Big Pharma middlemen McKesson (NYSE: MCK), Cencora (NYSE: COR) and Cardinal Health (NYSE: CAH) draw scrutiny over push to expand into cancer care
Pharmaceutical distributors McKesson (NYSE: MCK), Cencora (NYSE: COR) and Cardinal Health (NYSE: CAH)—known collectively in the industry as “The Big Three” because they hold 98% of the US wholesale market—have all been eyeing a push into cancer care and are trying to scoop up networks of oncology doctors who prescribe the drugs they sell. An antimonopoly advocacy group says the vertical integration would reduce competition and end up hurting patients.
“American cancer patients will be left to pay the life-threatening costs of ever-increasing wholesaler concentration,” the American Economic Liberties Project wrote in a letter last week to the Federal Trade Commission, saying the distributors could steer patients toward more expensive drugs even if they may not be the most effective. It wants the regulator to block McKesson’s proposed $2.5 billion purchase of a controlling stake in Florida Cancer Specialists & Research Institute and Cardinal Health’s plan to buy Integrated Oncology Network for $1.1 billion.
Cencora, formerly known as AmerisourceBergen, last year purchased OneOncology together with alternative asset management firm TPG (NASDAQ: TPG) in a transaction that valued the network of oncology practices at $2.1 billion. The American Economic Liberties Project argues that further integration between drug wholesalers and cancer treatment centers would drive up costs for patients and likely violate the Clayton Act, an antitrust law enacted in 1914 that outlaws mergers and acquisitions when they may substantially reduce competition.
The antitrust non-profit also says the proposed transactions would likely fall afoul of guidelines that were refreshed by the FTC last year. The regulator last month sued a separate “Big Three” of pharmacy benefit managers including OptumRx, Express Scripts and Caremark, alleging they used anticompetitive practices to raise the price of insulin drugs. It had also moved against a merger between health technology firms Grail and Illumina (NASDAQ: ILMN) that would have created a monopoly over cancer screening tests.
“We respectfully request that the FTC apply the same level of scrutiny to block McKesson’s proposed acquisition of FCS’ Core Ventures and Cardinal Health’s proposed acquisition of the Integrated Oncology Network, both of which exceed the threshold for merger review by at least ninefold,” the American Economic Liberties Project wrote in the letter that was also signed by other organizations including Just Care USA, Labor Campaign for Single Payer, Open Markets Institute, Pharmacists United for Truth and Transparency and Social Security Works.
Amid the concern about their expansion plans, McKesson, Cencora and Cardinal Health—which have a combined market capitalization of more than $100 billion with annual revenues of almost $800 billion—have all underperformed the S&P 500 so far this year, with shares rising 1.8%, 5.9% and 7.2%, respectively. That suggests investors may be concerned about future growth prospects, despite all three companies reporting increased profits in their latest quarters in addition to ongoing dividends and share buybacks.
Healthcare in the US involves a complex mix of drug manufacturers, distributors, private insurers and government agencies like Medicare, with the massive sector accounting for $4.5 trillion of gross domestic product in 2022. Of that total, annual cancer spending has been grabbing an increasing share and is expected to exceed $245 billion by 2030. Mortality rates are declining in the country, and that’s all meant big business for companies up and down the value chain as new medicines improve survival odds. It’s clear why the drug distributors would want in on what is unfortunately still a growth market.
When it comes to drug wholesaling, McKesson, Cencora and Cardinal Health already enjoy an oligopoly, and it looks like they all want to keep moving together into the lucrative oncology treatment centers. Amid the heightened regulatory risk that can also be subject to political cycles, however, the company that breaks away from the pack may be the one that pulls ahead. With drug companies increasingly starting to distribute their own products, some may start to wonder why drug wholesalers are even needed in the first place.
