HDTI (JA 1094).

2a 3a

Appendix A. Appendix A.

TABLE II i TABLE III

PHYSICIAN SELECTION OF Puysician Use oF ANTI-INFECTIVES

ANTI-INFECTIVES BY PATHOGEN WitHout a CuLture Test* (000)

Pathogen Anti-Infective Seiected (000) Total . Used % of Uses

er Estimated Without Without

Ceph- Ceph. Uses Culture Test Culture Test

Other Strepto- Other alospo- % of

B&M* Pen.* mycin Sulfas Urin* A/B* rins Total Total NG ti 7478 4594 61%

Escherichia Coli ........ a a 93 42 3 114 613, «19% Other B&M** ....... 2070 1217 59%

Klebsiella-Unspecified ... 39 17 — — + — 47 107 44% Cephalosporins rea ems 1153 668 58%

No-Growth ............ ce 44 3 = 6 1 26 114 23%

Pr Soil cnn so ae 9 2344

Staphylococcus Aureus .. 17 66 — — — _ 22 105 21% Pen.** .... 3597 65%

Staphylococcus Aureus Streptomycins ...... 64 44 69%

Coagulase Positive .... 23 29 — _ — — 19 71 27%

Proteus Mirabilis ...... in 24 a 7 3 ee 17 51 33% eS ere 358 208 58%

Proteus Unspecified .... 16 20 == 4 2 — 14 58-24% a 149 54 36%

Staphylococcus Aureus

Coagulas Positive .... 15 = — — — 1 10 26 39% Other A/ ee teem nes 87 59 68%

Pseudomonas Aeruginosa 4 14 _ 1 2 1 7 59 12%

Escherichia Coli &

Klebsiella- Unspecified 18 + a - — _ 7 29 24%

* The term “culture test” refers to a procedure through which

infecting organisms are identified. (JA 1066 at pp. 118-19.)

** See definitions in Table I.

* See definitions in Table I.

pre

Appendix B,

Trend in Purchases of Selected Antibiotic Entities.*

Measured in Grams (000’s)

Ampicillins Injectable ....... NR 19,492.6 12,421.3 12,535.2 1,382.0

Penicillin G Injectable ....... NR_ 57,299,940 102,537,150 195,594,220 166,526,778

Tetracyclines Injectable ...... NR 348.5 306.9 608.7 623.0

Gentamicin Injectable ........ NR 806.1 687.3 226.1 —

Cephalosporins Injectable .... NR 32,844.1 30,324.6 23,460.1 4,511.5

Carbenicillins Injectable ...... NR 7,045.4 7,896.3 2,114.7 _—

Clindamycin Injectable ....... 614.8 2,016.0 1,201.6 — —

All data measured in thousands of grams with exception of Penicillin

G’s which are thousands of MU’s.

NR—Not Required.

* This table is Table III to Exhibit P-170 of the record.

Appendix C,

Opinion and Judgment of the Court of Appeals

(Filed April 3, 1978).

UNITED STATES COURT OF APPEALS

For THe Txurrp Circuit

No. 77-1232

SmithKline Corporation

Eli Lilly and Company,

Appellant

Appeal from the United States District Court

for the Eastern District of Pennsylvania

(D. C. Civil Action No. 75-1102)

Argued February 21, 1978

Before: AupisErT, VAN Dusen and Weis, Circuit Judges.

Pepper, Hamilton & Scheetz

2001 The Fidelity Building

Philadelphia, Pennsylvania 19109

Dewey, Ballantine, Bushby, Palmer & Wood

140 Broadway

New York, New York 10005

Appendix C.

Of Counsel:

John G. Harkins, Jr., Esq.

Edward N. Sherry, Esq.

Jack Kaufmann, Esq.

John F. Collins, Esq.

CouNSEL FOR APPELLANT

Frederic L. Ballard, Esq.

William S. Rawls, Esq.

Lewis A. Grafman, Esa.

Of Counsel:

Ballard, Spahr, Andrews & Ingersoll

30 South 17th Street

Philadelphia, Pennsylvania 19103

John L. Boyle, Esq.

Richard L. Sherman, Esq.

1530 Spring Garden Street

Philadelphia, Pennsylvania 19130

CouNSEL FOR APPELLEE

ALpIsERT, Circuit Judge.

The major question for decision is whether the district

court in a non-jury trial erred in defining the relevant

product market in a proceeding brought by SmithKline

Corporation against Eli Lilly and Company under § 2 of

the Sherman Act, which proseribes monopolies and at-

tempts to monopolize. The court determined that the

relevant product market is the nonprofit hospital market

for a class of antibiotic drugs known as cephalosporins

and that the relevant geographic market is the United

States. Having so defined the relevant market, the court

concluded that Lilly had illegally monopolized it. A per-

Appendix C.

manent injunction against Lilly’s illegal marketing prac-

tices was issued. Lilly has appealed, taking issue with

the court on its market formulation; it would expand the

relevant product market to include all anti-infective drugs

prescribed by physicians. We affirm.’

2 At the outset, SmithKline asserted claims for damages and

injunctive relief, alleging that Lilly’s marketing practices consti-

tuted: (a) a tying arrangement in violation of §§ 1 and 3 of the

Sherman Act, 15 U.S.C. §§ 1, 3, and §3 of the Clayton Act, 15

U.S.C. § 14; (b) monopolization in violation of § 2 of the Sherman

Act, 15 U.S.C. § 2; and (c) abuse and misuse of Lilly’s patents in

violation of §§ 1, 2 and 3 of the Sherman Act, 15 U.S.C. §§ 1, 2, 3.

Following a non-jury trial the district court, in a meticulous

and comprehensive treatment of the relevant facts and law by

Judge Higginbotham, determined that liability exists only on the

monopolization claim. 427 F. Supp. 1089 (E.D. Pa. 1976). Pursu-

ant to § 16 of the Clayton Act, 15 U.S.C. § 26, the district court

entered a permanent injunction against those marketing practices

of Lilly found to violate §2 of the Sherman Act. A separate

trial on the issue of damages has been stayed pending disposition

of this appeal.

15 U.S.C. § 1, as amended, provides:

Every contract, combination in the form of trust or other-

wise, or conspiracy, in restraint of trade or commerce among

the several States, or with foreign nations, is declared to be

illegal. Every person who shall make any contract or engage

in any combination or conspiracy declared by sections 1 to 7

of this title to be illegal shall be deemed guilty of a felony,

and, on conviction thereof, shall be punished by fine not ex-

eeeding one million dollars if a corporation, or, if any other

person, one hundred thousand dollars or by imprisonment not

exceeding three years, or by both said punishments, in the

discretion of the court.

15 U.S.C. § 2, as amended, provides:

Every person who shall monopolize, or attempt to monopo-

lize, or combine or conspire with any other person or persons,

to monopolize any part of the trade or commerce among the

several States, or with foreign nations, shall be deemed guilty

of a felony, and, on conviction thereof, shall be punished by

(footnote continued on following page)

Appendix C.

The parties to this lawsuit are major manufacturers of

human ethical pharmaceutical products which they sell in

interstate and foreign commerce. Both manufacture anti-

biotic or anti-infective drugs; these are substances pro-

duced by micro-organisms that are active against other

micro-organisms. Used by physicians to treat bacterial

infections, antibiotics include, e.g., ampicillins, carbeni-

(footnote continued from preceding page)

fine not exceeding one million dollars if a corporation, or, if

any other person, one hundred thousand dollars or by impris-

onment not exceeding three years, or by both said punish-

ments, in the discretion of the court.

15 U.S.C. § 3, as amended, provides:

Every contract, combination in form of trust or otherwise,

or conspiracy, in restraint of trade or commerce in any Terri-

tory of the United States or of the District of Columbia, or in

restraint of trade or commerce between any such Territory

and another, or between any such Territory or Territories and

any State or States or the District of Columbia, or with for-

eign nations, or between the District of Columbia and any

State or States or foreign nations, is declared illegal. Every

person who shall make any such contract or engage in any

such combination or conspiracy, shall be deemed guilty of a

felony, and, on conviction thereof, shall be punished by fine

not exceeding one million dollars if a corporation, or, if any

other person, one hundred thousand dollars or by imprison-

ment not exceeding three years, or by both said punishments,

in the discretion of the court.

15 U.S.C. § 14 provides:

It shall be unlawful for any person engaged in commerce,

in the course of such commerce, to lease or make a sale or

contract for sale of goods, wares, merchandise, machinery,

supplies, or other commodities, whether patented or un-

patented, for use, consumption, or resale within the United

States or any Territory thereof or the District of Columbia

or any insular possession or other place under the jurisdiction

(footnote continued on following page)

pom £8 cur en tenet

Appendix C.

cillins, gentamycins, penicillins, tetracyclines, and nitro-

furantoins. The companies also manufacture other

bacteria inhibiting drugs, such as sulfas, which are not

denominated antibiotics because they are composed of

chemicals not produced by living organisms. Antibiotics

are available in parenteral (administered by intravenous

or intramuscular injection) and oral forms.

In 1964 Lilly introduced the first cephalosporin antibio-

tic, Keflin (cephalothin), into the United States market.

It has subsequently introduced four additional cephalo-

sporin forms: Kefiex (cephalexin), Loridine (cephalori-

dine}, Kafocin (cephaloglycin), and Kefzol (cefazolin).

Lilly has United States patents on all its cephalosporin

antibiotics except cefazolin. It is Lilly’s marketing prac-

tices for cefazolin that bring this case before us.

(footnote continued from preceding page)

of the United States, or fix a price charged therefor, or dis-

count from, or rebate upon, such price, on the condition,

agreement, or understanding that the lessee or purchaser

thereof shall not use or deal in the goods, wares, merchandise,

machinery, supplies, or other commodities of a competitor or

competitors of the lessor or seller, where the effect of such

lease, sale, or contract for sale or such condition, agreement, or

understanding may be to substantially lessen competition or

tend to create a monopoly in any line of commerce.

15 U.S.C. § 26, as amended, provides:

Any person, firm, corporation, or association shall be en-

titled to sue for and have injunctive relief, in any court of

the United States having jurisdiction over the parties, against

threatened loss or damage by a violation of the antitrust laws,

including sections 13, 14, 18, and 19 of this title, when and

under the same conditions and principles as injunctive relief

against threatened conduct that will cause loss or damage is

granted by courts of equity, under the rules governing such

proceedings, and upon the execution of proper bond against

damages for an injunction improvidently granted and a show-

ing that the danger of irreparable loss or damage is immediate,

a preliminary injunction may issue... .

10a

Appendix C.

