The ruling on Wednesday was an initial victory for government efforts to force drug wholesalers to play a bigger role in fighting drug abuse, and may crimp Cardinal's business for the next 12 months.

Judge Reggie Walton of the U.S. District Court for the District of Columbia had previously given Cardinal a temporary restraining order to block the suspension of the Lakeland facility, which serves about 2,700 drug stores or hospitals, while it pleads its case to a judge within the DEA.

Cardinal said it was appealing Wednesday's decision to the U.S. Court of Appeals for the D.C. Circuit.

"We want to be part of a new, more effective solution to stop prescription drug abuse, without disrupting legitimate use," the company said in a statement.

The DEA ordered the current suspension on February 3, saying Cardinal knew, or should have known, that four of its customers, including two CVS Caremark Corp pharmacies, were inappropriately filling prescriptions for the painkiller oxycodone.

Cardinal, one of the country's largest drug distributors, said it had already cut off supplies to two of the pharmacies before the DEA's suspension order. It cut supplies to the remaining two pharmacies as soon as the DEA issued its order.

Walton said on Wednesday that after getting more information from the DEA, he agreed with the decision to suspend Cardinal's license.

"I think DEA is correct that companies have an obligation to police themselves... and to be proactive in assessing whether diversion (of controlled substances) is taking place," Walton said during a court hearing.

Morningstar analyst Matthew Coffina said Walton's ruling could cause Cardinal to lose some market share, at least in the short run, to competitors such as McKesson Corp and AmerisourceBergen Corp.

Coffina said it is also likely to force all distributors to invest more money in policing the pharmacies they serve.

"It's a negative for the distributors more broadly to the extent that they are going to be held accountable for the actions of pharmacies," he said.

Shares of Cardinal closed 1.3 percent lower, while McKesson gained 1.2 percent and AmerisourceBergen slipped 0.9 percent.

The judge said he did not believe Cardinal would suffer 'irreparable harm' because of the suspension, as it had recovered its business after a previous suspension of Lakeland in 2007.

An administrative hearing of Cardinal's Lakeland license is scheduled to begin at the DEA on April 3. That process could take as long as a year to play out as both sides present their cases.

The DEA judge will then make a recommendation to the DEA's administrator, Michele Leonhart, who will make a ruling. Leonhart signed the initial order to suspend Cardinal's license.

FIGHTING ABUSE

The case comes as prescription drug abuse has surged in the United States, eclipsing the abuse of most illicit drugs, including heroin and cocaine.

Distributors such as Cardinal argue they are unfairly targeted because it is easier for the DEA to attack a distributor than the thousands of doctors who write the prescriptions.

"DEA does not regulate the practice of medicine. And if anything, a wholesaler is in even less of a position to do so," said Randolph Moss, the attorney arguing on behalf of Cardinal.

"It doesn't regulate doctors, and it doesn't regulate patients," he said, adding that the company was doing its best to prevent prescription drug abuse.

For its part, the DEA argues distributors have an obligation to ensure none of the controlled drugs that go out their doors land in the wrong hands.

"Cardinal ... is facilitating diversion when it does not take adequate measures to prevent diversion," said Lee Reeves, an attorney with the U.S. Department of Justice, who argued on behalf of the DEA.

Every entity that handles controlled narcotics, from physician to pharmacy to manufacturer, must register with the DEA and the agency says each entity must monitor the next.

The DEA said distributors are required to design systems that detect suspicious orders, and Cardinal failed to do so.

Cardinal says it took significant steps to rebuild its systems and hire new personnel after DEA suspended the license at the same Lakeland facility in 2007.

It also argues there is no "imminent danger" to the public as the affected pharmacies are no longer allowed to dispense controlled drugs.

The case is Cardinal Health Inc. V. Holder, U.S. District Court, District of Columbia, No. 12-185.

(Reporting By Toni Clarke in Boston and Anna Yukhananov in Washington D.C.; Additional reporting by Bill Berkrot in New York; Editing by Michele Gershberg, Andre Grenon and Tim Dobbyn)

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