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).
346 Pharmaceutical Industry Antitrust Handbook
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.

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