Fear of Merger Challenge Jolts Drug Stocks

ORANGE —  Shares of Bergen Brunswig Corp. and three other major drug wholesalers involved in merger deals dropped sharply Tuesday as fears mounted that the Federal Trade Commission will challenge the mergers on antitrust grounds.

The FTC has yet to vote on the two deals, including Orange-based Bergen’s merger with Ohio-based Cardinal Health Inc., but staff lawyers are recommending that the transactions be blocked, according to published reports.

The proposed Cardinal-Bergen combination, along with McKesson Corp.’s acquisition of AmeriSource Health Inc., would give just two companies about 70% of the $80-billion wholesale drug business.

The FTC staff is worried that the concentration of market share would allow the surviving giants to dictate higher prices, a concern that industry analysts voiced when Bergen and Cardinal first announced their $2.8-billion deal in August.

But Wall Street reacted Tuesday not only to FTC concerns but also to recent spikes in the stock prices of the industry’s four biggest competitors, analysts said.

Bergen, the nation’s second-largest drug distributor, saw its stock price drop the most--$7.13 a share--to close at $45. Stock in Cardinal, the nation’s third-largest, fell $6.19 a share to close at $79.81.

Industry leader McKesson dropped $2.75, closing at $53.19 a share, while AmeriSource, the industry’s fourth-largest, fell $3.19 to close at $60.19 a share.

Executives at the companies wouldn’t comment, except to say they expect a decision from the FTC in the next week or two, or by the end of March.

Despite the drop in stock prices, analysts weren’t overly concerned. The lower prices simply put the stocks back where they had been trading until last week, when prices started climbing for no apparent reason.

Analyst Lawrence C. Marsh at Salomon Smith Barney brokerage in New York, for instance, said he lowered his rating on Bergen on Tuesday to “neutral” from “outperform,” mainly because the company’s stock jumped unreasonably in the last week. After trading in the mid-$40 range since the deal was announced, it rose Monday to a 52-week high of $52.13 a share.

“If there were absolutely no deal approved, there might be some additional pullback in shares, especially in Bergen, to reflect fundamental values rather than takeover premiums,” Marsh said.

Bergen and AmeriSource, as well as the two buyers, should have no trouble continuing with profitable operations should the deals fall apart, he said.

Michael Krensavage, an analyst at Brown Brothers Harriman brokerage in New York, figures the FTC will have to look at other factors besides the final size of the two behemoths.

“Even though the whole industry has been consolidating, gross [profit] margins have been going down,” Krensavage said. “What they’ve done as they’ve merged is to cut costs, and they’ve passed some of that cost savings on to consumers.”

He contends that wholesalers don’t have much power to increase prices anyway and, in fact, have been “brutalizing each other” with lower prices.

But independent pharmacists, who voiced strong opposition to the mergers, aren’t so sure they’ll see lower prices, especially rivaling those already granted to hospitals, nursing homes and managed-care groups.

Jerry Feitelberg, a pharmacist at Alameda Drug Store in Alameda, pointed out that his cost for the generic drug for tranquilizer Ativan soared last week from $7 per 1,000 pills to $340 per 1,000 because a West Virginia company had cornered the market on the raw materials.

“This is what happens when too much power is concentrated in too few companies and competition is eliminated,” said Feitelberg, a consultant to the nonprofit Pharmacy Planning Service, which represents 3,800 independents.

The Cardinal-Bergen deal would have created the nation’s biggest drug wholesaler, but in September, a month after the merger was announced, McKesson said it reached agreement to buy AmeriSource, overshadowing the Cardinal-Bergen transaction and raising antitrust concerns even higher.

Bloomberg News contributed to this report.