Three years back, Orange-based Bergen Brunswig Corp. and Cardinal Health Inc. of Dublin, Ohio, were gearing up to be a greater force in the wholesale drug distribution industry.
But Cardinal’s acquisition of Bergen never happened,the Federal Trade Commission nixed the deal and another one between McKesson HBOC Inc. and AmeriSource Health Corp. The reason: antitrust concerns in the politically sensitive drug sector. Regulators feared the combinations would slice the industry’s competitive field in half.
But Bergen and Valley Forge, Pa.-based AmeriSource now believe they’ve got a marriage that won’t crack up over antitrust issues. Last month, Ameri-Source announced plans to buy Bergen for about $4.5 billion in stock and debt.
The two companies contend the deal makes sense in light of industry consolidation, such as Cardinal’s February buy of smaller rival Bindley Western Industries Inc. Another variable is the new administration in Washington (see story below).
“The FTC’s certainly going to look at it. That doesn’t mean that the FTC will automatically try to block it,” said Richard Parker, a partner with O’Melveny & Myers LLP’s Washington office and a former trade commission staff lawyer who argued the government’s cases against the 1998 industry mergers.
Antitrust lawyers and industry observers say things have changed enough since 1998 to give the AmeriSource-Bergen deal good odds.
“I would be optimistic about the chances,” said Mark Haddad, a partner at law firm Sidley & Austin in Los Angeles. “Based on what little has come out in public, their chances are pretty good. There’s not going to be a reflexive reaction because they blocked two mergers three years ago.”
AmeriSource-Bergen Corp., as the new company is set to be called, would have annual revenue of around $35 billion. Based on recent quarterly results, McKesson HBOC counts annual sales of about $44 billion, while Cardinal is at roughly $38 billion. But Cardinal’s acquisition of Bindley Western created what some estimate is the biggest drug wholesaler.
Bergen and AmeriSource’s primary hurdle is proving to regulators that a combined company would keep the drug distribution market competitive, according to Robert Badal, a partner with Heller Ehrman White & McAuliffe LLP, a Los Angeles law firm.
“They have to show that it creates more competition with Cardinal and McKesson than the prior arrangement,” Badal said. “They have to show that it’s pro-competition and creates a stronger third force. Antitrust officials see it as a highly concentrated industry.”
Badal described the wholesale drug distribution industry as “four or five players that all want to get married.”
Regulators are expected to do a second review of the proposed combination, said Andrew Speller, an analyst who follows Bergen and AmeriSource for A.G. Edwards Inc. in St. Louis.
“They will be pushing the Sept. 15 drop-dead date,” he said, in reference to a deal termination date set by the two companies.
Speller said he gives the AmeriSource-Bergen deal a 60% chance of getting done.
One thing that’s different today than two years ago is that another big industry acquisition isn’t in the mix, Speller said.
Back then, “The industry (would have) gone from four to two in terms of national distributors. The FTC had no choice,it had to either approve both or not approve both. This time, it will not have a competing offer,” he said.
Another big difference: No organized opposition so far.
“Last time, the customer groups, the large retail chains and hospital group purchasing (organizations) were against the deal. We haven’t seen that so far,that’s a major plus,” Speller said.
A lack of deal critics could counteract arguments that going from four to three national wholesale drug distributors is anti-competitive, he said.
If the AmeriSource-Bergen deal goes through, Speller estimates that the three largest drug distributors would each control around 27% of the market. Figures from the Healthcare Distribution Management Association’s 2000 industry profile estimated Cardinal’s market share at 31%, McKesson’s at 30%, Bergen’s at 22% and AmeriSource’s at 11% in 1999.
“You have to be very large in terms of scale in order to be profitable,” Speller said.
The fact that the companies would be roughly the same size also could help Bergen and AmeriSource’s case, said Martin Thompson, a principal in Los Angeles-based Riordan & McKinzie’s Costa Mesa office who practices antitrust law.
Thompson cited a federal “concentration index” showing that companies with roughly the same market share,rather than one giant player,make for a more competitive market and reduces the likelihood of collusion.
Geographical penetration is another area regu-lators are expected to look at. Bergen and AmeriSource’s overlap tends to be in certain parts of the Southeast and Midwest, rather than across the entire country, according to analyst Speller.
When it comes to pricing concerns, drugstore chains and hospital group purchasing organizations are in the driver’s seat, Speller said. Competition in the drug distribution arena has helped lower prices over a 10-year period, he said, and a merger “may or may not raise the prices, but the decline (rate) may slow.”
The fact that Bergen and AmeriSource sell to large customers works in their favor, Thompson said. “Large buyers will force large sellers to be competitive,” he said.
Bergen, with $23 billion in annual sales, is almost double AmeriSource’s size. But AmeriSource has the larger market capitalization at $2.5 billion vs. Bergen’s $2.2 billion as of last week. That’s partially because Bergen had serious financial woes during the past two years as it wrestled with two acquisitions.
Since then, Wall Street has credited Bergen Chairman Robert Martini, who came out of semi-retirement in 1999 to serve as interim chief executive, with paying down debt and shoring up the business. On the proposed merger, Martini said in a release that “our two companies have significant complementary strengths that will allow us to deliver enhanced benefits for shareholders, customers, suppliers and employees.”
Martini is set to become chairman of the combined company. R. David Yost, AmeriSource’s chairman and chief executive, will become chief executive and president of AmeriSource-Bergen. AmeriSource-Bergen’s corporate offices would be in Valley Forge, with local offices retained as a West Coast management center. Bergen employs around 10,450 people company-wide, and some 800 in OC. n
