Smithkline Corp. vs. Eli Lilly and Co.

CL Issue:

- Eli Lilly introduced the first cephalosporin antibiotic known as “Keflin” into the United States
o It subsequently introduced 4 additional cephalosporin drugs
 Loridine
 Keflex
 Kafocin
 Kefzol (cefazolin)
- Eli Lilly’s patents on the said drugs gave it a monopoly over all cephalosporin drug except Kefzol.
- A Competitor, Smithkline Corp., introduced a new cephalosporins known as Ancef (cefazolin).
- Eli Lilly adopted a marketing program known as the Cephalosporin Savings Plan (CSP). CSP is
designed to make its cephalosporins more competitive with other antibiotics and to expand its
sales.
o 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.
- Eli Lilly dominated the cephalosporin market with its sales of Keflin and Keflex, but its Kefzol and
Smithkline’s Ancef were in direct competition with comparable sales.
- As competition increased, Eli Lilly instituted a Revised CSP, which, apart from the rebate,
combined hospital purchases of Keflex and Keflin with those of Kefzol.
- Smithkline sued Lilly for various antitrust violations, seeking damages and an injunction. The
district court found that Lilly monopolized the cephalosporin market.

Anti-Competitive effects:

- Marketing program provided monopolistic effects.

o The revised CSP in practical effect combined hospital purchases of Keflex and Keflin with
those of Kefzol.
o In 1974 the two market leaders, Keflex and Keflin, accounted for 75% of all hospital
cephalosporin purchases; Kefzol/Ancef was a small fraction of that. Hospitals were free
to purchase SmithKline's Ancef with their Keflin and Keflex orders with Lilly, so no tie-in
was compelled, but if they did so (tie-in of Keflex, Keflin and KEFZOL) they risked loss of
the 3% rebate on all cephalosporin purchases from Lilly, where 75% of the total was Keflex
and Keflin.
o This calculated out, the court said, to make Smithkline give a 16% to 30% discount on
Ancef sales to meet Lilly's 3% on Keflex and Keflin on an equal net dollar basis.

Pro-Competitive effects:

- None discussed;

Issue:

- Whether or not the Revised CSP constituted an anti-trust violation under the Sherman Act.

Ruling:

- YES
 - Supreme Court defined relevant market, it is the market which one must study to determine when
a producer has monopoly power which will vary with the part of commerce under consideration.
o Such market is composed of products that have reasonable interchangeability for the
purposes for which they are produced. Price, use and qualities are considered.
o If products are substituted one for another, they will display positive cross-elasticity.
o 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.
o The greater the positive cross elasticity of demand between two products is, the closer
substitutes they are.
o District Court found that cephalosporins and non-cephalosporin anti-infectives do not
demonstrate significant positive cross-elasticity of demand insofar as price is concerned.
o Regarding the interchangeability of cephalosporins and other anti-infective drugs, the
district court found that there are significant differences between groups in the areas of
effectiveness and toxicity – cephalosporins are effective against certain organisms where
other anti-infectives are not, and vice versa.
o The US SC therefore concluded that the relevant product market, the market where there
is true economic rivalry because of product similarity, is that composed of cephalosporin
antibiotics; there is neither appropriate interchangeability, price sensitivity, nor cross-
elasticity of demand in the broader market of all antibiotics.
- After determining the relevant product market of cephalosporin, the US SC found that Lilly
possessed monopoly power over the said market.
- The act of willful acquisition and maintenance of monopoly power was brought about by linking
products on which Eli Lilly faced no competition Keflin and Keflex with a competitive product,
Kefzol.
o 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.
o The effect of the Revised CSP was to force SmithKline to pay rebates on one product,
Ancef, equal to rebates paid by Eli Lilly based on volume sales of three products.
- With Lilly's cephalosporins subject to no serious price competition from other sellers, with the
barriers to entering 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.

Eli Lilly and Co.’s price-discounting practice was called “Bundling”

Bundling is the setting of the total price of a purchase of several products or services from one seller at a
lower level than the sum of the prices of the products or services purchased separately from several
sellers. Typically, one of the bundled items (the "primary product") is available only from the seller
engaging in the bundling, while the other item or items (the "secondary product") can be obtained from
several sellers. The effect of the practice is to divert purchasers who need the primary product to the
bundling seller and away from other sellers of only the secondary product. For that reason, the practice
may be held an antitrust violation as it was in the SmithKline v. Lilly case, in which the Third Circuit held
that Lilly engaged in monopolization in violation of Sherman Act § 2.