Antitrust Issues in the Distribution of Pharmaceutical Products

• Pages: 345-396

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CHAPTER VII

ANTITRUST ISSUES IN THE DISTRIBUTION OF

PHARMACEUTICAL PRODUCTS

This chapter addresses antitrust issues that can arise in pharmaceutical

distribution. Part A of this chapter discusses mergers and acquisitions

involving drug wholesalers, retail pharmacies, pharmacy benefit managers

(PBMs), and group purchasing orders (GPOs). Part B discusses exclusive

dealing, bundled rebates, and tying issues.

A. Mergers and Acquisitions

1. Mergers and Acquisitions Involving Drug Wholesalers

The potential antitrust implications of a merger among drug

wholesalers are spelled out in challenges by the Federal Trade

Commission (FTC) to two proposed wholesaler mergers, and a subsequent

decision by the FTC to permit a third wholesaler merger. After the FTC

succeeded in blocking two proposed mergers in 1998, it abandoned its

investigation of a third proposed merger after finding significant

differences between that merger and the prior challenged transactions.

Among the key considerations for the FTC in making its decisions were

the number of firms remaining should the transaction be allowed to

proceed, the parties’ efficiencies claims, and the effect of the resulting

industry structure on drug wholesaling prices.

In the fall of 1997, Bergen-Brunswig Corporation and Cardinal

Health, the second and third largest independent wholesale distributors of

prescription drugs in the United States, announced a proposed merger.

Immediately following this announcement, McKesson and Amerisource

Health, the first and fourth largest independent wholesale distributors of

prescription drugs in the United States, also announced plans to merge.

After a lengthy investigation, the FTC filed two separate preliminary

injunction complaints in the United States District Court for the District of

Columbia under Section 13(b) of the FTC Act.

The court consolidated the two cases in FTC v. Cardinal Healt h (Drug

Wholesalers),1 and after a seven-week trial, the court issued a 72-page

1. FTC v. Cardinal Health, 12 F. Supp. 2d 34 (D.D.C. 1998).

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opinion that enjoined the completion of both mergers.2 To date, Drug

Wholesalers is the only litigated case concerning a merger between two

drug wholesalers. In its decision, the court first addressed whether the FTC

had met its initial burden of showing market power in a relevant market.

The FTC contended that the relevant product market should be limited to

the distribution of pharmaceuticals via independent wholesalers; the

defendants argued that the relevant market should be extended to the entire

prescription drug industry.3 The court concluded that there likely would

be several different product markets, including a broad market as

advocated by the defendants, a smaller submarket consisting of

independent drug wholesalers and self-warehousing, and an even smaller

submarket of independent drug wholesalers of prescription drugs.4 The

court found that if the defendants were to raise prices after the proposed

mergers, their customers would not be able to switch to alternative sources

of supply to defeat the price increase.5

The defendants asserted that the independent wholesalers’ function in

the delivery chain easily could “be substituted by other wholesalers, the

manufacturers, or customers themselves.”6 The defendants cl aimed that

manufacturers and self-warehousers perform the same function that

wholesalers perform.7 The court generally agreed, finding there was a

broader market encompassing the delivery of prescription drugs by all

forms of distribution, and that “[a]ll the forms of distribution must, at some

level, compete with one another.”8 According to the court, “when a

customer can replace the services of a wholesaler with an internally-

created delivery system, this ‘captive output’ (i.e., the self-production of

all or part of the relevant product) should be included in the same market.”9

However, the court concluded that a large segment of dispensers,

particularly independent pharmacies and hospitals, have no reasonable

substitutes for the services provided by the independent wholesalers, so

that defendants operated within an economically distinct submarket of the

overall industry—one that did not include self-warehousing chains.10

According to the court, the “[b]usiness and economic realities of this

2. Id.

3. Id. at 45.

4. Id. at 47-48.

5. Id. at 47.

6. Id.

7. Id.

8. Id.

9. Id. at 48.

10. Id. at 48-49.

Antitrust Issues in the Distribution of Pharmaceuticals 347

industry demonstrate that the other forms of distribution lack the practical

availability to be included within the relevant product market.”11

With regard to geographic market, the Drug Wholesalers court held

that the United States was the relevant market for the drug wholesale

industry.12 Both the FTC and the defendants agreed that the wholesale

industry was largely driven by competition at the national level.13 The

government nevertheless argued that competition in regional markets

would be threatened by the mergers.14 The FTC’s expert contended that

the four defendants were the only competitors within 300 miles of Seattle,

and “that the four defendants had close to 90 percent of the market share”

in the Los Angeles Major Trading Area (MTA), which included Phoenix,

Salt Lake City, and San Francisco.15 Based on this evidence, the court

concluded that competition in Los Angeles, San Francisco, and Seattle

would be substantially threatened after the merger, and held each to be a

relevant geographic market.16

Based on these market definitions, the court initially made market

share calculations based on sales of all of the independent drug

wholesalers in the United States, both national and regional.17 These

calculations showed that the postmerger firms would hold close to

80 percent of such sales.18 This estimate excluded self-warehousing

chains but included the sales of independent wholesalers to those chains.

Using these figures, the FTC asserted that each merger would effectively

double market concentration, increasing the HHI from 1648 to 3079.19

Acknowledging that the shares above included sales by independent

warehouses to chain retailers who could and did self-warehouse, the court

then considered alternative share calculations. It observed that if the

11. Id. at 49.

12. Id. at 50.

13. Id.

14. Id.

15. Id. at 51. The court took issue with the fact that the FTC calculated market

shares based upon shi pments from distrib ution centers withi n a region,

regardless of the destination of those shipments, while failing to account

for sales made from distribution centers outside a region to customers

located within a regio n. The court also took issue wit h the FTC’s regional

market shares, which failed to distinguish between sales to national

customers and sales to regional customers. For these reasons, the court

held that the FTC’s market share calculations were inaccurate. Id. at 63.

16. Id. at 51.

17. Id. at 52-53.

18. Id.

19. Id. at 53.