From 1964 until 1973, a period during which cephalo-

sporins gained wide acceptance in the medical field, Lilly

enjoyed a complete and legal monopoly by virtue of its

patents. Beginning in 1973, however, competition emerged

as other manufacturers began to market new varieties of

cephalosporin drugs. The first such competitor was

plaintiff-appellee SmithKline, who entered the competition

with cefazolin, which it marketed under the trade name

Ancef. SmithKline’s Ancef is identical to the cefazolin

introduced shortly thereafter by Lilly under the trade

name Kefzol. SmithKline and Lilly, the only producers

of cefazolin in the United States, hold non-exclusive United

States licenses granted by the Japanese developer of the

formula.

The following chart lists the various cephalosporins now

on the market:

CEPHALOSPORINS

INJECTABLE

Brand Name

Keflin (Lilly)

Loridine (Lilly)

Kefzol (Lilly) (generic

Ancef (SmithKline) equivalents)

Cefadyl (Bristol)

Velosef (Squibb)

OraL

Keflex (Lilly)

Kafoein (Lilly)

Anspor (SmithKline) (generic

Velosef (Squibb) equivalents )

Generic Name

Cephalothin (1964)

Cephaloridine (1967)

Cefazolin (1973)

Cephapirin (1974)

Cephradine (1974)

Cephalexin (1972)?

Cephaloglycin (1971)

Cephradine (1974)

? Although not affecting the disposition of this case, the record

of the district court contains an inconsistency and so it is unclear

whether Keflex and Kafocin were first marketed, respectively, in

1972 and 1971, or 1971 and 1970.

Ce and ere ee a Ok es bee

lla

Appendix C.

SmithKline’s entry into the cephalosporin market was

preceded by a five-year research and market development

program during which more than $20,000,000 was ex-

pended. Some 500 sales representatives visited physicians

to explain Ancef’s characteristics and effectivness as an

antibiotic, particularly its superiority over Keflin for in-

tramuscular, as opposed to intravenous, injection. Both

companies introduced price-related marketing plans, Lilly

to combat competition, and SmithKline to break into the

cephalosporin market.

Prior to encountering competition, Lilly had adopted a

marketing program known as the Cephalosporin Savings

Plan (CSP), designed to make its cephalosporins more

competitive with other antibiotics and to expand its sales.

The CSP provided that a rebate in the form of Lilly mer-

chandise would be paid to hospitals based on the total

amount of Lilly cephalosporin purchased. As competition

increased, Lilly instituted a Revised CSP effective in April

1975. The monopolistic effects of this revised plan con-

stitute the gravamen of the present dispute. The Revised

CSP provides for a rebate in much the same form, but at

lower rates than the original CSP. In addition, however,

the Revised CSP provides for an additional three percent

(3%) bonus rebate, based on the purchases of established

minimum quantities of any three of Lilly’s five cephalo-

sporins.

At the same time, SmithKline had a rebate program of

its own, the Price Insurance Plan (PIP), allowing a five

percent (5%) rebate, paid in the form of SmithKline mer-

chandise, on hospital purchases of Ancef; additional re-

bates were available for certain volume purchases of Ancef

and Anspor, SmithKline’s other cephalosporin.

12a

Appendix C.

The comparative market positions of the cephalosporins

are illustrated by the district court findings:

Total Cephalosporins** ......

BIS ca vacivanasasoneansess

Keflin (9/64) ........66-

ee GATED ciccs carves

Kefzol (11/73) ........:

Keflin Neutral (5/75) ....

Loridine (3/68) ........-

Kafocin (7/70) ......+6-

Cephaloridine (9/68) ....

Bristol

Cefadyl (5/74) ......+:-

SmithKline

Ancef (10/73) ......00e:

Anspor (10/74) .......+-

Squibb

Velcsef (8/74) ....cce0.

Total Cephalosporins** ......

BI peataciakacsaces sees

J re

Bee ana havnnes

Motet CUAs/7E) sv iscncese

Keflin Neutral (5/75) ....

Loridine (3/68) .........

Kafocin (7/70) .........

Cephaloridine (9/68) ....

Bristol

Cefadyl (5/74) ..ccccees

SE. kena sagees sacs

Ameet CIB/78) .caceccee

Anspor (10/74) .........

Squibb

Velosef (8/74) ........

*6 Months data.

1970 197i 1972

Volume Share Volume Share Volume Share

$ 67,325 100.0% $ 81,239 100.0% $98,520 100.0%

67,325 100.0 81,239 100.0 98,520 100.0

40,693 60.4 51,062 62.9 62,796 63.7

Thegrn a! rath a 11,239 13.8 20,752 «21.1

35622 381 «17,916 221 14607 148

994 1.5 1,016 1.3 356 0.4

Aa 6 9

1973 1974 1975*

Volume Share Volume Share Volume Share

$105,405 100.0% $123,771 100.0% $65,007 100.0%

103,858 98.5 111,177” 89.8 57,611 88.6

68,233 64.7 67,854 548 30,630 47.1

22,945 218 25,346 20.4 13,834 21.3

1,149 1.4 13,593 11.0 8355 12.9

See se ry eRe eae 3,340 5.1

10,996 10.4 4,322 3.5 1,430 2.2

191 0.2 61 0.1 yes

14 <i are 1

oie a NADH 1,865 1.5 1,766 ne

1,547 1.5 10,425 8.5 5,292 8.1

1,547 1.5 10,355 8.4 4,988 7.7

aa eaat 70 0.1 304 0.5

bata ere 304 0.3 338 0.5

** Dates in parentheses are dates of introduction.

13a

Appendix C.

It can readily be seen that Lilly’s Keflin, usually admin-

istered in intravenous form, and Keflex, an oral drug,

have dominated the cephalosporin market. As Lilly’s

other cephalosporins, Loridine and Kafocin, have dimin-

ished in competitive importance, Kefzol has risen to a

position as Lilly’s third-ranking cephalosporin, and it is

clear that Lilly and SmithKline were in direct competition

with their generically equivalent Kefzol and Ancef. An-

other competitive factor appreciated by the two companies

is that the cefazolin formula is a therapeutic equivalent

of the market leader Keflin, yet is more suitable for ad-

ministration by intramuscular or intravenous injection—

the former being a simpler and apparently less expensive

procedure—and offers more sustained and higher blood

levels. Thus, the Kefzol-Ancef formula offers similar

therapeutic features at a lower cost per patient than

Keflin, and is therefore a potentially strong competitor of

that drug. An examination of the sales figures, supra,

reveals that the cefazolin formula—Kefzol more so than

Ancef—has gained popularity at some expense to Keflin’s

market share.

The economic significance for Lilly is great: the district

court found that profits on the patented Keflin are far

higher than on Kefzol, for which Lilly holds a non-exclusive

license and in the pricing of which it must consider the

existence of a competitor, SmithKline. To the extent that

the cefazolin formula is accepted as a substitute for the

cephalothin formula (Keflin), Lilly faces the loss of its

monopolistic profits. Thus, in addition to the normal eco-

nomic incentive to preempt a market, an additional incen-

tive for Lilly to control the cefazolin market is present

on these facts: Lilly would stand to preserve the market

position of Keflin by discouraging widespread acceptance

in the medical field of Kefzol or Ancef as a substitute drug.

l4a

Appendix C.

It was the theory of SmithKline, and accepted by the

district court, that to further its economic ends, Lilly in-

stituted the Revised CSP, the linchpin of which was the

well established hospital market for its patented drugs,

Keflin and Keflex. The district court determined that the

effect of the Revised CSP was to combine—for purposes

of pricing—hospital purchases of Keflex and Keflin with

those of Kefzol. An examination of the working of the

Revised CSP makes this conclusion inescapable. Although

eligibility for the 3% bonus rebate was based on the pur-

chase of specified quantities of any three of Lilly’s cepha-

losporins, in reality it meant the combined purchases of

Kefzol and the leading sellers, Keflin and Keflex. In 1974

these two market leaders accounted for 75% of all hospital

cephalosporin purchases. Although hospitals were free

to purchase SmithKline’s Ancef with their Keflin and

Keflex orders with Lilly, thus avoiding the penalties of a

tie-in sale,* the practical effect of that decision would be to

The district court found, and it is not disputed, that Lilly

did not condition the availability of any of its products on the

purchase of any other of its products or on the refusal of pur-

chasing hospitals to deal with its competitors. Thus, Lilly did not

“tie’’ purchases of Kefzol to purchases of Keflin or Keflex. We

accept the decision of the district court that, in the absence of such

a requirement, there is no illegal tie-in. Although sufficient to

establish the offense of monopolization under § 2 of the Sherman

Act, 15 U.S.C. § 2, Lilly’s marketing scheme lacks the element of

coercion necessary for liability under the theory of tie-ins. As

stated by this court in Ungar v. Dunkin’ Donuts of America, Inc.,

531 F.2d 1211 (3d Cir. 1976), cert. denied 429 U.S. 823 (1976) :

To prove a per se illegal tie-in, a plaintiff must establish

three things. First, he must establish that the conduct in

question was a tie-in: “an agreement by a party to sell one

product but only on the condition that the buyer also pur-

chases a different (or tied) product.” Northern Pacific Ry.

v. United States, supra, 356 U.S. at 5, 78 S.Ct. at 518, 2

L.Ed.2d at 550. Second, he must establish that the seller

(footnote continued on following page)

lda

Appendix C.

deny the Ancef purchaser the 3% bonus rebate on all its

cephalesporin purchases.

In understanding the effects of Lilly’s Revised CSP, the

importance of cephalosporins in hospital pharmacies can-

not be understated. They are carried in stock by virtually

every general hospital in the country. To meet the bonus

discounts offered by Lilly, a competitor was forced to

more than meet the competition on the one product, cefazo-

lin; it had to match the bonus rebate awarded to the hos-

pital purchaser based on total purchases of three cepha-

losporins, including the leading sellers, Keflin and Keflex.

In SmithKline’s case, this meant it had to compete “three-

on-one”. (Brief for Appellee at 36.) In computing its

percentage of rebate on the one product, Ancef, Smith-

Kline was forced to meet the total dollar discounts avail-

able to purchasers of Lilly’s three high volume cephalo-

sporins. Although the Revised CSP only gave a 3% bonus

rebate, because of Lilly’s volume advantage, in order to

offer a rebate of the same net dollar amount as Lilly’s,

SmithKline had to offer purchasers of Ancef rebates of

some 16% to hospitals of average size, and 35% to larger

volume hospitals.

(footnote continued from preceding page)

“has sufficient economic power with respect to the tying

product to appreciably restrain free competition in the

market for the tied product.” Ibid. at 6. And third, he must

establish that “a ‘not insubstantial’ amount of interstate com-

merce is affected.’’ Ibid.

