SmithKline Corp. v. Eli Lilly & Co.
| Decision Date | 03 April 1978 |
| Docket Number | No. 77-1232,77-1232 |
| Parties | 1978-1 Trade Cases 62,007 SmithKLINE CORPORATION v. ELI LILLY AND COMPANY, Appellant. |
| Court | U.S. Court of Appeals — Third Circuit |
Pepper, Hamilton & Scheetz, Philadelphia, Pa., Dewey, Ballantine, Bushby, Palmer & Wood, New York City, for appellant; John G. Harkins, Jr., Philadelphia, Pa., Edward N. Sherry, New York City, Jack Kaufmann, John F. Collins, Philadelphia, Pa., of counsel.
Frederic L. Ballard, William S. Rawls, Lewis A. Grafman, Philadelphia, Pa., for appellee; Ballard, Spahr, Andrews & Ingersoll, John L. Boyle, Richard L. Sherman, Philadelphia, Pa., of counsel.
Before ALDISERT, VAN DUSEN and WEIS, Circuit Judges.
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 proscribes monopolies and attempts 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 permanent injunction against Lilly's illegal marketing practices 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. 1
The parties to this lawsuit are major manufacturers of human ethical pharmaceutical products which they sell in interstate and foreign commerce. Both manufacture antibiotic or anti-infective drugs; these are substances produced by micro-organisms that are active against other micro-organisms. Used by physicians to treat bacterial infections, antibiotics include, e. g., ampicillins, carbenicillins, gentamycins, penicillins, tetracyclines, and nitrofurantoins. 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 antibiotic, Keflin (cephalothin), into the United States market. It has subsequently introduced four additional cephalosporin forms: Keflex (cephalexin), Loridine (cephaloridine), Kafocin (cephaloglycin), and Kefzol (cefazolin). Lilly has United States patents on all its cephalosporin antibiotics except cefazolin. It is Lilly's marketing practices for cefazolin that bring this case before us.
From 1964 until 1973, a period during which cephalosporins 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
Generic Name Brand Name
Cephalothin (1964) Keflin (Lilly)
Cephaloridine (1967) Loridine (Lilly)
Cefazolin (1973) Kefzol (Lilly) (generic
Ancef (SmithKline) equivalents)
Cephapirin (1974) Cefadyl (Bristol)
Cephradine (1974) Velosef (Squibb)
ORAL
Cephalexin (1972) 2 Keflex (Lilly)
Cephaloglycin (1971) Kafocin (Lilly)
Cephradine (1974) Anspor (SmithKline) (generic
Velosef (Squibb) equivalents)
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 expended. Some 500 sales representatives visited physicians to explain Ancef's characteristics and effectiveness as an antibiotic, particularly its superiority over Keflin for intramuscular, 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 merchandise 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 constitute 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 cephalosporins.
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 merchandise, on hospital purchases of Ancef; additional rebates were available for certain volume purchases of Ancef and Anspor, SmithKline's other cephalosporin.
The comparative market positions of the cephalosporins are illustrated by the district court findings:
1970 1971 1972
Volume Share Volume Share Volume Share
Total Cephalosporins ** $ 67,325 100.0% $ 81,239 100.0% $ 98,520 100.0%
Lilly 67,325 100.0 81,239 100.0 98,520 100.0
Keflin (9/64) 40,693 60.4 51,062 62.9 62,796 63.7
Keflex (2/71) ...... .... 11,239 13.8 20,752 21.1
Kefzol (11/73) ...... .... ...... .... ......
Keflin Neutral (5/75) ...... .... ...... .... ......
Loridine (3/68) 25,622 38.1 17,916 22.1 14,607 14.8
Kafocin (7/70) 994 1.5 1,016 1.3 356 0.4
Cephaloridine (9/68) 16 .... 6 .... 9 ....
Bristol
Cefadyl (5/74) ...... .... ...... .... ...... ....
SmithKline ...... .... ...... .... ...... ....
Ancef (10/73) ...... .... ...... .... ...... ....
Anspor (10/74) ...... .... ...... .... ...... ....
Squibb
Velosef (8/74) ...... .... ...... .... ...... ....
1973 1974 1975 *
Volume Share Volume Share Volume Share
Total Cephalosporins ** $105,405 100.0% $123,771 100.0% $65,007 100.0%
Lilly 103,858 98.5 111,177 89.8 57,611 88.6
Keflin (9/64) 68,233 64.7 67,854 54.8 30,630 47.1
Keflex (2/71) 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) 191 0.2 61 0.1 21 ....
Cephaloridine (9/68) 14 .... 1 .... 1 ....
Bristol
Cefadyl (5/74) ...... .... 1,865 1.5 1,766 2.7
SmithKline 1,547 1.5 10,425 8.5 5,292 8.1
Ancef (10/73) 1,547 1.5 10,355 8.4 4,988 7.7
Anspor (10/74) ...... .... 70 0.1 304 0.5
Squibb
Velosef (8/74) ...... .... 304 0.3 338 0.5
* 6 Months data.1/5
** Dates in parentheses are dates of introduction.1/5
It can readily be seen that Lilly's Keflin, usually administered in intravenous form, and Keflex, an oral drug, have dominated the cephalosporin market. As Lilly's other cephalosporins, Loridine and Kafocin, have diminished 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. Another 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 administration 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...
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