FTC v. Cardinal Health, Inc. case brief summary
12 F. Supp. 2d 34, 65 (D.D.C. 1998)
Cardinal, Bergen, McKesson, and Amerisource were the top four firms in the drug wholesaling business. These companies delivered drugs overnight to hospitals as well as independent pharmacies after buying in bulk and warehousing drugs. In August of 1997, Cardinal announced that it was going to merge with Bergen, then McKesson. Amerisource announced that they would merge, either because it was necessary to compete or simply to challenge Cardinal/Bergen.
Notable Case Facts
Hospitals purchased 85% of drugs
from wholesalers, 15% directly; independent pharmacies bought 95%
from wholesalers; chain pharmacies (CVS, Rite Aid, Walgreens, etc…) purchased
approximately 30 to 35% from wholesalers.
Competition between the
wholesalers was so fierce that there was essentially no delivery fee
and the wholesalers made all their profits simply by paying the
manufacturers thirty days early and receiving rebates.
The preliminary injunction was
tried for seven weeks because Judge Sporkin loved the case and wanted to
hear everything from everyone (he used to be the head of the SEC and
did not know anything about antitrust).
The wholesalers attempted to
portray themselves as merely “delivery boys” with minimal
percentages of revenues of the drug industry as a whole; they were
unsophisticated players with no market power who were squeezed between the
hospitals and the drug manufacturers.
The wholesalers also attempted to minimize
consideration of barriers to entry by showing a film of three people
in a warehouse. These individuals were shown wearing blue jeans and t-shirts, running around like
crazy and putting drugs in a delivery truck. (They
were actually running enormous enterprises on incredibly small margins; it
was an incredibly dangerous and risky business to enter.)
Within a week of losing the
preliminary injunction, the companies abandoned the merger,
since the cost of appeal would not be worth the benefit of winning
(much less the cost of losing).
The FTC brought in a purchaser for
the troops in Iraq, who testified how he played the wholesalers off
each other in bidding contests and argued that if there were only
two wholesalers, the military would end up paying more for drugs.
Originally, there were only two
wholesalers in California, then the other two entered, so the FTC
brought in a purchaser who testified how prices kept dropping after
the second two entered the market.
An independent hospital was also brought in as a witness. The purchaser testified to the
wholesalers’ convincing the hospital to sell their warehouse and instead to simply rely upon the wholesalers, which locked them into dealing with
The last witness was an economist,
who commented on all the evidence, essentially summarizing it for
the judge and the court of appeals.
The most potent evidence was
from Goldman Sachs, since they were really trying to sell the deal
to investors based upon the idea of monopoly profits.
An efficiency study has to be done
before the announcement of the merger, then it needs to be defended;
otherwise it becomes impossible to argue that there is efficiency
gains and that the gains are certain.
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