Optimism on the Rise for Pharmaceutical Takeovers

Bergen Brunswig Corp. and AmeriSource Health Corp. shares rose Tuesday on growing optimism that a federal judge will approve the takeovers of the drug wholesalers by rivals.

Shares of Orange-based Bergen Brunswig, the second-largest U.S. wholesaler, rose $1.88 to $53, while No. 4 AmeriSource rose $1.06 to $73.94. Shares of McKesson Corp., the nation’s largest wholesaler, climbed $3.56 to $89.56, while No. 3 Cardinal Health Inc. shares rose $2.25 to $100.44. McKesson seeks to acquire AmeriSource, while Cardinal wants to purchase Bergen Brunswig.

The Federal Trade Commission is challenging both proposals, contending the combined companies could push up prices and reduce service quality.

In comments late Monday, however, U.S. District Judge Stanley Sporkin suggested he might permit the acquisitions with restrictions that would force the wholesalers to pass on some savings from their consolidations to drug purchasers.

“The judge has demonstrated through his comments that he is inclined to consider a variety of outcomes,” said Christopher McFadden, an analyst at Wheat First Union. “The defense has done a very effective job of presenting their case.”

Sporkin must decide whether to grant the FTC’s request for a preliminary injunction that would block the transactions until an administrative law judge can hold a longer trial. A decision siding with the FTC almost certainly would prompt the companies to abandon the acquisitions. Sporkin is expected to rule by the end of this month.

Although Sporkin previously raised the possibility of imposing a price cap on the wholesalers as a condition of approval, his latest remarks were his strongest signal yet that he might side with the companies. They came in the middle of testimony from a string of company witnesses who said the takeovers wouldn’t lead to higher prices for chain drug stores, hospitals and other customers.

“The vehemence with which he delivered his statements allows for increased optimism that he might side with the wholesalers’ argument of increased efficiency as a rationale for these mergers,” said Lawrence Marsh, a Salomon Smith Barney analyst who rates Cardinal, McKesson and AmeriSource as “buy” and Bergen Brunswig as “hold.”

At the beginning of the trial last month, investors generally saw little chance that the two acquisitions would go through. Now, though, there’s more hope that the purchases might be allowed, one way or another, analysts said.

San Francisco-based McKesson is seeking to buy Valley Forge, Pa.-based AmeriSource for about $3.6 billion. Dublin, Ohio-based Cardinal is offering about $4.6 billion for Bergen Brunswig.