Obviously, with respect to the first element, a formal agree-

ment is not necessary, although it is sufficient. But, in the

absence of a formal agreement, a plaintiff must establish in

some other way that a tie-in was involved and not merely the

sale of two products by a single seller. This can be done by

proof that purchase of one product, the tied product, was not

voluntary, i.e., by proof of coercion.

531 F.2d at 1223-24 (footnote omitted).

l6a

Appendix C.

II.

“The offense of monopoly under § 2 of the Sherman Act

has two elements: (1) the possession of monopoly power

in the relevant market and (2) the willful acquisition or

maintenance of that power as distinguished from growth

or development as a consequence of a superior product,

business acumen, or historic accident.” United States v.

Grinnell Corp., 384 U.S. 563, 570-71 (1966).

Appellant does not contest the finding that the United

States is the relevant geograghic market. The parties’

dispute centers instead around what products should be

included, SmithKline contending that the relevant market

should include only cephalosporin antibiotics and Lilly

arguing that it should include all antibiotics. The trial

court found that cephalosporins, as a group, are therapeu-

tically interchangeable with other antibiotics only to a

limited extent; that they lack price sensitivity and cross-

elasticity with other antibiotics; and that a special demand

exists for them.

To the extent that the court’s findings are based on

narrative or historical facts, they can only be disturbed

on appeal if they are found to be clearly erroneous.

Rochez Brothers, Inc. v. Rhoades, 527 F.2d 880, 887 (3d

Cir. 1975), citing Krasnov v. Dinan, 465 F.2d 1298, 1302-

03 (3d Cir. 1972). Moreover, the Supreme Court teaches

that whether a product is “reasonably interchangeable for

the same purpose” is reviewed by the clearly erroneous

test, International Boxing Club v. United States, 358 U.S.

242, 251 (1959), and that for an appellant to prevail “it

must show that erroneous legal tests were applied to essen-

tial findings of fact or that the findings themselves were

‘clearly erroneous’ within our rulings on Rule 52(a) of the

Rules of Civil Procedure”, United States v. E. I. duPont

deNemours & Co., 351 U.S. 377, 381 (1956) (The Cellophane

Case).

17a

Appendix C.

IIl.

We first address the question whether the district court

properly defined the relevant market.

The Supreme Court offers this guidance in defining a

relevant market: ‘‘The ‘market’ which one must study to

determine when a producer has monopoly power will vary

with the part of commerce under consideration. The tests

are constant. That market is composed of products that

have reasonable interchangeability for the purposes for

which they are produced—price, use and qualities con-

sidered.” The Cellophane Case, supra, 351 U.S. at 404.

These controlling legal precepts have been succinctly

explained by Justice Fortas: “In $2 cases, the search

for ‘the relevant market’ must be undertaken and pursued

with relentless clarity. It is, in essence, an economic task

put to the uses of the law. . . . As this court held in

Brown Shoe [v. United States, 370 U.S. 294 (1962)], the

‘reasonable interchangeability of use or the cross-elasticity

of demand,’ determines the boundaries of a product mar-

ket. 370 U.S., at 325. . . . In plain language, this means

that the court should [define] the relevant market . . . to

include all services which, in light of geographical avail-

ability, price and use characteristics, are in realistic rivalry

for all or some part of the business [of antibiotics]... .

[I]f defendant has so large a fraction of the market as to

constitute a ‘predominant’ share, a rebuttable presumption

of monopolization follows. The fraction depends upon the

denominator (the ‘market’) as well as the numerator (the

defendants’ volume). Clearly, this ‘presumption’ is un-

warranted unless the ‘market’ is defined to include all com-

petitors.” United States v. Grinnell, supra, 384 U.S. at

587, 592-94 (1966) (Fortas, J., dissenting on the applica-

tion of these standards to the facts).

18a

Appendiz C.

If the search for the relevant market is “an economic

task put to the uses of the law,” our analysis perforce is

directed to basic economic precepts. Elasticity of demand

for a product has been defined as the degree by which the

amount of a product purchased will change in response to

changes in its price. If products are substituted one for

another, they will display positive cross-elasticity. Thus, a

decrease in the price of one of two substitutes, while the

other stays constant, will result in a decrease of sales of

the constant price product. Similarly, an increase in the

price of one while the other stays constant will result in

an increase of sales of the constant price product. The

greater the positive cross-elasticity of demand between two

products is, the closer substitutes they are. See L. Suuu-

van, Hornspook oF THE Law or Antirrust 53-54 (West

1977).

In sum, defining a relevant product market is a process

of describing those groups of producers which, because

of the similarity of their products, have the ability—actual

or potential—to take significant amounts of business away

from each other. A market definition must look at all

relevant sources of supply, either actual rivals or eager

potential entrants to the market. A market definition must

provide the numerator and the denominator in the frac-

tion labeled “market share”. See M. Hanpter, H. Buake,

R. Prrorsxy, H. Goitpscomm, Cases AND MareRIALS ON

TrapE Recuiation 284-86 (Foundation Press 1975).

The district court made findings as to price and cost of

cephalosporins. It noted that, although competition be-

tween SmithKline and Lilly resulted in lowering the cost

of cefazolin (Ancef and Kefzol) to hospitals, there has

been no comparable reduction—or any erosion at all—in

the price of Keflin. Prescribing physicians are not cost-

create arene

19a

Appendix C.

conscious in their choices of an antibiotic for a hospitalized

patent, and so do not opt for a less expensive over a more

costly medication. The district court observed that it was

estimated by Lilly that even a 50% reduction in the price

of Keflin would not greatly increase Keflin’s sales. Com-

pared to other antibiotics in terms of cost per patient for

a daily dosage, cephalosporins are very expensive; for ex-

ample, injectable cephalosporins cost several times as

much as injectable penicillin G, a widely used antibiotic

which is often compared to the cephalosporins. Never-

theless, changes in the relative amounts of the cephalo-

sporins and non-cephalosporins purchased by hospitals are

not directly related to the relative costs thereof. During

the period from 1966 through 1974, while hospital pur-

chases of cephalosporins increased by nearly 700%, hos-

pital purchases of penicillin G decreased by nearly 60%.

The district court noted that only the appearance of a new

generation of anti-infectives to challenge the position of

Keflin would effect a price reduction on that drug. Al-

though such a challenge might have been forthcoming from

the Ancef-Kefzol formula, the effect of Lilly’s Revised

CSP was to stifle that competition.

On the basis of the foregoing, we must conclude that the

cephalosporins and non-cephalosporin anti-infectives do not

demonstrate significant positive cross-elasticity of demand

insofar as price is concerned. We therefore will not dis-

turb the district court’s conclusion that there is a lack

of price sensitivity between cephalosporins and other

antibioties.

Regarding the interchangeability of cephalosporins and

other anti-infective drugs, the district court found that,

although there is a certain degree of interchangeability

among all antibiotics, there are significant differences be-

tween the groups in the areas of effectiveness and toxicity.

Cephalosporins are considered more desirable by some

20a

Appendix C.

physicians because they are broad spectrum anti-infectives,

that is they are effective against a wider range of infec-

tious organisms than are other antibiotics. In addition,

cephalosporins are generally used in treating penicillin-

allergic patients. Particularly significant in terms of

practical interchangeability is the fact that cephalosporins

are effective against certain organisms where other anti-

infectives are not, and vice versa.

The district court noted, for example, that cephalo-

sporins are less toxic, i.e., produce fewer undesirable side

effects, than some other anti-infectives. In addition, unlike

penicillins, cephalosporins are effective against the or-

ganism Klebsiella; they are also active against both

staphylococci and gram negative bacilli, whereas peni-

cillins tend to be active against one but not the other.

These features can obviously be of great significance in the

determination of the proper medication for a given patient.

Thus, although there is a certain overlap in therapeutic

capability, in the view of the district court, cephalosporins

possess sufficiently unique features to warrant their char-

acterization as a discrete product market, one lacking

interchangeability with antibiotics in general.

By brief and at oral argument, Lilly placed great em-

phasis on a Hospital Disease Therapeutic Index (HDTI),

a nationwide study of hospital-based physicians, describ-

ing actual use of antibiotics in treating hospitalized pa-

tients. This study purported to confirm that for virtually

every purpose for which hospital physicians use cephalo-

sporins, they also use other antibiotics. It scarcely need

be commented that this was evidence presented at the

trial, not a fact found by the factfinder. We do not con-

duct de novo fact findings on appeal, and will review

evidence not with a view toward making our own findings

but only to determine whether those of the district court

are clearly erroneous, and we conclude that these are not.

21a

Appendix C.

The analysis of the district court comports with the

standard for defining relevant market enunciated by the

Supreme Court in The Cellophane Case, supra, and the

elaboration of that standard offered by Justice Fortas

in his Grinnell dissent, supra. Viewing this treatment

against the standard of review mandated by the Supreme

Court in International Boxing Club, supra, and The Cello-

phane Case, supra, we do not find the findings clearly

erroneous.‘ Accordingly, we reject appellant Lilly’s con-

tention that the district court erred in its choice of appli-

cation of the proper legal standards to test the market

definition and that the material facts as found were clearly

erroneous. We therefore conclude that the relevant prod-

uct market, the market where there is true economic

rivalry because of product similarity, is that composed of

cephalosporin antibiotics; there is neither appropriate

interchangeabiilty, price sensitivity, nor cross-elasticity of

demand in the broader market of all antibiotics.

IV.

Having agreed with the court’s definition of the relevant

product market, we are now required to determine whether

Lilly possessed monopoly power in that market, and if

so, whether it was a willful acquisition or maintenance of

that power as distinguished from growth or development

as a consequence of a superior product, business acumen,

or historic accident. United States v. Grinnell Corp., supra.

* As enunciated by this Court, findings are clearly erroneous

only when they are found to be “completely devoid of minimum

evidentiary support displaying some hue of credibility, or [bear-

ing] no rational relationship to the supportive evidentiary data.”

Krasnov v. Dinan, supra, 465 F.2d at 1302. The district court’s

findings of fact with respect to the absence of price sensitivity be-

tween cephalosporins and other antibiotics, findings 38-48(a), bear

a credible and rational relationship to the supporting evidence.

22a

Appendix C.

The Supreme Court has defined monopoly power as “the

power to control prices or exclude competition’’, The Cello-

phane Case, supra, 351 U.S. at 391. Between 1964 and

1974, Lilly controlled from 100% to 89.8% of the cephalo-

sporin market, and notwithstanding that its position in

the market was originally the result of its patents, this

share is generally considered monopolistic. See, e.g , United

States v. Grinnell, swpra, (87% market share found to

constitute monopoly). The district court’s characteriza-

tion of Lilly as a monopolist is further buttressed by its

fair measure of success in insulating Kefzol from true

price competition with Ancef by means of its Revised CSP.

