McKesson Corp. figures to stay top gun in drug distribution, regardless of whether its $2.25 billion bid for No. 4 distributor AmeriSource Health Corp. actually succeeds.
San Francisco-based McKesson said last week that it has reached a definitive agreement to acquire AmeriSource in a combined stock-swap and assumption of debt. The deal would create the nation's largest drug distributor, with projected annual revenues of $26 billion, market share in excess of 35%, and efficiencies worth $120 million annually after two years.
But the acquisition must first scale a mountain of skepticism from the Federal Trade Commission. That could spell deja vu for McKesson, which in 1988 abandoned a buyout of AmeriSource in the face of strident FTC opposition.
Nevertheless, McKesson could win the drug distribution war even if it loses the battle to acquire Valley Forge, Pa.-based AmeriSource, some observers said.
With heightened concerns about drug distribution concentration, the FTC could balk at approving both McKesson's bid and that by rival Cardinal Health, Dublin, Ohio, for Bergen Brunswig Corp., Orange, Calif., announced last month. That would freeze the market as is, with McKesson on top.
"We've got the battle of the titans in product distribution," said Lawrence Marsh, an analyst at Salomon Brothers, New York. "McKesson's volley was . . . a really savvy move," he said, reducing the odds that either deal will be approved.
And a blocking strategy has worked in other industries. Soft-drink leader Coca Cola made a play for No. 4 Dr. Pepper after No. 2 Pepsi said it would acquire No. 3 Seven-Up in the mid-1980s, recalled Marc Schildkraut, a former FTC attorney now with Howrey & Simon, Washington.
"The (FTC) found it impossible to separate out the two, and couldn't approve one and not the other," he said. Both deals fizzled. But in preparing for trial against Coca Cola, Schildkraut said, it appeared the beverage giant's objective all along was to use the FTC to prevent its rival's deal. "So in a way the Coke strategy worked," he said.
McKesson and AmeriSource executives emphasized their proposal was for real. Last week they said a combination would spur better pricing and increase competition.
"We feel very strongly that this merger is pro-competitive," said Mark Pulido, president and chief executive officer of McKesson.
Profit margins have decreased in step with the decline in the number of drug distributors over the past six years, Pulido said.
But consolidation could be passing the point of diminishing returns.
Last week Cardinal said the FTC had made a second request for information on its deal, a sure sign of a full investigation.