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November 2, 1976


The opinion of the court was delivered by: HIGGINBOTHAM


 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, *fn1" 2, *fn2" and 3, *fn3" and for an alleged violation of section three of the Clayton Act, 15 U.S.C. § 14. *fn4" The plaintiff and defendant corporations are major manufacturers of prescription pharmaceuticals, engaged in both interstate and foreign commerce. This complaint was occasioned by the defendant's marketing practices in the sale of certain pharmaceutical products, cephalosporins. *fn5" 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 on the total volume of a hospital's purchases of Lilly cephalosporins, the "base dividend"; *fn6" 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 violation of sections one and three of the Sherman Act and section 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 foreclose 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. *fn7"

 Plaintiff, on May 14, 1975, filed a motion for a preliminary 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 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 cause with which a complex case can be effectively presented without undue antagonism or histrionics among counsel.

 Cephalosporins are extraordinary semisynthetic, antibacterial agents which on certain occasions can save the lives of the ill or reduce significantly extraordinary suffering. Neither plaintiff nor defendant disputes the significance of the pharmaceutical breakthrough caused by cephalosporins. Lilly persuaded the medical profession to purchase more than $519,730,000 of its cephalosporins from 1970 through the first quarter of 1975. [Finding of Fact para. 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 impermissibly sought to mortally wound SmithKline, so that it would no longer be the only viable competitor in the cephalosporin field? In the injury which it imposes on SmithKline by the Revised CSP, Lilly has clearly overstepped the boundaries of restraint required by the antitrust 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 entitled to final injunctive relief. I further find that SmithKline has failed to prove that the Revised CSP constitutes an illegal tying arrangement and, thus, Lilly has violated neither sections one and three of the Sherman Act nor section three of the Clayton Act. There is no need to separately consider SmithKline's averment of patent misuse.

 This entire opinion, including the legal discussion, constitutes my Findings of Fact and Conclusions of Law, and any proposed findings of fact and conclusions of law inconsistent with those here found are hereby rejected in accordance with Rule 52 of the Federal Rules of Civil Procedure.


 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 industry and the relevant marketing practices of the parties. 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), *fn8" cephaloridine (Loridine), and cephaloglycin (Kafocin), all of which, including Keflin, are covered by the United States patents owned by Lilly under which it has exclusive rights.

 Lilly was the sole United States supplier of cephalosporins until October, 1973 when SmithKline brought yet another cephalosporin, cefazolin (Ancef), into the drug 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 cephalosporins. *fn9" Cephalosporins are distributed by both parties through independent wholesalers, who, then, sell the products 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. *fn10" 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 hospital's staff of physicians, nurses and pharmacists -- the Pharmacy and Therapeutics Committee ("P & T Committee"); and (3) the P&T Committee's independent recommendation that a certain drug be included in or deleted from the hospital's formulary. The P&T Committee ultimately 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 participating hospitals. A participating hospital could receive a percentage rebate based on its total Lilly cephalosporin 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. *fn11" In April, 1975 Lilly instituted the aforementioned Revised CSP.

 SmithKline, also, has offered hospitals several different rebate programs over the past few years. Its initial approach 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 to a five percent rebate on Ancef purchases. Furthermore, hospitals were eligible for an additional five percent rebate on each individual order for five hundred vials or more of Ancef. *fn12" 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 returned 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 purchases of five hundred grams or more per quarter. *fn13"


 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 inferences 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 findings. 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, 3 L. Ed. 2d 270, 79 S. Ct. 245 (1959); United States v. Brown Shoe Company, 179 F. Supp. 721 (E.D. Mo. 1959), aff'd 370 U.S. 294, 8 L. Ed. 2d 510, 82 S. Ct. 1502 (1962). Thus, these record references are supplemental, but not exclusive.


 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, among other products, human ethical pharmaceutical products which it sells in interstate and foreign commerce. SmithKline markets its human ethical pharmaceutical products through independent wholesalers, who in turn sell the products to hospitals. [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 $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 organized and existing under the laws of the State of Indiana with its principal place of business in Indianapolis, Indiana. [Stipulation 1.4]

 5. 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 million. [Stipulation 1.5; P-33.]

 6. Lilly markets its human ethical pharmaceutical products through independent wholesalers to whom it sells the products, who in turn sell the products to others, including hospitals. [van Roden, Tr. 36; Lange, Tr. 1117-1118.]

