The Federal Trade Commission last week launched a formal antitrust investigation of AmeriSource Health Corp., Valley Forge, Pa., and Bergen Brunswig Corp., Orange, Calif., whose proposed merger would create the nation's largest drug distributor in a field of three superpowers.
The would-be partners said they had anticipated the "second request for information" and factored an extended waiting period into their merger timetable. As a result, the $7 billion deal remains on track to close by the end of summer, officials said.
The companies announced their merger plans March 19 and filed their required pre-merger notification documents with the FTC on April 6. The 30-day waiting period expired May 7, when the FTC requested additional documents from the companies rather than giving its approval.
Federal investigators presumably have contacted customers of the drug distributors in recent weeks as part of the antitrust review, but the deal has been "getting good customer support," said Michael Kilpatric, an AmeriSource spokesman. "(Customers) are stepping up and saying it would work."
The combined company would pull in an estimated $35 billion in annual revenue. Between them, the two companies operate 52 distribution centers in 26 states and Puerto Rico, but there are plans to close as many as 22 of those centers over the next two years if the merger is approved.
Both distributors already are profitable. AmeriSource reported record results for the second quarter ended March 31 with operating revenue up 23% to an all-time high of $3.5 billion compared with $2.8 billion for the year-ago period. Net income was up 30% to $31.5 million, or 57 cents per share, from $24.3 million, or 47 cents per share, from the year-ago period. Bergen similarly reported record revenue of $5 billion for its second quarter, a 9% increase from the $4.6 billion for the year-ago period. Net earnings increased 63% to $28.2 million, or 21 cents per share, compared with $17.3 million, or 18 cents per share, from the year-ago period.
Larry McComber, vice president of contract and program services at Novation, one of the largest hospital group purchasing organizations, confirmed that the FTC is taking "an interest" in the deal but declined to say whether Novation was contacted. McComber said he believes the merger would benefit the industry.
"It will create a third company that competes in the likes of volume and geographical coverage with Cardinal (Health) and McKesson (HBOC)," McComber said.
Industry watchers give the deal slightly better odds with the Bush administration's nomination of Timothy Muris for FTC chairman. Muris, a law professor at George Mason University, Fairfax, Va., would replace Robert Pitofsky, perhaps as early as June 1.
A former FTC official during the Reagan administration, Muris is regarded as a supporter of these kinds of mergers. A 1999 article by Muris, titled "The Government and Merger Efficiencies: Still Hostile After All These Years," criticized some high-profile antitrust cases during the Clinton administration, including the quashing of drug distributors' 1998 attempt to consolidate into two firms.
Lisa Gill, senior analyst at J.P. Morgan Chase & Co., New York, gauges the probability that the deal will pass FTC scrutiny at 70%, even without Muris' confirmation.
"We believe that changes in the competitive landscape since the 1998 ruling, coupled with a Republican administration, increase the odds of approval," Gill said.
The merger would combine the third- and fourth-largest drug distributors, giving the new AmeriSource-Bergen Corp. a wafer-thin lead in volume over McKesson and Cardinal. Although the FTC blocked the four largest distributors' efforts to consolidate the industry into two major players in 1998, AmeriSource and Bergen Brunswig officials say the market has changed, not least because of the February 2000 merger of Cardinal and Bindley Western Industries. Thus, a combination of AmeriSource and Bergen Brunswig would consolidate a field of four major distributors into three nearly equal-sized players, Kilpatric said.