Federal Trade Com'n v. Cardinal Health, Inc.

• Decision Date: 31 July 1998
• Docket Number: No. CIV. A. 98-596.,No. CIV. A. 98-595.,CIV. A. 98-595.,CIV. A. 98-596.
• Parties: FEDERAL TRADE COMMISSION, Plaintiff, v. CARDINAL HEALTH, INC. and Bergen Brunswig Corp., Defendants. FEDERAL TRADE COMMISSION, Plaintiff, v. McKESSON CORP. and Amerisource Health Corp., Defendants.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 34

12 F.Supp.2d 34

FEDERAL TRADE COMMISSION, Plaintiff, v. CARDINAL HEALTH, INC. and Bergen Brunswig Corp., Defendants.

FEDERAL TRADE COMMISSION, Plaintiff, v. McKESSON CORP. and Amerisource Health Corp., Defendants.

No. CIV. A. 98-595.

No. CIV. A. 98-596.

United States District Court, District of Columbia.

July 31, 1998.

COPYRIGHT MATERIAL OMITTED

Michael E. Antalics, Federal Trade Commission, Washington, DC, for Federal Trade Commission.

Thomas Francis Cullen, Jr., Kevin David McDonald, Phillip Aaron Proger, Jones, Day, Reavis & Pogue, Washington, DC, Bernard W. Nussbaum, New York, NY, for Cardinal Health, Inc.

Steven A. Newborn, Rogers & Wells, Washington, DC, James B. Weidner, Roger & Wells, New York, NY, for Bergen Brunswig Corp.

Robert W. Doyle, Jr., Arent, Fox, Kintner, Plotkin & Kahn, Jonathan Mark Shaw, Wiley, Rein & Fielding, Frank S. Swain, Baker & Daniels, Washington, DC, for Bindley Western Drug Company, C.D. Smith Drug Company, Michael F. Ackerman.

William Bradford Reynolds, Collier, Shannon, Rill & Scott, P.L.L.C., Frank James Eisenhart, Dechert, Price & Rhoads, Washington, DC, for McKession Corp.

Joseph Tate, Dechert, Price & Rhoads, Philadelphia, PA, Ezra D. Rosenberg, Dechert, Price & Rhoads, Princeton, NJ, for Amerisource Health Corp.

MEMORANDUM OPINION

SPORKIN, District Judge.

The Plaintiff Federal Trade Commission ("FTC") seeks to enjoin the proposed mergers of Defendants Cardinal Health, Inc. ("Cardinal") with Bergen-Brunswig Corp. ("Bergen") and McKesson Corp. ("McKesson") with AmeriSource Health Corp. ("AmeriSource"). The Plaintiff moves for the injunction under Section 13(b) of the Federal Trade Commission Act, 15 U.S.C. § 53(b) in order to stop the Defendant companies from merging before the FTC can hold a full administrative hearing on the whether the proposed transactions are in violation of Sections 7 and 11 of the Clayton Act, 15 U.S.C. §§ 18, 21, and Section 5 of the FTC Act, 15 U.S.C. § 45. From June 9, 1998 to July 17, 1998, this Court held an extensive evidentiary hearing in the matter. After careful consideration of all of the facts presented, this Court grants Plaintiffs motion for the reasons set forth below.¹

I. BACKGROUND

A. THE PARTIES

Plaintiff FTC is an administrative agency charged with the mission of enforcing the federal antitrust laws for the benefit of the American consumer. See Federal Trade Commission Act, 15 U.S.C. § 41 et seq. The Defendants are Fortune 500 corporations listed on the New York Stock Exchange whose principal business is the nationwide wholesale distribution of prescription drugs.² The four Defendants are the largest of the forty plus wholesale drug distributors in the United States.

Defendant McKesson is a Delaware corporation headquartered in San Francisco, California. In both size and sales, McKesson is the largest wholesale distributor of prescription drugs in the United States. It currently operates 35 pharmaceutical distribution centers, 33 of which are in the contiguous United States. In the fiscal year ending March 1998, McKesson posted revenues of 20.8 billion dollars, approximately 12 billion dollars coming from prescription drug distribution alone. For the 1998 fiscal year, its after-tax net income was 154.9 million dollars. See DXC 48 at 24. McKesson's profit margins are widening. Excluding nonrecurring charges, for the quarter ending December 31, 1997, McKesson reported an 80% increase in operating profits over the same quarter a year ago, while revenues increased 34%. Based on sales from the fourth quarter of 1997, 32% of McKesson's sales were to hospitals and other institutions, 37% to independent pharmacies, and 31% to retail chain pharmacies. See PX 461 at 11.

Defendant Bergen is a New Jersey corporation headquartered in Orange County, California. Bergen is the second largest wholesale distributor of prescription drugs in the United States. It currently operates 31 pharmaceutical distribution centers, as well as alternate site and depot facilities. For the fiscal year ending September 30, 1997, Bergen's net sales and other revenues were 11.6 billion dollars, with an after-tax net income of 81.6 million dollars. Bergen's 1997 net sales were 17% higher and after-tax earnings 20% higher than 1996. See PX 1205 II-2-3. To date, Bergen's 1998 revenues are approximately 12.5 billion dollars. Based upon 1995 data, 50% of Bergen's sales were to hospitals, 27% to independent drugstores, and 16% to chain pharmacies.