 7. U.S. 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 pharmaceuticals. [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 pursuant to 15 U.S.C. §§ 1, 2, 14, 15 and 26. [See Complaint in C.A. 75-1102, paras. 1 and 15.]

 10. This matter comes before the Court on a motion for final injunction submitted by plaintiff in this action.


 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, i.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 important form of competition since a company that introduces 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 community. [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 research in human ethical pharmaceuticals, a majority of 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 development. [Step, Tr. 1035-1037.]

 16. The marketing of a new drug, a competitively important 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 representatives, of whom 3% are registered pharmacists. [SmithKline response to Lilly Interrogatory No. 65.]

 20. Among U.S. pharmaceutical manufacturers, Lilly has the largest number of sales representatives, nearly 1,200, 75% of whom are graduate registered pharmacists. [Step, Tr. 1034-1035.]


 21. The Relevant Market is the nonprofit hospital market for cephalosporin drugs. [Findings of Fact para. 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, paras. 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 paras. 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, paras. 35-37, infra.]

 26. Human ethical pharmaceutical products include among their number antibiotic drugs (anti-infectives). Antibiotics are chemical substances which are produced by microorganisms and are active against other microorganisms (bacteria). The major properties of an antibiotic 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.]

 27. Antibiotics include, among others: ampicillins, carbenicillins, cephalosporins, chloramphenicol, erythromycins, aminoglycosides, gentamycins, nitrofurantoins, penicillins, semisynthetic penicillins and tetracyclines. Such drugs are available in both parenteral (injectable, whether intravenous or intramuscular) and oral forms. [D-2082; D-355; D-2116; van Roden, Tr. 17-18.]


 28. Hospitals generally serve bed-ridden, seriously ill patients while retail pharmacies serve ambulatory, less seriously 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 administered intravenously or intramuscularly, sometimes following 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 physician affiliated with the hospital; (2) the review and approval 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 deleted from the hospital's formulary. The hospital pharmacist 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 included 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-164 at 6, 8, 11; van Roden, Tr. 30-32; Step, Tr. 1032-1033.]

 31. Generic equivalents are drugs that have identical 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 response in treating a particular illness in a patient. [DiMatteo, Tr. 293.]


 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 substituent groups to 7-aminocephalosporanic acid, a chemical nucleus obtained from cephalosporin C, which is elaborated by the fungus Cephalosporium. The cephalosporins interfere with the synthesis of the bacterial cell wall by inactivating a transpeptidase, thereby preventing 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 prescribes an antibiotic that is approved for use in the hospital (i.e., listed in the hospital formulary), the hospital pharmacist 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 cephalosporin cannot be filled with a non-cephalosporin, such as penicillin, ampicillin or tetracycline. Thus, the hospital physician population, in practice, does not view other antibiotics as reasonably interchangeable with the cephalosporins. [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.]


 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 significantly 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 antibiotic drugs -- e.g. the aminoglycosides. [Ex. P-11; P-12; P-35; Nudelman, Tr. 707; Kass, Tr. 828-829; Holloway, Tr. 856-857; Schiefe, Tr. 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 penicillins are active against staphylococci but lack gram negative bacillus activity. Cephalosporins thus provide a broader spectrum of activity.


c. 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 penicillin-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 peculiar characteristics and uses to make them a distinguishable 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 antibiotics 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.]


 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 hospitalized 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 sentenced 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 cephalosporins, as compared with other antibiotic drugs, is as follows: COST/DAY OF MAJOR ANTI-INFECTIVES Poly- Keflin Loridine cillin-N Kefzol Ancef 4.0 gm 2.0 gm 2.5 gm 2.0 gm 2.0 gm /day /day /day /day /day 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 7.80 6.48 1972 11.52 7.28 6.48 1973 11.24 7.28 3.25 9.68 9.88 1974 11.24 7.14 3.25 9.60 9.68 Chloro- Gara- Coly- Terra- Bi-Cillin ck mycetin Kantrex mycin mycin mycin 1.200 MU 4.0 gm 1.0 gm 240 mg 300 mg 2.0 gm 2.4 mu /day /day /day /day /day / day 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 4.80 13.77 14.50 11.12 4.18 1974 13.68 4.80 13.17 14.50 9.84 4.18


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