Healthcare providers may soon face fewer choices about who moves their drugs from the factories to central purchasing. Last week, AmeriSource Health Corp., Valley Forge, Pa., and Bergen Brunswig Corp., Orange, Calif., announced plans to merge in a $7 billion deal that, if completed, would realign the wholesale drug-distribution industry into three superpowers.
The marriage would create the nation's largest drug distributor, just barely, in an industry that has been on a consolidation bender in recent years, with mixed success.
Hospital supply purchasers said they see the merger as ultimately a good thing that will improve services if not costs. It will simplify the process, said Joe Cassidy, director of materials management at 392-bed Medical Center at Princeton (N.J.).
"Reducing the playing field to three major players adds to the competition because it gives you more discrete control over who you are going to go to," Cassidy said.
Similarly, officials at Broadlane, a San Francisco-based group purchasing organization that exclusively deals through Bergen Brunswig, said they view the merger as a positive. Broadlane's hospital customers include Oakland, Calif.-based Kaiser Permanente and Santa Barbara, Calif.-based Tenet Healthcare Corp.
"We think this merger may increase service levels at Bergen," said David McAdam, a Broadlane spokesman.
But officials at Novation, the supply company owned jointly by VHA and University HealthSystem Consortium, were not so sure that the deal would directly benefit their hospital members.
Last April, Novation signed three-year drug distribution agreements with five distributors, including Cardinal Health, McKesson HBOC and AmeriSource-but not Bergen Brunswig. The agreement won't automatically roll over to the new company, Novation officials said.
And further industry consolidation could tighten the cash flow for hospital purchasing departments, cautioned William Larkin Jr., senior vice president of pharmacy services at GNYHA Services, a subsidiary of the Greater New York Hospital Association.
"Our marketplace has gone from five national (distributors) and one powerful regional distributor to three," Larkin said. "(Member hospitals) are being made to conform to the new reality that they have to pay their bills more quickly than in the past when there was more competition."
The deal, expected to close during the summer, requires shareholder and antitrust approval from the Federal Trade Commission-by far the biggest question mark. The industry still harbors vivid memories of what happened in 1998 when they tried to consolidate into two major players.
At the time, Bergen Brunswig wanted to merge with Cardinal Health, while AmeriSource shadowed the deal with plans to merge with McKesson Corp., now McKesson HBOC. The FTC shot down both deals over anti-competitive concerns.
Since then, the companies have regrouped. Last month, Cardinal completed a merger with Bindley Western Industries, forming the nation's second-largest drug distributor.
AmeriSource-Bergen Corp., as the combined company would be called, likely will jump to the top of a nearly equally divided market, according to Ray Falci, senior managing director of Bear Sterns, New York. Combined, AmeriSource and Bergen Brunswig would pull in about $35 billion in annual revenue, compared with McKesson's $31 billion and Cardinal's $30 billion, Falci said. Together, the three superpowers would tie up 80% of the drug distribution market, Falci added.
AmeriSource and Bergen Brunswig officials said they are confident that the FTC would not challenge the proposed merger, arguing it would promote rather than reduce competition. Drug distribution is one of the few areas of healthcare where costs are declining, they said. Together, the companies can achieve economies of scale they could not achieve alone, officials added.
They also said they take heart in the fact that the Cardinal-Bindley deal did not even muster an investigation from the FTC, indicating "a totally different environment" from 1998.
"This combination is not about being big; it's about being the best," said R. David Yost, chairman and chief executive officer of AmeriSource, who will become CEO and president of the new company. Robert Martini, chairman and CEO of Bergen Brunswig, will become chairman.
Falci, however, said he expects the FTC will give this deal greater scrutiny "because clearly this is much more of a consolidation." Though unwilling to handicap it, Falci said there is "a decent chance" it ultimately will be blocked.
But working in the companies' favor is that rather than setting drug prices, distributors are in the business of moving product, Falci added. They work on thin margins, and reap profit on volume.
"I think that could help soften the antitrust argument," Falci said.