Friday, January 17, 2014

FTC v. Cardinal Health, Inc. case brief summary

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).
Government’s Witnesses
  • 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 wholesalers.
  • 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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