The evidence demonstrates that Lilly’s competitors did

not have the actual or potential ability to capture a sig-

nificant share of Lilly’s business. The district court noted

that Lilly’s entrenched position as a supplier of cephalo-

sporin, as well as the high costs of research and market

development, made competition from a new entrant to the

market unlikely.

. #

In sum, the act of willful acquisition and maintenance

of monopoly power was brought about by linking products

on which Lilly faced no competition—Keflin and Keflex—

with a competitive product, Kefzol. The result was to sell

all three products on a non-competitive basis in what

would have otherwise been a competitive market for Ancef

and Kefzol. The effect of the Revised CSP was to force

SmithKline to pay rebates on one product, Ancef, equal

to rebates paid by Lilly based on volume sales of three

products. On the basis of expert testimony, the court

found SmithKline’s prospects for continuing in the cepha-

losporin market under these conditions to be poor.

With Lilly’s cephalosporins subject to no serious price

competition from other sellers, with the barriers to enter-

ns weet

+ Coan

23a

Appendix C.

ing the market substantial, and with the prospects of new

competition extremely uncertain, we are confronted with

a factual complex in which Lilly has the awesome power

of a monopolist. Although it enjoyed the status of a legal

monopolist when it was engaged in the manufacture and

sale of its original patented products, that status changed

when it instituted its Revised CSP. The goal of that plan

was to associate Lilly’s legal monopolistic practices with

an illegal activity that directly affected the price, supply,

and demand of Kefzol and Ancef. Were it not for the

Lilly’s Revised CSP, the price, supply, and demand of

Kefzol and Ancef would have been determined by the eco-

nomic laws of a competitive market. The Revised CSP

blatantly revised those economic laws and made Lilly a

transgressor under § 2 of the Sherman Act.

The judgment of the district court will be affirmed.

To the Clerk:

Please file the foregoing opinion.

24a,

Appendix C.

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 77-1232

SmithKline Corporation

vs.

Eli Lilly and Company,

Appellant

(D. C. Civil No. 75-1102)

On APPEAL FROM THE Unitep States District Court

FOR THE EasTeRN District oF PENNSYLVANIA

Present: Atpisert, VAN Dusen and Wes, Circuit Judges

AIUDGMENT

This cause came on to be heard on the record from the

United States District Court for the Eastern District of

Pennsylvania and was argued by counsel on February 21,

1978.

On consideration whereof, it is now here ordered and

adjudged by this Court that the order of the said District

Court, filed December 28, 1976 as amended by order filed

December 29, 1976, be, and the same is hereby, affirmed,

with costs taxed against appellant.

April 3, 1978

Certified as a true copy and

issued in lieu of a formal

mandate on April 25, 1978.

Test:

s/ M. ExizasetH Fercuson

Chief Deputy Clerk, U.S.

Court of Appeals for the

Third Cireuit

ATTEST:

s/ THomas F. Quinn

Clerk

Costs taxed in favor of

appellee as follows:

ear $1,873.61

COPY

23a

Mt Appendix D,

Opinion and Order of the District Court.

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

SmiraHKuine Corporation : Crvm Action

Vv.

Eur Litty anp Company : No. 75-1102

OPINION

November 2, 1976 Hicernsotuam, A. L., J.

FImep

Nov-2 1976

Joun J. Harprne, Clerk

By A. M. N. Dep. Clerk

26a

Appendix D.

TABLE OF CONTENTS

a eae aa paela odie abil

Il. History Or THe CEPHALOSPORIN MARKET ......

Se Ne anc keeeseeestecseveseces

ye oO

CH ay SOS

Tue Parties AND JURISDICTION .........-00:

Tue Human Erxicat PHarmMacevTicaL Iy-

0 REO Se oh iy | ee

i. Human Ernicat PHARMACEUTICALS PuR-

CHASED For Use In HospPITats ..........

ii. Lack Or INTERCHANGEABILITY BETWEEN

CEPHALOSPORINS AND OTHER ANTIBIOTICS

iii. Spectan CHaracteristics Or CEPHALO-

te ul aoe eke

lili. Lack Or Price Sensiriviry BETWEEN

CEPHALOSPORINS AND OTHER ANTIBIOTICS

v. Price Sensitiviry AnD INTERCHANGEABIL-

iry Or Usr AmMone CEPHALOSPORINS IN THE

ABSENCE Or Litty’s Revisep CSP ......

. History Or CEPHALOSPORINS ...........e000.

. SmirHKurne’s Entry Into THE MarRKET ......

. COMPETITION BETWEEN SMITHKLINE AND LILLY

ves: i dk 4, REREEECRT CTE EER CLE

. Litiy’s Apoption Or THE Revisep CSP ......

. Latzy’s Paromune STRATEGY 2... cc ccccccccsce

. Competitive Errects Or Tue Revisep CSP ..

Damace AnD THREATENED DamMace To Smitu-

DE vce uae anuwGuetiuaiaw vals eba c@e ete et

28a

27a

Appendix D.

EUs IU Shc 5s chad pha 60a so cv aweeea ce T1la

A. Tymia ARRANGEMENTS .............ccccece: Tla

1. SmrrHKuine’s Contentions Anp Litiy’s

EN oN are's hain Cea D AS Wack Ga po BP Ba coe Tla

i SS I aa a ees Bie ca wre 74a

3. THe Derinition Or Tiz-Ins As Derrnep By

ee ON COED one csc ceecdavccscs 79a

Bx: MORIA os invest dnwasedud dacewes 8la

1. Retevant Propuct MaRKET ............. 82a

a. ConTEeNTIONS Or THE ParTIES ........ 84a

b. Sranparp For Derintnc THE RELEVANT

Propuct Market: Turrareutic Capa-

BILITY, SPECIALIST PPZFERENCE AND GEN-

ERAL Puysician, [{osprran Anp Con-

WRN PMI oc wb be vcde cvavnccs 85a

ce. Sensitivity To Price CHANGES ....... 90a

POE TO boss dsicecécdos cuesive 93a

3. WrutruL Maintenance Or Mownoporiy

I et cal at oc es i cake, oie sake 94a

a. Operation Or THE Revisep CSP ..... 97a

b. Economic Impact Or Tue Revisep CSP

ie NN oe es 99a

ce. Impact Or THe Revisep CSP On THE

Non-prorir Hosprran Market For

CEPHALOSPORINS ........ FC Titel dws ahi 102a

d. Revevance Or Tetex v. IBM ......... 106a

C. Litty’s Riaut To COMPETE ..........cccceees llla

Pe OS rere reer 112a

28a

Appendiz D.

1. IwrropuctTion

The plaintiff, SmithKline Corporation (‘‘SmithKline’’),

instituted this antitrust action against the defendant, Eli

Lilly and Company (‘‘Lilly’’), for purported violations of

sections one, two and three of the Sherman Act, as amended,

15 U.S.C. §$1,? 2,2 and 3,° and for an alleged violation of

215 U.S.C. § 1 provides in relevant part:

Every contract, combination in the form of trust or otherwise,

or conspiracy, in restraint of trade or commerce among the

several States, or with foreign nations, is declared to be il-

legal ...

215 U.S.C. § 2 states:

Every person who shall monopolize, or attempt to monopolize,

or combine or conspire with any other person or persons, to

monopolize any part of the trade or commerce among the sev-

eral States, or with foreign nations, shall be deemed guilty of

a misdemeanor, and, on conviction thereof, shall be punished

by fine not exceeding fifty thousand dollars, or by imprison-

ment not exceeding one year, or both said punishments, in the

diseretion of the court.

15 U.S.C. §3 states:

Every contract, combination in form of trust or otherwise, or

conspiracy, in restraint of trade or commerce in any Territory

of the United States or of the District of Columbia, or in re-

straint of trade or commerce between any such Territory and

another, or between any such Territories and any State or

States or the District of Columbia, or with foreign nations,

or between the District of Columbia and any State or States

or foreign nations, is hereby declared illegal. Every person

who shall make any such contract or engage in any sach com-

bination or conspiracy, shall be deemed guilty of a misde-

meanor, and, on conviction thereof, shall be punished by fine

not exceeding fifty thousand dollars, or by imprisonment not

exceeding one year, or by both said punishments, in the dis-

eretion of the court.

29a

Appendix D.

section three of the Clayton Act, 15 U.S.C. $14.4 The

plaintiff and defendant corporations are major manu-

facturers of prescription pharmaceuticals, engaged in both

interstate and foreign commerce. This complaint was oc-

casioned by the defendant’s marketing practices in the sale

of certain pharmaceutical products, cephalosporins.®

More specifically, plaintiff claims that a marketing scheme

Lilly created in April, 1975, known as the Revised

Cephalosporin Savings Plan (‘‘Revised CSP’’), violated

the antitrust laws. Under the Revised CSP, participating

hospitals were eligible for two rebates: (1) a rebate based

*15 U.S.C. § 14 states:

That it shall be unlawful for any person engaged in commerce

in the course of such commerce, to lease or make a sale or con-

tract for sale of goods, wares, merchandise, machinery, sup-

plies, or other commodities, whether patented or unpatented,

for use, consumption, or resale within the United States or

any Territory thereof or the District of Columbia or any

insular possession or other place under the jurisdiction of the

United States, or fix a price charged therefore, or discount

from, or rebate upon, such price, on the condition, agreement,

or understanding that the lessee or purchaser thereof shall not

use or deal in the goods, wares, merchandise, machinery, sup-

plies, or other commodities of a competitor or competitors of

the lessor or seller, where the effect of such lease, sale, or con-

tract for sale or such condition, agreement, or understanding

may be to substantially lessen competition or tend to create

a monopoly in any line of commerce.

5 Cephalosporins are:

. . . Semisynthetic antibacterial agents that are closely related

chemically to the penicillins and, like them, contain a beta

lactam ring as part of the nucleus. They are produced by the

addition of substitutent groups to 7-aminocephalosporanic

acid, a chemical nucleus obtained from cephalosporin C, which

is elaborated by the fungus Cephalosporium. The cephalo-

sporins interfere with the synthesis of the bacterial cell wall

by inactivating a transpeptidase, thereby preventing cross-

of peptidoglycan chains. A.M.A. Drug Evaluations

523 (2d Ed. 1973).

