FTC Stalls Two Major Mergers in Wholesale Drug Business
The Federal Trade Commission voted Tuesday to block two mergers in the drug distribution industry that would have left most of the nation’s wholesale drug business in the hands of two corporate behemoths.
The commission said the deals, if allowed, would significantly reduce competition in the wholesale market for prescription drugs and trigger higher prices for consumers.
Commissioners, who voted 3 to 1 against the mergers, also said they feared that vital health care services, such as emergency deliveries of rarely used drugs, would deteriorate.
As a result, the FTC said it will go to court in an effort to block the acquisition of Orange-based Bergen Brunswig Corp. by Cardinal Health Inc., of Dublin, Ohio, and San Francisco-based McKesson Corp.’s purchase of AmeriSource Health Corp. of Malvern, Pa. Bergen is the nation’s second-largest drug wholesaler, while Cardinal ranks No. 3. McKesson is the largest distributor, and AmeriSource No. 4.
Bergen, one of Orange County’s largest public companies, would have become part of a new company, called Cardinal Bergen Health, based in Ohio.
Though Bergen’s earnings have failed to grow as rapidly as those of its three big competitors, analysts say that the company could emerge even stronger, regardless of whether the its merger with Cardinal eventually goes through. Analyst Don Spindel at A.G. Edwards in St. Louis, says the merger talks have given Bergen some insights into how Cardinal has negotiated lower prices from drug companies--knowledge Bergen can use to toughen its price negotiations with drug suppliers and improve earnings.
Trading in the four companies’ stocks was halted after the agency’s announcement. At the time, Bergen Brunswig shares were trading at $42.88, off 19 cents a share, on the New York Stock Exchange. Cardinal shares were down $2.69 to $79, McKesson was up $1.25 to $53.25, and AmeriSource was off 69 cents, at $56.75. Last week, all four stocks tumbled as word spread that the FTC’s legal staff had urged the commission to challenge the deals.
The agency said Tuesday that the mergers would give two surviving giants a market share of more than 80% of prescription drugs sold by wholesalers.
“I view this as an extreme case of concentration,” said Richard Parker, the agency’s senior legal counsel. He noted that while the agency is particularly concerned about any deterioration in the timely delivery of drugs, a life-and-death issue, the FTC likely would have stopped any merger that leaves such a high share of the market with two companies.
A Bergen Brunswig spokeswoman said Tuesday that the company’s board met to discuss the agency’s decision. Spokespersons for Cardinal and AmeriSource couldn’t be reached. A McKesson spokesman didn’t return calls seeking comment.
Antitrust law experts say the mergers may present a classic case of potential pricing problems caused by industry concentration.
“When you have too few decision makers making decisions relating to a single market, then prices get higher,” said William Baxter, a Stanford University law professor.
The agency will seek a preliminary injunction to halt the mergers and have the matter considered by an administrative law judge.
It could be six weeks or so before the agency’s request for a preliminary injunction is heard--and, if an injunction is granted, another six months to a year before an administrative judge takes up the case, the FTC’s Parker said.
Commissioners stressed the importance of the wholesaling industry to the marketplace for drugs.
A retail pharmacy can efficiently order and receive within a day all its drug needs from one wholesaler, rather than having to place multiple orders from various manufacturers on a less timely basis, the agency said.
Commissioners said many drug companies refuse to deal directly with small pharmacies and won’t sell drugs in small quantities.
In addition, wholesalers serving hospitals can provide 24-hour emergency delivery services.
Antitrust lawyers say that if the drug wholesalers challenge its decision, they will likely fight over the agency’s assertion that drug wholesaling is a specific market, and that two giant companies would hold dominant shares.
For example, the companies might be able to argue that the wholesalers making up the other 20% share of the market still could provide significant competition, said Eleanor Fox, a law professor at New York University.
With few exceptions, such as its recent effort to block the merger of Staples Inc. and Office Depot Inc., the FTC has generally cleared most major mergers.
But the commission’s legal staff had recommended the deals involving drug wholesalers be challenged on antitrust grounds.
Cardinal’s plans to purchase Bergen in a deal valued at $2.8 billion were announced last August. Less than a month later, McKesson said it would acquire AmeriSource for $2.3 billion.
Analysts said that if the mergers don’t proceed, the companies will be relatively unscathed.
Earnings of all but Bergen Brunswig have been growing recently at 20% a year--and Cardinal’s have been growing at that rate for a decade.
Bergen itself has committed to meeting that 20% growth mark, too.
Since the merger was announced months ago, it has lined up an impressive amount of new business, say analysts.
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Mega Market Share
The four companies involved in the two mergers blocked by the Federal Trade Commission control more than 80% of the wholesale market for prescription drugs. Total 1997 revenue (billions):
McKesson Corp.: $12.9
Bergen Brunswig: 11.7
Cardinal Health Care: 11.0
AmeriSource Health Corp.: 7.8
Stop That Merger
Other mergers challenged by the Federal Trade Commission in recent years:
1997
Staples--Office Depot
Industry: Office supplies
Details: Obtained preliminary injunction against $4.6-billion merger, which was subsequently scrapped
1996
Butterworth Health Corp.--Blodgett Memorial Medical Center
Industry: Health care
Details: Challenged merger of two largest acute-care hospitals in Grand Rapids, Mich. District court declined to issue injunction and commission withdrew its complaint; hospitals completed merger.
Questar Corp.--Kern River Pipeline
Industry: Natural gas
Details: Challenged Tenneco Inc.’s plans to sell its half interest in Kern River natural gas pipeline as a violation of antitrust laws. Tenneco found another buyer.
Rite Aid Corp.--Revco DS Inc.
Industry: Retail drugstore chains
Details: FTC sued to block $1.8-billion purchase in April 1996 because combining nation’s two largest drugstore chains would dominate business in the East and Midwest. Rite Aid withdrew its bid.
1995
Freeman Hospital--Oak Hill Hospital
Industry: Health care
Details: Sought preliminary injunction to halt merger of two hospitals in Joplin, Mo. Appeals court declined to issue injunction. Commission withdrew its complaint and hospitals subsequently merged.
Ferro Corp.--Chi-Vit Corp.
Industry: Glass manufacturing
Details: Challenged merger because it would combine two of three leading producers of frit, a specialty glass used to make porcelain enameled steel commonly used in home appliances. Challenge still pending.
Boston Scientific--Cardiovascular Imaging Systems
Industry: Medical instruments
Details: Challenged merger because it would eliminate competition in market for intravascular ultrasound catheters used to diagnose and treat heart disease. Boston negotiated an agreement with commission and completed the merger.
1994
Lee Memorial Hospital--Cape Coral Hospital
Industry: Health care
Details: Challenged merger of hospitals in the Fort Myers, Fla., area. Merger called off in February 1995, after Cape Coral agreed to be acquired by Health Management Associates.
Sources: Federal Trade Commission, Times reports; Researched by JANICE L. JONES / Los Angeles Times
