DMS Pharmaceutical Group Inc lost a challenge to a decision by the United States Department of Veterans Affairs to exclude small businesses from a drug supply contract valued at as much as $32 billion.

The closely held Park Ridge, Illinois company had filed a protest with the Government Accountability Office, which arbitrates contract disputes, after the VA canceled a plan to reserve some work in the contract for small businesses.

VA officials "reasonably determined" that DMS's bid was unacceptable because the company didn't meet several of the agency's requirements for the work, such as having an online inventory system, the GAO found.

"The evaluation of technical proposals is a matter within the discretion of the contracting agency, since the agency is responsible for defining its needs and the best method for accommodating them," the decision said. "An official's mere disagreement with the agency's judgment concerning the adequacy of the proposal is not sufficient to establish that the agency acted unreasonably."

Protests by DMS and another small drug wholesaler have delayed the award of the drug distribution contract, expected to have about the same value as the current contract held by McKesson Corp, or about $4 billion a year over as many as eight years, according to the VA. Department officials won't award the new contract until both protests are resolved, said Jo Schuda, a VA spokeswoman, on March 26.

DMS officials "are extremely disappointed", said Bill Anderson, executive vice-president of the company.

"Once again, it appears this $4 billion contract will be awarded with zero small-business participation," Anderson said. "This decision, under President Obama's watch, proves that Main Street continues to get overlooked to the benefit of Wall Street."

He said he remains hopeful that the VA will find some way to increase work with small drug wholesalers in the upcoming contract.

PBA Health, a Missouri-based drug distributor, has also filed a protest on the contract, according to the GAO website. The GAO has until June 4 to rule on that protest.

Schuda and Josh Taylor, a VA spokesman, didn't respond to an e-mail and phone call seeking comment.

The VA has asked the GAO to dismiss the protest from PBA Health, said Ralph O. White, the GAO's managing associate general counsel, in an interview. He said that request would be shared with PBA Health, and the company would be given an opportunity to respond before the GAO makes its decision.

McKesson has been the VA's primary medicine supplier for veterans hospitals and the department's mail-order pharmacy since 2004. The largest US drug distributor based on revenue, McKesson has received as much as $27 billion in orders under the current contract, according to data compiled by Bloomberg.

The San Francisco-based company is competing against Cardinal Health Inc and AmerisourceBergen Corp for the current version of the contract.

The GAO, the investigative arm of Congress, issues decisions that provide guidance to government agencies during contract disputes.

It can't compel agencies to comply, but its guidance is rarely ignored.

Bloomberg News in Washington