The Federal Trade Commission unveiled its case against the mergers proposed by drug distributors Cardinal Health and McKesson Corp. last week and painted an ugly picture for customers if the deals are allowed to go through.
Although much of the antitrust regulators' case remained sealed, the publicly released documents provide the first detailed look at the federal government's beef with Dublin, Ohio-based Cardinal Health's proposed $2.5 billion acquisition of Orange, Calif.-based Bergen Brunswig Corp. and rival San Francisco-based McKesson Corp.'s bid for Valley Forge, Pa.-based AmeriSource Health Corp. for $2.3 billion.
The FTC said the marriage-minded drug distributors were motivated to merge and cut excess capacity in an effort to ease the pain caused by current competition. In a nutshell, the FTC said "these mergers are defendants' chosen means to remove their incentives to cut prices."
Moreover, the FTC lawyers told the U.S. District Court in Washington that many of the companies' customers are ready to stand up and be counted in opposition to the deals. "Some of the largest group purchasing organizations . . . large hospital chains and HMOs" are prepared to testify on the government's behalf about the dangers posed by mergers, the FTC said. The identities of the prospective witnesses, however, were struck from the publicly released documents.
After a six-month investigation, the FTC's commissioners voted March 3 to block the mergers. The FTC then filed for a preliminary injunction to halt the mergers while it prepares its administrative antitrust complaint and until that complaint is ultimately resolved. The FTC released the documents in support of the injunction last week.
For their part, the drug distributors roundly asserted that the deals are pro-competitive. The mergers, they said, would dramatically improve efficiency and ultimately result in cost savings being passed along to customers.
"The FTC's challenge to our transaction with Bergen Brunswig is wrong on its merits," said Robert Walter, Cardinal's chairman and chief executive officer. "We exist between powerful drug manufacturers and customers and win business only if we are more efficient than self-warehousing alternatives. To ignore this market reality is to totally misunderstand how our market really works."
Added McKesson spokesman Larry Kurtz: "We've indicated that in the merger we would take more than $120 million out of our two companies' cost structures. . . . Our focus hasn't been on the reduction of overcapacity but on the economies that can be delivered through this merger."
But the FTC said the two mega-companies left standing after the mergers plan to shutter 44 warehouses -- almost half the 99 they run today. Far from helping customers, the FTC argued, the dramatic drop in capacity would remove a strong incentive for the drug distributors to compete on price and service to gin up business.
Warehouse consolidation would hurt hospitals especially, the FTC said. A direct consequence of fewer and more distant drug distribution centers would be that hospitals would not "receive the same levels of service, including emergency service, on which they have come to rely."
Furthermore, dissatisfied customers seeking relief would have few options and little leverage. The FTC estimated that nearly 80% of the market and almost the entire market for national accounts would be in the hands of the two large post-merger companies. Perhaps most telling, the FTC said, "the merging firms would be eight times the size of the next largest wholesaler and almost 20 times larger than any of the remaining local and regional firms."
The FTC estimated market share at more than 40% for Cardinal-Bergen, 38% for McKesson-AmeriSource and 20% divided among about 40 companies that constitute the rest of the industry.
The resulting duopoly would make it too easy for the mega-distributors to coordinate pricing, the FTC said. And in a provocative assertion, the antitrust regulators said such price coordination has already occurred in the form of a "multi-supplier drug wholesaling contract." Although the specifics were withheld from the publicly released documents, the example appears to involve sales to hospitals.
Although neither Cardinal nor McKesson is set to make a final decision on litigation to challenge the feds' charges until later this week, their lawyers' comments in a federal court hearing for the preliminary injunction in Washington last week seemed to signal an intent to proceed with challenges, according to Bloomberg News. An administrative trial on the antitrust complaint could begin by May 12, Bloomberg said.