It seems to matter more to Wall Street than hospitals and other providers that the No. 2 wholesale drug distributor wants to acquire the No. 5 distributor, creating No. 1.
Dublin, Ohio-based Cardinal Health said last week it plans to buy Indianapolis-based Bindley Western Industries in a stock-for-stock transaction valued at approximately $2.1 billion and the assumption of Bindley Western's debt.
The deal is expected to close in the first half of 2001, but it hinges on antitrust approval from the Federal Trade Commission, which is far from a sure thing.
The FTC's read of the wholesale drug distribution business was the only cautious note sounded by analysts, who recall how the FTC shot down the top four distributors in 1998 when they tried to consolidate into two mega-powers.
At the time, Cardinal wanted to merge with another, albeit much larger distributor, Orange, Calif.-based Bergen Brunswig Corp. And soon after Cardinal announced its deal, San Francisco-based McKesson Corp., as it was known at the time, followed suit with plans to merge with Valley Forge, Pa.-based AmeriSource Health. When the FTC said it would seek an injunction to block both mergers because of anticompetitive concerns, administrative hearings in the U.S. District Court ensued.
The FTC prevailed, and all four distributors abandoned their plans.
Cardinal and Bindley expressed confidence in getting antitrust clearance this time around, touting their pending deal as "a great fit," a melding of two similar corporate cultures headed by their founders, Cardinal Health Chairman and Chief Executive Officer Robert Walter and Bindley Chairman, President and CEO William Bindley.
Bindley brings to Cardinal's diversified array of healthcare services some pharmaceutical distribution contracts with the federal government as well as its nuclear medicine business--a fast-growing field that Cardinal has not explored before now.
Apart from the growth in revenue--Cardinal posted $25.2 billion in operating revenue in fiscal 2000 to Bindley's
$5.8 billion--the two companies expect to realize an annual savings of more than $100 million per year through efficiencies such as the elimination of overhead after three years of doing business as one.
"We know distribution stone cold," Walter said during an investors' teleconference last week.
Combined, the merged company would have a 27% share of the distribution market, inching ahead of McKesson HBOC at 26%, said Lawrence Marsh, senior vice president of equity research at Lehman Brothers, New York.
Marsh was with many hospital pharmacists and group purchasing organizations at the midyear clinical meeting of the American Society of Health System Pharmacists in Las Vegas. He said the discussion was mostly about solving the problem of medication errors, not consolidation in the distribution industry.
Bindley's biggest buying group contract is with Consorta Catholic Resource Partners, based in Rolling Meadows, Ill. In 1999, the two signed a three-year pharmaceutical supply agreement with a two-year option to extend. The contract gave Bindley an opportunity for $550 million in annual sales to Consorta's 400 hospital members.
Consorta officials said they see no impediments if Cardinal enters the picture.
"We hope that a combined organization could achieve economies of scale that result in even greater value to Consorta hospitals and systems," said Darrel Weatherford, a Consorta vice president.
Cardinal is not showing any signs of skittishness in facing the FTC again. Walter argued at the investors' conference that the FTC had suggested during the 1998 hearings that it considered Bindley to be significantly outclassed in size by the four superpowers of distribution: Cardinal, McKesson, Bergen Brunswig and AmeriSource.
"We believe the FTC view is likely to be the same. Bindley is still significantly smaller," Walter said.
Marsh said he isn't so sure. He gave the deal a 70% chance of passing muster with the agency and being completed as planned.
"The issue is whether Bindley has expanded since then to be considered a national player. I don't think it's a given one way or the other how this plays out," Marsh said.
Bindley would move its headquarters to Dublin. Walter, 55, would head the combined company, and Bindley, 60, would join the board of directors.