30a

Appendiz D.

on the total volume of a hospital’s purchases of Lilly

cephalosporins, the ‘‘base dividend’’;* and (2) a 3% rebate

conditioned on the purchase of certain minimum quantities

of each of any three of Lilly’s five cephalosporin products,

the ‘‘bonus rebate’. The minimum quantity which had to

be purchased in order to qualify for Lilly’s bonus rebate

was separately calculated for each hospital.

SmithKline brought this private antitrust action alleging

that the Revised CSP is an unlawful tying device in viola-

tion of sections one and three of the Sherman Act and sec-

tion three of the Clayton Act. Furthermore, the plaintiff

contends: (1) that Lilly has monopoly power; and (2) that

the Revised CSP is a device designed to unlawfully fore-

close competition or exclude competitors from the United

States nonprofit hospital market in cephalosporins and,

thus, enables Lilly to commit the offense of monopolization

in violation of section two of the Sherman Act. Finally,

SmithKline avers that the Revised CSP is a technique for

the abuse and misuse of certain Lilly cephalosporin patents,

in abrogation of sections one, two and three of the Sherman

Act."

Plaiatiff, on May 14, 1975, filed a motion for a prelimi-

nary injunction; pursuant to conferences with the Court

and a stipulation by the parties it was determined that a

hearing on a final injunction would be held promptly. [See

Document Nos. 11, 12, 15 and 41.] After extensive discovery

and numerous pre-trial conferences, a non-jury hearing on

* In calculating the base dividend, if a hospital takes its rebates

from the previous quarter in the form of Lilly cephalosporins,

those drugs are added to cephalosporins purchased from Lilly in

the subsequent quarter when Lilly determines the next base

dividend. (Step, Dep. at 14).

™Sales to nonprofit hospitals are exempt from the Robirson-

Patman Act under 15 U.S.C. § 13(c).

3la

Appendix D.

liability commenced on November 24, 1975 and ended on

January 6, 1976. Counsel delivered their closing arguments

on March 19, 1976. The pretrial conduct of this matter was

a model of cooperation among counsel and, once again, was

a reminder of the ease with which a complex case can be

effectively presented without undue antagonism or his-

trionics among counsel.

Cephalosporins are extraordinary semisynthetic, anti-

bacterial agents which on certain occasions can save the

lives of the ill or reduce significantly extraordinary suffer-

ing. Neither plaintiff nor defendant disputes the signifi-

cance of the pharmaceutical breakthrough caused by ceph-

alosporins. Lilly persuaded the medical profession to pur-

chase more than $519,730,000 of its cephalosporins from

1970 through the first quarter of 1975. [Finding of Fact

{ 96.] At issue here is not solely the efficacy of the products,

but also the appropriateness of Lilly’s merchandising

scheme—the Revised CSP. While claiming to better the

medical condition of the seriously ill, has Lilly imper-

missibly sought to mortally wound SmithKline, so that it

would no longer be the only viable competitor in the ceph-

alosporin field? In the injury which it imposes on Smith-

Kline by the Revised CSP, Lilly has clearly overstepped the

boundaries of restraint required by the anti-trust laws.

After a most careful consideration of the detailed record

and the parties’ respective briefs and proposed findings of

fact, I find, for the reasons noted below, that since April 1,

1975, the date of the institution of the Revised CSP, that

Lilly has monopolized the nonprofit hospital market for

cephalosporins, in violation of section two of the Sherman

Act; consequently, the plaintiff is entitied to final injunctive

relief. I further find that SmithKline has failed to prove

that the Revised CSP constitutes an illegal tying arrange-

ment and, thus, Lilly has violated neither sections one and

three of the Sherman Act nor section three of the Clayton

32a

Appendix D.

Act. There is no need to separately consider SmithKline’s

averment of patent misuse.

This entire opinion, including the legal discussion, con-

stitutes my Findings of Fact and Conclusions of Law, and

any proposed findings of fact and conclusions of law incon-

sistent with those here found are hereby rejected in accord-

ance with Rule 52 of the Federal Rules of Civil Procedure.

History Or THe CEPHALOSPORIN MARKET

While the Findings of Fact note with greater specificity

the issues and relevant data, the following history is a

brief synopsis of the development of the cephalosporin in-

dustry and the relevant marketing practices of the par-

ties. In 1964 cephalosporins first became available for

use in United States hospitals when Lilly introduced

cephalothin, under the Lilly brand name Keflin, into the

United States market. Subsequently Lilly marketed three

additional cephalosporins: cephalexin (Keflex),* cephalo-

ridine (Loridine), and cephaloglycin (Kafocin), all of

which, including Keflin, are covered by United States

patents owned by Lilly under which it has exclusive rights.

Lilly was the sole United States supplier of cephalo-

sporins until October, 1973 when SmithKline brought yet

another cephalosporin, cefazolin (Ancef), into the drug

* The generic (chemical) name of the particular cephalosporin

appears first, followed by the Lilly brand name in parentheses. The

same method will be used in identifying both the generie and

brand names of drugs manufactured and marketed by companies

other than and including Lilly throughout this opinion, unless

another method of identification is necessary for the sake of clarity.

Generic equivalents are drugs with identical chemical structures

which can be used interchangeably to treat the same condition in a

patient.

33a

Appendix D.

market. SmithKline markets cefazolin under a non-

exclusive license obtained from a United States patent

owner, Fujisawa, a Japanese pharmaceutical company. In

November, 1973 Lilly, also under a non-exclusive license,

began marketing cefazolin under the brand name Kefzol.

Later, Bristol and Squibb also began selling cephalo-

sporins.* Cephalosporins are distributed by both parties

®In May, 1974 Bristol introduced cephapirin (Cefadyl); in

August of that same year Squibb marketed cephradine (Velocef) ;

and in October, 1974 SmithKline also sold cephradine under the

brand name Anspor. Lilly’s cephalosporin products were intro-

duced on the following dates: Keflin—September, 1964; Loridine

—March, 1968; Kafocin—July, 1970; Keflex—February, 1971; and

Kefzol—November, 1973.

For the convenience of the reader, the following chart lists the

various cephalosporins currently available in the United States by

their chemical and brand names; the manufactures are also in-

dicated. Those drugs which are chemical, i.e. generic, equivalents

are noted below. The various cephalosporins are also segregated

by the route of administration used by the physician. Some

cephalosporins are injectible, administered either intraveneously

and/or intramuscularly. Other cephalosporins are administered

orally. ite

Injectible

Generic Name Brand Name

cephalothin Keflin (Lilly)

cephaloridine Loridine (Lilly)

cefazolin **Kefzol (Lilly)

**Ancef (SmithKline)

cephapirin Cefadyl (Bristol)

cephradine ***Velocef (Squibb)

Oral

cephalexin Keflex (Lilly)

cephaloglycin Kafoein (Lilly)

cephradine ***Anspor (SmithKline)

***Velocef (Squibb)

**chemical (generic) equivalents

***chemical (generic) equivalents

34a

Appendia D.

through independent wholesalers, who, then, sell the prod-

ucts to the hospitals. Lilly and SmithKline promote their

respective products through sales representatives (“detail

men”), who consult with both physicians and pharmacists

within the hospitals.” Cephalosporins are available for

administration by a physician in a given hospital, in most

instances, only if they are included within that hospital’s

formulary—a list of drugs approved and available for

use in that institution. Drugs are listed on the formulary

as a result of: (1) a recommendation that a drug be so

included by a physician affiliated with the hospital; (2) the

review and approval or rejection of that recommendation

by a committee composed of representatives from a hos-

pital’s staff of physicians, nurses and pharmacists—the

Pharmacy and Therapeutics Committee (““P & T Com-

mittee”); and (3) the P&T Committee’s independent rec-

ommendation that a certain drug be included in or deleted

from the hospital’s formulary. The P&T Committee ulti-

mately determines which drugs shall be listed on the

formulary. The hospital pharmacists generally purchase

drugs for the hospital. On occasion, hospital pharmacists

from several institutions work in a collective purchasing

group in order to secure bids from drug manufacturers.

Lilly, in selling its cephalosporin products, has varied

its marketing approach. In October, 1972 Lilly instituted

a marketing program entitled the Cephalosporin Savings

Plan (“CSP”), a volume rebate scheme available to par-

ticipating hospitals. A participating hospital could re-

0 Although detail men also consult with office-based physicians

and pharmacists in drug stores, these competitive marketing efforts

are irrelevant for purposes of my decision in this case.

The gravamen of the complaint in this case concerns a market-

ing device aimed at boosting sales of Lilly cephalosporin products

only in nonprofit hospitals. Therefore, any mention of hospitals

in this opinion refers to nonprofit institutions, unless otherwise

indicated.

35a

Appendix D.

celve a percentage rebate based on its total Lilly cephalo-

sporin purchases, the rebate to be paid in the form of

Lilly merchandise. After the introduction of SmithKline’s

Ancef in October, 1973 and Lilly’s Kefzol in November

of that same year, Lilly altered its marketing strategy.

The CSP was expanded to include Kefzol within the

volume rebate scheme." In April, 1975 Lilly instituted

the aforementioned Revised CSP.

SmithKline, also, has offered hospitals several differeat

rebate programs over the past few years. Its initial ap-

proach was the Pricing Insurance Plan (“PIP”), adopted

in response to Lilly’s inclusion of Kefzol in the CSP, which

provided that participating hospitals could receive up toa

five percent rebate on Ancef purchases. Furthermore, hos-

pitals were eligible for an additional five percent rebate on

each individual order for five hundred vials or more of

Ancef.”? Later, PIP, like the CSP, was revised to grant a

third rebate equal to five percent of a hospital’s Anspor

purchases, if the hospital’s combined volume of Ancef-

Anspor purchases equaled or exceeded five hundred grams

per quarter. SmithKline changed its marketing scheme

again in April, 1975 after Lilly instituted the Revised CSP.

The plaintiff eliminated its rebate on combined Ancef-

Anspor purchases. Instead, hospitals qualified for rebates

in the following manner: (1) a five percent rebate was re-

turned on any Ancef purchases per quarter; (2) in addition,

a five percent rebate was paid for any individual orders of

Ancef of five hundred or more vials per quarter; and (3) a

third five percent rebate was available for Anspor pur-

chases of five hundred grams or more per quarter.”

** Prior to November, 1973 the CSP provided for rebat

hospital purchases of Keflin, Keflex, th and Kafocin. Ketzol

was not marketed by Lilly until November, 1973.

2 The rebates under PIP id i , é

merehandies. are paid in the form of SmithKline

*$ Plaintiff’s Exhibit P-189, at 15.

ee te

36a

Appendix D.

Ii.

