Battle Lines Are Drawn Over Baby Formula : Lawsuit: Glendale-based unit of Nestle accuses a medical group of conspiring with leading manufacturers to limit the Swiss food company’s growth.
After 4 1/2 years of disappointing results in thS. baby-formula market, Nestle U. S. A. Inc. alleges in a lawsuit that the American Academy of Pediatrics conspired with the nation’s two dominant formula makers to stop Nestle from getting a bigger piece of the market.
The Glendale-based unit of the giant Swiss food company, Nestle S. A., contends the medical group helped Abbott Laboratories and Bristol-Myers Squibb Co. maintain their 80% of the baby-formula market, by opposing Nestle’s efforts to advertise its Carnation brand baby formula to consumers.
The academy, which represents 45,000 pediatricians nationwide, denied Nestle’s allegations, saying that since 1982 it has opposed any consumer advertising of baby formula. The group believes that such marketing efforts will dissuade mothers from breast-feeding, which doctors say is nutritionally preferable.
In court papers, Nestle contends that Abbott and Bristol-Myers also participated in a price-fixing scheme and made exclusive deals with hospitals to give away samples, violating federal and state anti-trust laws, and artificially inflating prices for consumers. Abbott’s Similac formula is the nation’s top seller, and Bristol-Myers’ Enfamil is No. 2. Neither product is advertised to consumers, but is instead marketed through hospitals and doctors.
Because of vigorous opposition by the academy and members, Nestle said it canceled its baby-formula advertising in early 1989. That was just a few months after Nestle introduced its Good Start formula for newborns and Good Nature (now called Follow-Up), which is for babies 6 to 12 months old.
“The policy against advertising definitely put a major damper to our introduction” of baby formula, said Al Multari, Carnation’s marketing director of infant nutrition in Glendale. Nestle resumed consumer advertising in parenting magazines and on TV of its baby formula in 1991, but sales of its Carnation formulas have never exceeded about 5% of the $2-billion domestic baby-formula market. Nestle says its Carnation formula is 20% cheaper than the leading brands.
Nestle, which had worldwide sales of $36 billion in 1991, filed suit May 28 against the academy and the two formula makers in federal court in Los Angeles. That was three days after Abbott paid more than $140 million to settle antitrust charges about baby formula brought by Florida and dozens of retailers. Bristol-Myers and American Home Products Corp., whose SMA formula is the No. 3 baby-formula brand with about 11% of the market, settled similar charges in Florida last year. In settling, none of the three companies admitted any guilt. (Nestle’s suit does not name American Home Products.)
“As a competitor and a new entrant in the marketplace, Nestle has a good argument for obtaining some relief,” said Patricia Connors, an assistant attorney general in Florida who worked on the state’s case against Abbott.
Nestle’s suit seeks unspecified damages and to prohibit the defendants from limiting competition. While several other baby-formula pricing suits filed by retailers and various states, including Texas, are still pending, Nestle’s is the first case filed by a rival formula maker.
But some aspects of Nestle’s suit may be hard to prove. Analysts believe Nestle’s Carnation baby formula sales was hurt because of image problems. When Nestle launched its Good Start formula brand in late 1988, it advertised the product as “hypoallergenic.” But after some infants were reported to have had allergic reactions to the product, state and federal regulators raised questions about Nestle’s advertising. Carnation eventually agreed to drop the word on its label and pay a total of $90,000 to nine states.
Carnation’s parent, Nestle S. A., was also the target of a worldwide boycott that began in the late 1970s for promoting the sale of powdered formula in Third World countries where mothers unknowingly mixed it with contaminated water or over-diluted it, causing malnutrition and some deaths.
Officials at Nestle, however, contend that its baby-formula sales declined after they were forced to pull consumer advertising. Nestle says it cannot compete fairly because Abbott and Bristol-Myers have long and entrenched relationships with hospitals and doctors, where many new mothers are introduced to infant formula.
The academy said it has never found any evidence that advertising discourages breast feeding, but the group condemned Nestle in 1988 when the company launched its Carnation formulas with print and television advertising. Nestle’s marketing strategy was also criticized by the leading formula makers, which Nestle contends was also intended to stifle new competition.
Dr. James Strain, the academy’s executive director, denied that the advertising policy was influenced by formula makers or that his medical group favored one formula company over another. “We’re going to certainly challenge the Nestle case,” he said in an interview.
But former academy officials and court records in the Florida case involving Abbott suggest that the medical group did have finances in mind when evaluating the advertising policy and that it discussed the issue of advertising with formula companies.
In May, 1989, for instance, Strain wrote a memo to a top Abbott official, saying, “We’re together on our opposition to direct advertising of formula to the public, and we’ll continue to do what we can (within legal and ethical limits) to deal with the problem.”
Strain countered that the memo merely emphasized his group’s objection to advertising baby formula. As for financial considerations, Strain confirmed that the top three formula makers have donated about $1 million annually to the academy, including $250,000 from Abbott for the building of the academy’s $10-million headquarters in Elk Grove Village, Ill., in 1983.
But Strain said the baby-formula industry’s donations account for only 3% of the medical group’s annual budget. Much of that money is in foundation supports and grants, he said, and they are not part of the academy’s operating budget. Because of their insistence on advertising, the academy has refused donations from Carnation and Gerber Baby Formula, also a small and new player in the market.
Abbott’s Ross Laboratories, the Illinois subsidiary that makes infant formula, did not return calls seeking comment on Nestle’s suit. New York-based Bristol-Myers, through its Mead Johnson subsidiary, said in a written response: “Nothing Mead Johnson has done has in any way inhibited Nestle from offering its products to hospitals or any other customer in any way it chooses.”
Hospitals routinely provide samples of baby formula in “discharge packs” to mothers, while doctors are often asked what brands they prefer. Carnation contends hospitals have exclusive arrangements with formula makers, which experts say provide free supplies and often donate to pediatric centers. And at doctors’ offices, “Our sales reps were getting shut out,” Laurie MacDonald, a Nestle U. S. A. spokesperson, said.
Individual pediatricians are very likely to disagree. Experts agree there isn’t a significant difference among infant formulas because they all must meet federal requirements. Yet some local pediatricians interviewed said they do give away samples and suggest certain brands--as they do with cold syrup, aspirin and other drugs--because of their familiarity with those brands, success with them and for convenience sake. And in the case of baby formula, that sample is most likely to be one of the top three brands, they said.
“It’s not a conspiracy, whatever Carnation may say,” said Dr. Melvin Kirschner, a Van Nuys family physician who is chairman of the bioethics committee at Valley Presbyterian Hospital. The big formula makers “remind you constantly and provide you with large amounts of samples,” he said. “I haven’t seen a Carnation salesman here recently.”
