FTC Blocks 2 Drug Mergers; Health, Price Issues Cited

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 Orange-based Bergen Brunswig Corp.’s acquisition 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 ranks No. 4.

Last August, Cardinal announced plans to purchase Bergen in a deal valued at $2.8 billion. Less than a month later, McKesson said it would acquire AmeriSource for $2.3 billion.

The agency noted 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 although the agency is particularly concerned about deterioration in the timely delivery of drugs, a life-and-death issue, the FTC would probably have stopped any merger that leaves such a high share of the market with two companies.

Trading in the stock of the four companies was halted after the agency’s announcement.

On the New York Stock Exchange, Bergen Brunswig shares were trading at $42.88, off 19 cents a share, Cardinal shares were down $2.69 to $79 and McKesson was up $1.25 to $53.25. On Nasdaq, AmeriSource was down 69 cents to $56.75. Last week, however, all four stocks tumbled as word spread that the FTC’s legal staff had urged the commission to challenge the deals.

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 before the agency’s request for a preliminary injunction is heard, and, if an injunction is granted, six months to a year longer before an administrative judge takes up the case, the FTC’s Parker said.

Commissioners stressed the importance to the marketplace of the drug wholesaling industry. 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 probably 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.

Analysts said that if the mergers don’t proceed, the companies will emerge 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.

What’s more, says analyst Don Spindel, at A.G. Edwards, in St. Louis, Bergen has had an opportunity to learn how its intended merger partner, Cardinal, has negotiated lower prices from drug companies.

That knowledge will enable Bergen to toughen its price negotiations with drug suppliers and improve earnings.