Fixpincs Or Fact:

Some record references are given to substantiate many

of the findings of fact appearing herein. However, some of

these findings are predicated on the cumulative facts and in-

ferences from the testimony, and facts which are further

documented on numerous other pages of the record which

are not cited. I recognize that many, if not most, judges

make no page references in support of their general find-

ings. See, e.g., United States v. International Boxing Club

of N.Y., 150 F. Supp. 397, 401-419 (S.D.N.Y. 1957) aff’d 358

U.S. 242 (1959); United States v. Brown Shoe Company,

179 F. Supp. 721 (E.D. Mo. 1959), aff’d 370 U.S. 294 (1962).

Thus, these record references are supplemental, but not

exclusive.

A. Tue Parties AND JURISDICTION.

1. Plaintiff SmithKline Corporation (“SmithKline’’) is

a corporation organized and existing under the laws of the

Commonwealth of Pennsylvania with its principal place of

business in Philadelphia, Pennsylvania. [Stipulation 1.1.]

2, SmithKline manufacturers [sic], among other prod-

ucts, human ethical pharmaceutical products which it sells

in interstate and foreign commerce. SmithKline markets

its human ethical pharmaceutical products through inde-

pendent wholesalers, who in turn sell the products to hos-

pitals. [Stipulation 1.2; van Roden, Tr. 14, 36.]

3. In 1974, worldwide sales of SmithKline and French

Laboratories, the division of SmithKline that conducts

its human ethical pharmaceutical business, exceeded

37a

Appendia D.

$250,000,000, of which 65% to 70% were sales in the United

States. [van Roden, Tr. 16]

4. Eli Lilly and Company (“Lilly”) is a corporation or-

ganized and existing under the laws of the State of Indiana

with its principal place of business in Indianapolis, In-

diana. [Stipulation 1.4]

o. Lilly manufactures, among other products, human

ethical pharmaceutical products which it sells in interstate

and foreign commerce. In 1974, Lilly’s worldwide sales of

human ethical pharmaceutical products exceeded $500 mil-

lion. [Stipulation 1.5; P-33.]

6. Lilly markets its human ethical pharmaceutical prod-

ucts through independent wholesalers to whom its sells the

products, who in turn sell the products to others, including

hospitals. [van Roden, Tr. 36; Lange, Tr. 1117-1118.]

7. US. general hospitals in 1973 and 1974 purchased

more Lilly pharmaceutical products (in terms of dollars)

than any other manufacturer’s and at least four times as

much Lilly pharmaceuticals as SmithKline pharmaceuti-

eals. [Exhibit P-1, P-30.]

8. Lilly was the largest supplier of pharmaceuticals to

wholesalers in 1973 and 1974. [Exhibit P-2.]

9. Jurisdiction of this subject matter duly appears pur-

suant to 15 U.S.C. $$ 1, 2, 14, 15 and 26. [See Complaint in

C.A. 75-1102, J] 1 and 15.]

10, This matter comes before the Court on a motion for

final injunction submitted by plaintiff in this action.

38a

Appendix D.

B. Tse Human Ernicat PoarmaceuticaL [ypustry.

11. Human ethical pharmaceutical products are drugs

that are promoted to the medical profession and, generally,

can be utilized only on the prescription of a licensed

physician and dispensed by a licensed physician or by a

licensed pharmacist. [van Roden, Tr. 17-18.]

12. Competition in the human ethical pharmaceutical

drug industry generally is intense and is manifested in

many forms, including: price competition; innovation, 1.e.,

the invention or discovery of new or improved drugs;

marketing efforts, e.g., selling, promotion, and advertising

of drugs; establishing and maintaining the reputation of

the manufacturer; producing a product of consistent

quality; and providing consistent and needed service to all

members of the health care delivery team. This finding is

in reference to the industry generally and does not precisely

describe the operation of the submarket, cephalosporins, as

it functions pursuant to Lilly’s Revised CSP. (Step, Tr.

1028-1029. ]

13. Research and development leading to the invention

and marketing of new or improved products is an im-

portant form of competition since a company that in-

troduces a product to the market first, particularly a new

anti-infective (antibiotic), is able to establish a position of

reputation and loyalty in the medical communty. ([Step,

Tr. 1028-1029.)

14. A major objective of SmithKline is the discovery

and development of new and unique drugs. SmithKline

spends about $35 million per year in the United States on

,esearch in human ethical pharmaceuticals, a majority of

39a

Appendix D.

which is spent in research for discovery of new chemical

entities. [van Roden, Tr. 17.]

15. A major objective of Lilly is the discovery and

development of new and unique drugs. It invests over

$100,000,000 per year, which is approximately 9 to 10%

of its total annual sales revenue, in research and develop-

ment. [Step, Tr. 1035-1037. ]

16. The marketing of a new drug, a competitively im-

portant factor, consists of identification of the capabilities

of the drug, and utilization of the marketing firm’s abilities

to promote and sell the drug. [Step, Tr. 1031.]

17. The most effective form of marketing human ethical

pharmaceutical drugs is personal promotion to the medical

profession through sales representatives (‘detail men’’),

[van Roden, Tr. 18-19, 30-32, 57-58; Step, Dep. 33-34.]

18. An important competitive asset in the human ethical

pharmaceutical industry is the strength and experience of a

manufacturer’s sales representatives. [van Roden, Tr. 18

19; Step, Tr. 1034.]

19. SmithKline has approximately 510 sales representa-

tives, of whom 3% are registered pharmacists. [SmithKline

response to Lilly Interrogatory No. 65.]

20. Among U.S. pharmaceutical manufdturers, Lill

has the largest number of sales representatives, ‘nearly

1,200, 75% of whom are graduate registered pharmacists

[Step, Tr. 1034-1036.] . uF

40a

Appendix D.

C. Tue Revevant Market

21. The Relevant Market is the noaprofit hospital market

for cephalosporin drugs. [Findings of Fact ff 25-51, infra.]

22. The Relevant Geographic Market is the United

States.

23. Cross elasticity of demand and price sensitivity do

not exist, to any significant degree, between the

cephalosporins and other antibiotic or anti-infective drugs.

[Findings of Fact, 1] 33-48, infra.]

24. Without Lilly’s Revised Cephalosporin Savings

Plan, cross elasticity of demand and price sensitivity would

exist among the cephalosporins. [Findings of Fact ff 35,

48a-51, infra.]

25. There is a sufficient disparity between cephalosporins

on the one hand and all antibiotics (anti-infectives) on the

other to distinguish the former from the latter. [Findings

of Fact, [f 35-37, infra.]

26. Human ethical pharmaceutical products include

among their number antibiotic drugs (anti-infectives).

Antibioties are chemical substances which are produced by

microorganisms and are active against other micro-

organisms (bacteria). The major properties of an anti-

biotic are its spectrum of activity (i.e. which kinds of

bacteria does it inhibit and which are resistent to it); its

pharmacologic properties (e.g. how it is absorbed and

excreted) ; its toxicities (side effects) ; and its allergenicity

(i.e. how common are allergic reactions). [Exhibit P-178.]

4la

Appendiz D.

27. Antibiotics include, among others: ampicillins, car-

benicillins, cephalosporins, chloramphenicol, erythromycins,

aminogiycosides, gentamycins, nitrofurantoins, penicillins,

semisynthetic penicillins and tetracyclines. Such drugs are

available in both parenteral (injectable, whether intraven-

ous or intramuscular) and oral forms. [D-2082; D-355;

D-2116; van Roden, Tr. 17-18.1

i. Human Eruicat PHarMacevticaLts Purcuasep For Use

In Hosprrats

28. Hospitals generally serve bed-ridden, seriously ill

patients while retail pharmacies serve ambulatory, less se-

riously ill patients. [P-189 at 2-3.]

29. In treating hospitalized patients, who generally have

serious or life-threatening infections, physicians usually

prescribe an injectable antibiotic, i.e. one that is adminis-

tered intravenously or intramuscularly, sometimes follow-

ing up with an oral antibiotic when the infection subsides.

For outpatients they usually prescribe oral antibiotics; by

contrast, retail pharmacies deal almost exclusively in orally

administered forms of drugs. The market in this case is

limited solely to the sale of drugs for use in hospitals.

[First two sentences admitted by Lilly in its proposed final

pretrial order; Ex. P-178, Ex. P-15; P-188 at 3-4 and Figs.

1-4.]

30. The Pharmacy and Therapeutics Committee (“P & T

Committee”) of a hospital, made up primarily of staff

physicians and pharmacists as well as nurses, determines

the drugs which will be used at the hospital and listed on its

formulary, which is a list of drugs approved for use at that

hospital. Drugs are listed on the formulary as a result of:

(1) a recommendation that a drug be so included by a phy-

sician affiliated with the hospital; (2) the review and ap-

42a

Appendia D.

proval or rejection of that recommendation by the P & T

Committee; and (3) the P&T Committee’s independent

recommendation that a certain drug be included in or de-

leted from the hospital’s formulary. The hospital phar-

macist generally purchases drugs for the hospital. He

purchases on the basis of past usage (prescriptions written

by that hospital’s physicians). In marketing a drug to a

hospital, a manufacturer seeks first to have the drug in-

cluded in the hospital formulary and, second, to have the

drug prescribed by physicians. [DiMatteo, Tr. 292-293 ; 327-

332; Nudelman, Tr. 641-643, 651-659; P-105 at 9, 11-12;

P-114 at 58, 61-62; P-118 at 7; P-129 at 8-9, 12-15; P-135

at 6; P-144 at 5-6; P-154 at 6-7, 10; P-16 at 6, 8, 11; van

Roden, Tr. 30-32; Step, Tr. 1032-1033. ]

31. Generic equivalents are drugs that have ivjentical

chemical structures and can be used interchangeably to

treat the same conditions in a patient. [Shotwell, Tr. 264;

DiMatteo, Tr. 293.]

32. Therapeutic equivalents are drugs that do not have

identical chemical structures but give the same clinical re-

sponse in treating a particular illness in a patient. [Di-

Matteo, Tr. 293.]

ii. Lack Or InTERCHANGEABILITY BETWEEN CEPHALOSPORINS

Anp OTHER ANTIBIOTICS.

33. Cephalosporins are

“ |. semisynthetic antibacterial agents that are

closely related chemically to the penicillins and, like

them contain a beta lactam ring as part of the nucleus.

They are produced by the addition of substitutent

groups to 7-aminocephalosporanic acid, a chemical

nucleus obtained from cephalosporin C, which is elabo-

43a

Appendiz D.

rated by the fungus Cephalosporium. The cephalo-

sporins interfere with the synthesis of the bacterial cell

wall by inactivating a transpeptidase, thereby prevent-

ing cross linkage of peptidoglycan chains.’’ [A.M.A.

