Deals Merging Nation’s Top 4 Drug Sellers Into 2 Blocked

A federal judge on Friday granted an injunction blocking two mega-mergers that would have combined the nation’s four largest drug wholesalers--including Orange-based Bergen Brunswig Corp.--into two dominant giants.

The Federal Trade Commission had sought the injunction, claiming that Bergen Brunswig’s acquisition by Cardinal Health Inc. and San Francisco-based McKesson Corp.’s acquisition of AmeriSource Health Corp. would squelch competition and force up prices for consumers.

The agency maintained that the deals would have left most of the nation’s wholesale drug business in the hands of two behemoths.

Analysts expect the companies to call off their consolidation plans after nearly a year’s wait for the government to sign off on their deals.

Dublin, Ohio-based Cardinal and Bergen--the industry’s No. 2 and No. 3 biggest concerns--said Friday that they were “extremely disappointed” with Judge Stanley Sporkin’s decision to block their proposed $2.8-billion merger. The companies could choose to appeal.

San Francisco-based McKesson, the largest U.S. drug wholesaler, said it was “highly unlikely” that it would proceed with its $1.7-billion acquisition of AmeriSource, the No. 4 company.

But a jubilant Richard Parker, the FTC lawyer in charge of the case, said he was pleased with the ruling. “Consumers and customers will benefit,” he said.

The ruling was announced after the stock market’s close Friday. Bergen shares slipped to $53, off $1; McKesson fell $2.94, to $80.63; Cardinal lost $1.58, to $96.06; Valley Forge, Pa.-based AmeriSource rose $1.81, to $76.13.

While the judge’s ruling is disappointing for the companies, it does help dispel the uncertainty that has clouded the drug-wholesaling marketplace in the last year.

Analysts said the uncertainty had placed both Bergen and AmeriSource--the companies that intended to be acquired--at a disadvantage.

Don Spindel, an analyst at A.G. Edwards in St. Louis, said some potential new customers as well as present customers were reluctant to do business with either of them because, if the deals had proceeded, neither would have survived as independent companies.

Still, Bergen weathered the last year in fine shape and should prosper in the future, analysts predicted.

In the nine months ended June 30, Bergen’s earnings rose 10% to $60.9 million, or $1.31 a share as revenue advanced 16% to $10.1 billion. Profits for the most recent quarter jumped 23% to $27.2 million, or 53 cents a share on a 20% pop in revenue to $3.5 billion.

Sales and earnings for the other three giants have made similar advances.

Beth Cariello, an analyst from BT Alex. Brown, noted that their margins on drug sales have improved in the last several years. Drug makers’ direct-to-consumer advertising of Viagra and other medications is boosting demand. And the aging population of consumers bodes well for the future.

“The whole industry’s fundamentals continue to be very strong,” she said.

The news surprised some courtroom observers, who had taken the positive comments Sporkin made during the proceedings as evidence that he favored the deals.

However, courtroom observers said that, like any judge might, Sporkin simply had explored possible scenarios that might have led to the FTC allowing the deals to proceed in a modified form.

In his 72-page opinion, Sporkin left open that possibility, noting, “There are enough potential public benefits from the merger that would dictate a further effort by the parties to permit the mergers.”

During the proceedings, however, the companies’ suggestion that they might support the emergence of some competitors in a handful of markets didn’t come close to satisfying the FTC.

Lawrence Marsh, a Salomon Bros. analyst who reviewed the ruling, said the judge wasn’t persuaded by the companies’ claims that the mergers generally would have benefited consumers.

The key question was whether the wholesalers’ hospital and pharmacy customers would be stuck having to obtain their drug and medical supplies from the wholesaling giants or could deal directly with drug manufacturers and store their own supplies.

Marsh said that while the judge agreed that large hospital and pharmacy groups can do their own warehousing, he wasn’t convinced that small outfits could do so. What’s more, Marsh said, Sporkin wasn’t persuaded that new wholesalers could enter the market fast enough to offset the anti-competitive effects of the mergers.