Defendant Cardinal is an Ohio corporation headquartered in Dublin, Ohio. Cardinal is the third largest wholesale distributor of prescription drugs in the United States. It currently operates 26 pharmaceutical distribution centers, four specialty distribution centers, one medical/surgical distribution facility, six packaging facilities, and four specialty centers. For the fiscal year ending June 30, 1998, its revenues were approximately 12.7 billion dollars, with pharmaceutical distribution accounting for approximately 11.5 billion dollars. For the 1997 fiscal year, Cardinal's revenues were 10.97 billion dollars and its after-tax net income 184.6 million dollars. See DXC 45 at 20, DXC 419 at 70. Of that 184.6 million dollars, Cardinal's after-tax net earnings on pharmaceuticals alone were 140 million dollars, the highest in the industry. Cardinal's net earnings for the first quarter of 1998 were 34% higher than for the first quarter of 1997, even though revenues grew only 20%. According to 1996 sales figures, 52% of Cardinal's sales were to hospital and other institutional customers, 16% to independent drug stores, 29% to non-warehousing chain pharmacies, and 3% to self-warehousing chain pharmacies. See PX 1215 5(d).

Defendant AmeriSource is a Delaware corporation headquartered in Malvern, Pennsylvania. AmeriSource is the fourth largest wholesale distributor of prescription drugs in the United States. It currently operates 19 drug distribution centers and three specialty products distribution facilities. For the fiscal year ending September 30, 1997, its revenues were 7.8 billion dollars, with an after-tax net income of 45.5 million dollars. See PX 1212 part II.6. Based on 1997 sales data, 47% of the company's total sales were to hospitals and managed care facilities, 33% to independent drug stores, and 20% to chain pharmacies. See PX 1212 at 1.

Over the last twenty years, there has both substantial growth and rapid consolidation in the wholesale industry. For the most part, the four Defendants have been the ones leading the trend. As a result of their acquisitions over the years, the four Defendants are the only wholesalers that are able to provide national coverage through a network of distribution centers across the entire United States.³ Most recently, the four Defendants have also begun to integrate vertically by acquiring businesses related to the distribution of drugs and related health care products.

Founded in 1833, McKesson became the first national drug wholesaler. It achieved its nationwide scope during the Great Depression when it acquired many of the failing drug wholesalers. It remained the sole national drug wholesales until 1992, when Bergen expanded its coverage to the entire nation. In 1988, McKesson attempted to acquire AmeriSource, then known as Alco Health Services Corp. ("Alco"), but abandoned its efforts after the FTC challenged the merger. In November 1996, McKesson successfully acquired the business and principal assets of the bankrupt FoxMeyer Corp. ("FoxMeyer"), which at the time of the purchase, was the fourth largest wholesale distributor of prescription drugs. Immediately after the purchase, McKesson had approximately 57 pharmaceutical distribution centers. In the following two years, it closed 15 and sold 3 of them. As of February 5, 1998, McKesson's plans included closing three more of the centers as a result of the FoxMeyer merger.

Recently, McKesson began to integrate vertically by acquiring several businesses related to the distribution of pharmaceutical products and health care supplies: In December 1995, McKesson acquired BioServices Corporation, a business that provides product marketing and support services for the pharmaceutical industry; in April 1996, McKesson acquired Automated Healthcare, Inc., which specializes in automated pharmaceutical dispensing systems; and in February 1997, McKesson acquired General Medical, Inc., a multi-market distributor of medical/surgical supplies.

Bergen-Brunswig was created by the 1969 merger of Bergen, an East Coast company, and Brunswig Drug Co., a West Coast operation. Since 1978, Bergen expanded by acquiring eleven other drug wholesalers, including Durr Drug Company, Owens and Minor, South Bend Drug, and Dr. T.C. Smith. Bergen became the second national drug wholesaler in 1992 after it acquired Dirrfilauer in the southeastern part of the United States. Of the 38 drug distribution centers acquired by Bergen in the last fifteen years, 34 have been closed. In 1996, Bergen briefly explored the idea of vertical integration with a proposed acquisition of Ivax, which at the time was the largest generic drug manufacturer in the United States. The proposed transaction was abandoned shortly thereafter.

Cardinal was established in 1971 as a food wholesaling company that distributed food products to independent supermarkets. In 1979, Cardinal entered the drug wholesaling industry by purchasing Bailey Drug, an existing drug wholesaler. After going public in 1983, Cardinal continued to expand by acquisition: In 1984, it acquired Ellicott Drug; in 1986, Daly Drug and John L. Thompson; in 1988, Marmac Distributors; in 1990, Ohio Valley Drug; in 1991. Chapman Drug; in 1993, Solomons.; and in 1994, Baherns, and Humiston-Keeling.

Cardinal became a national drug wholesaler in 1994 when it acquired and merged with Whitmire Distribution Co., a California based drug wholesaler with 3 billion dollars in annual revenues and distribution centers...