Drug Evaluations 523 (2d Ed. 1973).]

34. Antibiotics such as cephalosporins can be lawfully

dispensed to a hospitalized patient only on the prescription

of a licensed physician. Assuming that a physician pre-

scribes an antibiotic that is approved for use in the hospital

(t.e., listed in the hospital formulary), the hospital pharma-

cist must fill the prescription with the prescribed drug or its

generic equivalent, i.e., a drug having an identical chemical

structure. Thus, a prescription for cefazolin must be filled

with either Ancef or Kefzol. A prescription for a cephalo-

sporin cannot be filled with a non-cephalosporin, such as

penicillin, ampicillin or tetracycline. Thus, the hospital

physician population, in practice, does not view other anti-

bioties as reasonably interchangeable with the cephalo-

sporins. [ DiMatteo, Tr. 296-297; Step deposition at 48-49;

Schiefe, Tr. 1011-1013; P-164 at 8-9, 14-15; P-144 at 8, 16,

49-50; P-129 at 23-24; P-118 at 16-17; P-135 at 10-12; P-154

at 12; P-105 at 12; P-114 at 65-66.]

ili. Spectra, CHaractreristics Or CEPHALOSPORINS

35. The cephalosporin family of antibiotics all have, for

practical purposes, an identical spectrum of activity and

all except Loridine are among the safest of antibiotics, with

very little toxicity and allergenicity. They differ signifi-

cantly only in pharmacological properties and toxicity and

are therefore generally interchangeable for treatment of

the same conditions. Given this interchangeability, Loridine

should be included within the same family of drugs and

the same product market. Despite its relatively higher

toxicity, Loridine is still less toxic than some other anti-

44a

Appendia D.

biotic drugs—e.g. the aminoglycosides. [Ex. P-11; P-12;

P-35; Nudelman, Tr. 707; Kass, Tr. 828-829; Holloway, at.

856-857 ; Schiefe, ‘T'r. 1007-1008; Ex. D-2096; Ex. P-178.]

36. There is a certain degree of interchangeability among

all antibiotic drugs. Cephalosporins, penicillins and the

aminoglycosides kill rather than merely inhibit the growth

of bacteria, contrary to the effect of the erythromycins,

chlorampenicol and the tetracyclines. However, there are

noticeable and acknowledged differences in the relative

effectiveness of cephalosporins as compared with other

antibiotics in the treatment of certain illnesses. The

cephalosporins are far less toxic than the aminoglycosides ;

this reduced toxicity is a characteristic shared by the

penicillins. However, the cephalosporins are:

a. Effective in treating Klebsiella—no penicillin is

capable of the same activity.

b. Active against both staphylococci and gram

negative bacilli. Most.staphylococci are resistant

to penicillin G, ampicillin and carbenicillin, which

have a good gram negative bacillus spectrum,

whereas methicillin-like penicilling are active

against staphylococci but lack gram negative

bacillus activity. Cephalosporins thus provide a

broader speetrum of activity.

ce. Although there is some cross-allergenicity between

penicillins and cephalosporins, it is by no means

complete. Most experts in Infectious Diseases will

use cephalosporins in serious infections in penicil-

lin-allergic patients who require therapy with a

penicillin or a cephalosporin.

Therefore, while the cephalosporins and other antibiotics

are equally effective in treating some illnesses, for other

illnesses there is no equal interchangeability. Regardless

of some overlapping, the cephalosporins have sufficient

45a

Appendiz D.

peculiar characteristics and uses to make them a dis-

tinguishable product market. [Ex. P-178; P-20; P-21; P-24;

P-25; P-26; P-27; P-31; P-34; Holloway, Tr. 844-846.]

37. The plaintiff and defendant recognized the special

attractiveness and peculiar qualities of a family of anti-

biotics effective in treating both gram positive and gram

negative infections. Cephalosporins demonstrated the

above capabilities, and were promoted as unique drugs.

[Exhibit D-102A at 9; P-20.]

iii. Lack Or Price Sensitiviry BeTween CEPHALOSPORINS

Anp OTHER ANTIBIOTICS

38. The cost of drugs is a relatively small percent of the

overall daily cost of therapy for a hospitalized patient.

[Step deposition at 48; Kass, Tr. 826.]

39. In selecting an antibiotic to prescribe for a hos-

pitalized patient, the two properties given most weight by

physicians are efficacy and safety. In comparison with

these, cost is an insignificant factor. [Exhibit P-38; Step

Dep. at 47-48; Holloway, Tr. 846, 861; Schiefe, Tr. 989.]

40. Cephalosporins are very expensive compared to

other antibiotics in terms of cost per patient for a daily

dose. Injectable cephalosporins cost several times as much

as injectable penicillin G, a widely used antibiotic which

is often compared to the cephalosporins. [Last sentence

admitted by Lilly in its proposed pretrial order; Ex. P-170,

Tables II and IV; Chappell, Tr. 111-114; Ex. P-38; Step

deposition at 45-47; P-164 at 14; P-129 at 21-23; P-144 at

15-16; P-135 at 17; P-154 at 11-12; P-105 at 50-51; P-114 at

65; D-2129.]

41. The average cost per day of therapy for the

46a

Appendiz D.

cephalosporins, as compared with other antibiotic drugs,

is as follows:

Cost/Day or Masor AntI-INFECTIVES

Poly-

Keflin Loridine cillin-N Kefzol Ancef

4.0 20 gm 2.5 gm 2.0 gm 2.0 gm

1965 $17.76

1966 12.96 $11.40

1967 12.96 11.40

1968 12.96 8.40

1969 12.96 $ 7.80 8.40

1970 12.96 7.80 7.25

1971 12.96 ed aa

1972 11.52 d .

1973 11.24 7.28 3.25 $ 9.68 $ 9.88

1974 11,24 7.14 3.25 9.60 9.68

Gar Coly- _ Terra- _Bi-Cillin ck

pene 3 Kantrex pve 6 mycin mucin 1 2o MU

4.0 1.0 240 mg 300mg 20gm 4mu

[des tiles. /day lday [doy Lday_

1965 $11.12 $ 4.08 $12.60 $ 8.16 $ 3.22

1966 11.12 4.08 12.60 8.16 3.22

1967 10.80 4.08 12.60 8.16 3.58

1968 9.60 4.08 12.60 8.16 3.74

1969 10.56 4.08 12.60 8.16 3.74

1970 10.56 4.08 21.00 12.60 8.16 3.94

1971 11.64 4.37 17.28 12.60 8.16 3.94

1972 11.64 4.80 17.28 14.50 8.96 3.94

1973 12.68 4.30 15.77 14.50 11.12 4.18

1974 13.68 4.80 13.17 14.50 9.84 4.18

Exuisir D-2129

42. During the first quarter of 1975, more than 95% of

the general hospitals purchased cephalosporins and more

than 89% purchased injectable cephalosporins. There is

probably no short-term general hospital, and certainly no

significant number of short-term general hospitals, that

does not purchase and stock cephalosporins. [Admitted by

Lilly in its proposed final pretrial order; Ex. P-170, Tables

Ia, Ib, Yla; Chappell, Tr. 109-110, 121-124; Step deposition

at 64.]

47a

Appendiz D.

43. There are about 6,000 non-profit general hospitals in

the United States serving more than 100,000 prescribing

physicians. During the twelve-month period ending Au-

gust 1974, the total number of “patient starts” of cepha-

losporins in hospitals (meaning the number of times

cephalosporin treatment was initiated) was more than 2

million. (Chappell, Tr. 105-106; Gootee, Tr. 1210-1211;

Shotwell, Tr. 789, 794.]

44. There is a particular demand by doctors for the pe-

culiar qualities of cephalosporins in contradistinction to

other antibiotics; that demand is reflected in hospital pur-

chases of cephalosporins. In 1974, U.S. hospitals purchased

more cephalosporins (in terms of dollars) than any other

antibiotic. Their total purchases exceeded $120 million of

which more than 75% were injectables. [Second and third

sentences admitted by Lilly in its proposed pretrial order;

Exhibit P-4; Nudelman, Tr. 705-706. ]

45. Hospital purchases of cephalosporins since 1970 have

been as follows:

Squib

Velosef CEVPE) oc cccccecees — _ _ -_ _

1970 1971 1972

Volume _ Share Volume Share Volume Share

$ Jo $ %o $ Jo

Total Cephalosporins** ......... 67,325 100.0 81,239 100.0 98,520 100.0

XO NLR pcr a ES 67,325 100.0 — 100.0 98,520 100.0

BMD COED cc ceccccsccses 40,693 60.4 51, 62.9 62,796 63.7

os: aor — — 11,239 13.8 20,752 21.1

2 aa — - — _ — —

Keflin Neutral (5/75) ...... _ _— — _ — —

Loridine (3/68) ........... 25,622 38.1 17,916 22.1 14,607 148

Matos (7/70) ccccccccccce 994 1.5 1,016 1.3 356 0.4

Cephaloridine (9/68) ....... 16 _— 6 — 9 _

Briel 1 (5/74)

SMe. 7;.2+.......... a i ve ~ =

yea Ones 5 peetesieasas —_ — —_— _ ~ —

48a

Appendix D

1973 1974 1975*

Volume Share Volume Share Volume Share

$ %o $ % $ %

Total Cephalosporins** ......... 105,405 100.0 123,771 100.0 65,007 100.0

a Oe at 103,858 98.5 111,177 89.8 57,611 88.6

OED CIOED ccccccescccecs 68,233 64.7 67,854 54.8 30,630 47.1

Bee GIFS. cc ctincessnees 22,945 21.8 25,346 20.4 13,834 21.3

Kefzol (11/73) ............ 1,149 1.4 13,593 11.0 8,355 12.9

Keflin Neutral (5/75) ...... _ _ — — 3,340 5.1

Loridine (3/68) ........... 10,996 10.4 4,322 3.5 1,430 2.2

Kafocin (7/70) .......se00- 191 0.2 61 0.1 21 —

Cephaloridine (9/68) ....... 14 _ 1 _— 1 —_

Bristol

GS CED ev ccceracees _ _ 1,865 1.5 1,766 2.7

Smi NEE eee ae 1,547 1.5 10,425 8.5 5,292 8.1

Ancef (10/73) ......cccceee 1,547 : 10,355 8.4 4,988 7.7

> SED cucu duns oon _ _ 0.1 304 0.5

errr _ _ 304 0.3 338 0.5

*6 Months data.

** Dates in parentheses are dates of introduction.

[P-170, Table VIII, at 36.]

