The lack of a viable third competitor to Cardinal/ Bergen and McKesson/Amerisource is one reason the Federal Trade Commission is opposing the two wholesaler mergers.

In reviewing the two agreements, FTC "discerned that there would be nobody to be pressuring the two big firms to continue to reduce prices and to continue to provide value-added" computer-based and customer services, FTC Bureau of Competition/Senior Litigation Counsel Richard Parker reported at the National Community Pharmacists Association legislative meeting March 9 in Washington, D.C.

The four companies have been "slugging it out in a very fierce way for a number years, and frankly have come up with a very good product at a very good cost," Parker remarked. "But we are extremely concerned that that will come to an abrupt and screeching halt if you allow this industry to go to two."

In reviewing the mergers, FTC found that "if you add up the drug wholesalers' revenue on a national basis, you would find that the four of these parties together come to approximately...80%" of the market, Parker said, with each merged company controlling about 40% of the market.

The next largest wholesaler would be Bindley Western, with a market share of 4%-5%, "and it gets smaller from there," Parker said.

Parker explained that Supreme Court case law and economic theory creates "a presumption that any merger that results in market share in excess of 30% is presumptively illegal."

"Here you have two going to possibly 40%, and if you look at both transactions together, up to 80%" of the market, Parker emphasized. "That is unprecedented. So I think you can understand why the Commission couldn't let that pass."

FTC voted to oppose the two mergers March 3, and filed preliminary injunction requests in D.C. federal court March 9 ("The Pink Sheet" March 9, p. 3). If the wholesalers challenge the injunction, court proceedings could last six months to a year, Parker estimated.

FTC looked only at each merger company's national revenues in making its decision, Parker explained. However, a region-by-region analysis would not help the wholesalers, he added.

"I do not think that you would find any market in which these merged parties would not be dominant," Parker commented. In the northwest (a focus of FTC action to block McKesson's acquisition of Northwestern Drug and Alco/Amerisource in 1988), "the numbers would probably be higher than 80%." In the northeast, the market "might be different" because of the presence of Neuman, Parker acknowledged.

Parker's emphasis on the collective market share of the two merged companies suggests that McKesson's quick action in reaching a deal with Amerisource after the Cardinal/Bergen announcement paid off. McKesson appeared to be hoping for a tandem review that would ensure that it retained the number one position in the market no matter which way FTC ruled.

Parker, however, maintained that FTC would have "gone after either of them or both of them." He did indicate that the simultaneous reviews highlighted the concerns: "One of them is bad, two of them are worse, but we would have gone after either one."

The FTC complaint against McKesson explicitly links the two deals. "These anticompetitive effects would be heightened by another proposed merger in the same relevant market(s), if Cardinal Health, Inc. consummates its proposed acquisition of Bergen Brunswig."

The lack of a significant competitor undercuts attempts by the wholesaler to justify the merger based on cost savings, Parker said.

"It is absolutely the case that many mergers do have cost savings, and it is absolutely true that there will be cost savings, one would assume, from this one as well," Parker acknowledged. However, "our concern is...there really isn't anybody out there other than each other to force them to share those costs with customers."

While the merger review process lacked the open opposition engendered by the proposed McKesson/ Alco merger a decade ago, Parker maintained that there was widespread opposition among customer groups.

"It is fair to state that the phones rang off the hook at the FTC" with groups including retail pharmacists, chain drug stores, hospitals, buying groups, clinics, HMOs and other groups voicing similar concerns about the effects of the merger on costs, Parker said.

FTC Wholesaler Merger Ruling Reflects Lack Of Large Third Competitor

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