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Growing share of 'Big Three' gets federal attention

Published: May 30, 2007 12:27 a.m. ET


Giant wholesalers dominate market, to hit quarter-trillion mark in sales


Los Angeles bureau chief

LOS ANGELES (MarketWatch) -- They are known as the "Big Three" in the pharmaceutical wholesale industry, and their control over the market is drawing the attention of lawmakers, the scrutiny of regulators and the wrath of smaller rivals who say they've had enough.

Behemoths Cardinal Health Inc. CAH, -0.28% McKesson Corp. MCK, +0.17% and AmerisourceBergen Corp. ABC, -0.10% have a virtual lock on the wholesale drug market with at least 90% and as much as 95% of all revenue. Collectively, the trio is expected to hit the quarter-trillion-dollar mark this year in sales.

The three companies now are in the enviable position of controlling sales to pharmacies and other outlets, as well as being drugmakers' biggest customers. Regulators are concerned that because the Big Three control both the sell and buy sides of the equation, they could form both a potential monopoly and oligopoly, in antitrust parlance. A monopoly puts market clout into the hands of one entity, and an oligopoly means heavy market power put in the hands of a select few.

"Ninety percent is a market that we would consider to be oligopolistic in nature," said Michael Moiseyev, assistant director for the Federal Trade Commission's bureau of competition. "Ninety percent is a zone where further consolidation is problematic."

While these pharmaceutical middlemen have amassed massive sales and market clout, there is no indication they have violated any statutes, experts say. But by holding massive buying and selling power, they're making federal officials nervous -- again.

And the companies' size and market control stands out all the more starkly against a backdrop of rising health-care costs.

These companies have grown far faster than the FTC anticipated when the agency last visited them just a few years ago. In the late 1990s, the FTC said no to McKesson's plan to buy Amerisource and Cardinal's dreams of owning Bergen Brunswig.

As a concession, the FTC allowed Amerisource and Bergen Brunswig to merge in 2001, and could live with the fact the three collectively controlled roughly 80% of all drug wholesaling. Since then, however, it appears that all three have continued to steamroll and virtually corner that market.

Recent efforts to quash the reimportation of drugs probably have strengthened the position of the Big Three. Drug reimportation, designed to help consumers save money by getting pharmaceuticals overseas, likely would have cut into the sales of these wholesalers. But a Senate bill, passed last week, effectively prevented that from happening.

"I can't say whether the market is more competitive with the three of them," said Moiseyev, who worked the FTC's cases involving McKesson and Cardinal.

Four out of five

McKesson, Cardinal and Amerisource essentially have secured the wholesale drug market, and they're close to having a similar standing over all prescriptions sold in the U.S. Some retailers and other end-users have direct ties to manufacturers, but it is estimated four out of every five drugs sold in the nation pass through the hands of the Big Three.

Various estimates on the Big Three's share of just the wholesale market alone hover around 90%, though some say it is up to 95% by now, much of it due to dozens of acquisitions. Those purchases continue at a brisk pace, though they're now branching out into other fields with more recent buyouts such as distribution of medical devices and services for drugmakers.

How did they get so big? See related story on acquisitions by these companies.

There are few significant pharmaceutical distributors left for them to buy. Amerisource did, however, announce on March 28 it is trying to complete a deal for one of the last remaining major regional wholesalers, Bellco Health.

The ever-expanding market share of all three companies has competitors crying foul for a number of reasons.

For one, rivals say, the Big Three's market share could grow even more under a rule that would require their smaller wholesalers to provide documentation of where a drug has been, known as "pedigree." Amerisource, Cardinal and McKesson would be exempt from that rule, putting smaller rivals at a disadvantage.

Further, drugmakers prefer to deal with the Big Three. Small wholesalers who try to deal directly with major drugmakers often find themselves steered toward McKesson, Cardinal or Amerisource for product. That puts these smaller players in the unusual predicament of relying on their much larger rivals for their livelihood.

Under normal circumstances, economies of scale would help keep prices down with the size that the Big Three offer. But they're increasingly dictating prices and terms. In nearly all cases, Cardinal, McKesson and Amerisource are mandating that customers buy large amounts of product in bulk. Since the Big Three have most of the access to the drugs, customers feel compelled to comply.

Sal LaDuca, president of QK Healthcare, a small wholesaler based in Ronkonkoma, N.Y, says the Big Three's marketing clout manifests itself in numerous ways. For example, generic drugmakers often will sell to anyone, but the Big Three's access to popular brand drugs such as Viagra allows them to charge more for generic goods.

"They're able to demand that because they have these proprietary items," he said. "That's their game."

In addition, wholesalers don't capture the same attention that producers or retailers get; they often are considered the unsexy conduit between the two. As a result, the Big Three have flown under the radar to a large extent, and so it's unclear how much of an effect they have on pricing. Anecdotal evidence suggests these wholesalers could add as much as 25% to the price of drugs.

"I've heard everything from a few percent to 20%, but I honestly don't know," said Fred Gebhardt, a writer who covers drug wholesalers for the trade magazine Drug Topics. "I don't know if anybody even has the data to build a reasonable model for that kind of setup. Everybody agrees that you get higher prices from an oligopoly, but I don't know how much higher."

FTC probe

Recent concerns have prompted the FTC to reopen the file on at least the two biggest players in this troika, McKesson and Cardinal.

McKesson's most recent annual 10K, filed May 9 with the Securities and Exchange Commission, says the FTC has requested documents as "part of a non-public investigation to determine whether the company may have engaged in anti-competitive practices with other wholesale pharmaceutical distributors in order to limit competition for provider customers seeking distribution services."

Last year's filing from Cardinal used virtually identical language to disclose its situation. Both companies have said the probe has been ongoing since December 2004, when they first were contacted by the FTC. Neither McKesson nor Cardinal would comment on the matter.

It's unclear whether Amerisource is part of that same investigation. The company will only say it hasn't had any FTC requests that it feels it must disclose. And neither Moiseyev nor other FTC officials would comment directly on the probe, except to confirm McKesson's and Cardinal's statements, and to say their investigation hasn't been completed.

While the FTC is investigating Cardinal and McKesson, it hasn't put the kibosh on any of their acquisition plans. Since late 2004, the two companies have taken part in nine acquisitions. And all three have made more than 100 acquisitions since 1980, with the bulk of them in the past 10 years.

In one of its purchases, McKesson obtained an FTC waiver on a waiting period so it could buy wholesaler D&K Healthcare Resources Inc. in mid-2005, several months after the company disclosed the FTC probe. The deal was completed in little more than a month for $427 million.

FTC officials had no comment on the D&K deal.

Biggest in Fortune 500

The Big Three are dominant players by any corporate yardstick. From 2002 to 2005, they were the largest of all health-care companies in sales among the Fortune 500, all consistently ranking in the top 30.

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