46. Changes in the relative amounts of cephalosporins

and non-cephalosporins purchased by hospitals are not di-

rectly related to the relative costs thereof. During the

period from 1966 through 1974, hospital purchases of

cephalosporins increased by nearly 700%. In the same

period hospital purchases of penicillin G decreased by

nearly 60%. [Ex. P-170, Table III; Chappell, Tr. 113;

P-38; P-154 at 66.]

47, A small number of pharmacist [sic] and physicians

are encouraging the decreased usage of cephalosporins, in

favor of other antibiotics for reasons of economy. The vast

majority of hospitals do not purchase their antibiotic re-

quirements in accordance with the efforts of these persons.

49a,

Appendix D.

[Kass, Tr. 819-820, 825; Nudelman, Tr. 704; Holloway, Tr.

857-858.]

48. There has been no erosion in the price of Keflin in

the last ten years. [Step, Tr. 1062.]

v. Price Sznsirrviry AND INTERCHANGEABILITY Or UsE

AmonG CEPHALOSPORINS IN THE ABSENCE OF LILLY’s

Revisep CSP

48. Many hospitals purchase their drug requirements

for specific periods by letting formal bids and buying from

the lowest bidder for the ¢ tire period (usually from one

ealendar quarter to one year in length). This is par-

ticularly true of an increasing number of hospitals who

are forming ‘‘Buying groups’’ for the purpose of making

such bids. [DiMatteo, Tr. 293-294, 298-301, 305-307, 356-

358; P-129 at 11; P-135 at 7-8; P-144 at 5-6; P-164 at 7-8.]

49. When there are two reputable manufacturers of the

same generic pharmaceutical, as in the case of cefazolin,

most hospitals can be expected to fill most, if not all of

their requirements with the brand which costs.the least.

This is particularly true of hospitals that buy such products

on a bid basis. About 50% of hospital purchases of

cefazolin are made on this basis. [DiMatteo, Tr. 293-296,

301, 356-358; Step, deposition at 60 (pharmacist deposi-

tions); van Roden, Tr. 38-39; P-57; P-71; Nudelman, Tr.

653-655, 660, 706; Schiefe, Tr. 1013-1015; P-164 at 7-12, 24

25; P-144 at 8-9, 11, 32, 35; P-129 at 13-15, 42; P-135 at 12-

13, 47; P-154 at 8-10, 43, 63; P-105 at 13-14, 34-35, 47; P-114

at 62, 82.]

50. Ancef and Kefzol are equivalent drugs, so that most

hospitals stock only one brand. Thus, of hospitals pur-

chasing cefazolin, about 75% purchase only one brand

50a

Appendia D.

(either Ancef or Kefzol but not both). Of those purchasing

both brands, about half purchase 70% or more of one of

them. [Exhibit P-170, Table V; Chappell, Tr. 115-121;

Exhibits P-57, P-71; DiMatteo, Tr. 294, 295a; Exhibits

P-105 at 15, P-114 at 66; P-129 at 24, P-135 at 17, P-144 at

16; P-154 at 12; P-164 at 15.]

51. Dr. Weston’s economic theory of price responsive-

ness and cross-elasticity of demand among _ several

hypothetical current and future generations of antibiotic

drugs is rejected; the evidence does not establish that the

relevant product market is all antibiotic or all anti-in-

fective drugs. [Weston, Tr. 1624-1628; Exhibit P-188.]

p. History Or CEPHALOSPORINS

52. The first cephalosporin became available for use in

the treatment of patients with infectious diseases in United

States hospitals when Lilly introduced cephalothin into the

United States market in 1964. Lilly markets cephalothin

under the brand name Keflin. Keflin is administered

parenterally. [D-2000]

53. In 1967, Lilly introduced another cephalosporin,

cephaloridine, under the brand name Loridine. Loridine

is administered parenterally. [D-2002.]

54. In 1971, Lilly introduced another cephalosporin,

cephaloglycin, under the brand name Kafocin. Kafocin is

administered orally. [D-2003.]

55. In 1972, Lilly introduced another cephalosporin,

cephalexin, under the brand name Keflex. Keflex is ad-

ministered orally. [D-2004.]

56. In October, 1973, SmithKline introduced a cephalo-

sporin, cefazolin, under the brand name Ancef. Ancef

5la

Appendia D.

is the generic equivalent of Lilly’s Kefzol, and was intro-

duced prior to Kefzol. Ancef is administered parenterally,

both intramuscularly and intravenously. [van Roden, Tr.

23, 43; Stipulation 3.9.]

57. In November, 1973, Lilly began marketing another

cephalosporin, cefazolin, under the brand name Kefzol.

Kefzol is administered parenterally, both intramuscular

and intravenously. [D-2001.]

58. In May, 1974, Bristol introduced cephapirin under

the brand name Cefadyl. Cefadyl is a parenteral product.

[D-1047.]

59. In August, 1974, Squibb introduced cephradine

under the brand name Velocef. Velocef is marketed in

oral and parenteral forms. [Exhibit D-2008.]

60. In November, 1974, SmithKline began marketing

Anspor, the generic equivalent of Squibb’s Velocef, in oral

form. [van Roden, Tr. 53-55.]

61. All Lilly cephalosporins except cefazolin are cov-

ered by U.S. patents under which Lilly has exclusive

rights, and Lilly is the sole U.S. source of these products.

Cefazolin is also covered by a U.S. patent or patents,

under which both SmithKline and Lilly have non-exclusive

licenses, as to each other, and these two companies are

the only sources of cefazolin in the United States. [Ad-

mitted by Lilly in its proposed final pretrial order; Lilly’s

Answer, para. 6-8; Lilly’s answers to plaintiff’s inter-

rogatories 14-18; Hutchinson deposition at 21.]

E. SmirHKurve’s Entry Into THe Market

62. Ifistorically, SmithKline’s prescription pharmaceu-

ticals have not included antibiotics to any significant

degree. [van Roden, Tr. 16.]

52a

Appendiz D.

63. In the late 1950’s SmithKline made a substantial

commitment of research and development resources toward

antibiotic discovery, concentrating on the cephalosporin

field. Accordingly, SmithKline in the late 1950’s and

early 1960’s, did substantial research in semi-synthetic

penicillins and cephalosporins. Its interest in cephalo-

sporins goes back to 1959. [van Roden, Tr. 19, 22.]

64. In 1962 SmithKline negotiated with Lilly for the

right to use Lilly’s patented process for producing a basic

cephalosporin intermediate called 7ACA. Alternatively,

SmithKline sought to buy 7ACA from Lilly. [Admitted

by Lilly in its proposed final pretrial order. }

65. In the late 1960’s SmithKline’s interest revived.

Management felt that cephalosporins would be the anti-

biotics of the 1970’s and that SmithKline, as a result of

previous efforts, was in an excellent position to enter this

market. It adopted a two-pronged approach: (1) a long-

te-m research and development effort to develop new

e.ntibiotics with therapeutic advantages over those already

on the market; (2) a licensing program to obtain imme-

diate rights to products already developed by others. [van

Roden, Tr. 19, 22-23.]

66. SmithKline’s licensing program resulted in 1971

agreements with Fujisawa Pharmaceutical Company of

Japan for cefazolin and with Squibb for cephradine.

Squibb and SmithKline each had patents relating to cer-

tain aspects of cephradine. [Admitted by Lilly in its pro-

posed final pretrial order; van Roden, Tr. 23.]

67. Cefazolin was originally synthesized by Fujisawa.

Clearance for marketing in the United States resulted

from SmithKline’s efforts with respect to Ancef. Lilly

obtained clearance for Kefzol by “piggy backing” on

53a

Appendiz D.

SmithKline’s clinical studies. [First sentence admitted by

Lilly in its proposed final pretrial order, van Roden,

Tr. 23-28.]

68. SmithKline’s decision to enter the field of anti-

biotics with Ancef entailed a very substantial commit-

ment. As of the present time, SmithKline’s investment

in Ancef, including research, development, clinical test-

ing, promotion, personnel and production facilities totals

more than $20 million. [van Roden, Tr. 25-26, 66-67;

Ex. P-5.]

69. In October 1973, wher SmithKline began to market

Ancef, SmithKline considered cefazolin (Ancef) a promis-

ing drug, much better than Keflin for IM, equally good

for IV. It believed that the primary market for Ancef

would be in hospitals. [Admitted by Lilly in its proposed

final pretrial order; van Roden, Tr. 23-24, 27, 72.]

70. SmithKline knew that its cost of goods for Ancef

would be substantially higher than Lilly’s cost for Kefzol.

However, SmithKline management believed there would

be a number of possibilities for lowering SmithKline’s

cost to a level competitive with Lilly’s, once SmithKline

achieved a substantial level of sales. [Admitted by Lilly

in its proposed final pretrial order. ]

71. SmithKline would not have entered the hospital

antibiotic market if its prospects had been limited to

Ancef alone or even to Ancef and Anspor, because such

a limited market entry would not have justified the re-

quired large investment in money and effort. Jn deciding

to make antibiotics a major commitment, SmithKline

viewed Ancef and Anspor as the first of a series of spe-

cialty antibiotics, in which SmithKline, through its re-

search efforts, would play a substantial part as originator

and/or developer. [van Roden, Tr. 22, 31-32.]

o4a

Appendix D.

72. The names of the cephalosporins in current use in

the United States are listed below. There is no generic

equivalent for any of these cephalosporins except in the

eases noted. The dates in parentheses, are the dates the

particular cephalosporin was introduced in the market.

Injectable

Generic Name Brand Name

cephalothin—(1964) Keflin (Lilly)

cephaloridine—(1967) Loridine (Lilly)

cefazolin—(1973) Kefzol (Lilly) **

Ancef (SmithKline)**

cephapirin—(1974) Cefadyl (Bristol)

cephradine—(1974) Velosef (Squibb)***

Oral

cephalexin—(1972) Keflex (Lilly)

cephaloglycin—(1971) Kafocin (Lilly)

cephradine—(1974) Anspor (SmithKline) ***

Velosef (Squibb)***

** Generic equivalents

*** Generic equivalents

F. Competition Between SmrruKurse & Litty—1973 &

1974

73. When SmithKline entered the market with Ancef,

it felt that there was only a limited potential for overall

expansion in injectable cephalosporins. Consequently,

SmithKline felt that Ancef would have to obtain its growth

at the expense of Lilly’s established preducts, Loridine

and Keflin. Because Keflin was used much more than

Loridine (the use of which was declining), SmithKline

eee

o08a

Appendix D.

decided to position Ancef in competition with Keflin. Ac-

cordingly, SmithKline decided to price Ancef about 5%

below Keflin on a recommended daily dosage basis. [van

Roden, Tr. 27-29, 34; Exhibits P-49, P-53.]

74. About

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