The Federal Trade Commission has voted to allow Express Scripts Inc. to complete its controversial acquisition of Medco Health Solutions, a $29 billion deal that will create the nation's largest pharmacy benefit manager (PBM), holding about a third of the market for prescription drug benefits.


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FTC approves Medco-Express Scripts merger

April 2nd, 2012

WASHINGTON – The Federal Trade Commission has voted to allow Express Scripts Inc. to complete its controversial acquisition of Medco Health Solutions, a $29 billion deal that will create the nation's largest pharmacy benefit manager (PBM), holding about a third of the market for prescription drug benefits.

The FTC said Monday that it voted 3-1 to let the transaction go forward, following an eight-month investigation of whether the merger would squelch competition for PBM services, boost the combined company's bargaining power with pharmacies, and have a negative impact on patients using specialty drugs for rare or chronic conditions. The merger deal was announced in July.

In a statement, the FTC majority explained that the investigation "revealed a competitive market for PBM services characterized by numerous, vigorous competitors who are expanding and winning business from traditional market leaders. The acquisition of Medco by Express Scripts will likely not change these dynamics: the merging parties are not particularly close competitors, the market today is not conducive to coordinated interaction, and there is little risk of the merged company exercising monopsony power.

"Under these circumstances, we lack a reason to believe that a violation of Section 7 of the Clayton Act has occurred or is likely to occur by means of Express Scripts' acquisition of Medco."

On Friday, National Association of Chain Drug Stores, the National Community Pharmacists Association and nine pharmacy operators had filed a request for a temporary restraining order in U.S. District Court for Western Pennsylvania to prevent Express Scripts and Medco from closing their merger pending the outcome of an antitrust lawsuit against the deal that the plaintiffs announced Thursday.

"If granted by the court, the temporary restraining order would prohibit ESI and Medco from consummating their merger or, alternatively, it would allow ESI and Medco to consummate their merger but would force ESI to hold all of the Medco assets separately to allow the court to subsequently break up the companies if it rules in our favor after trial," an NACDS spokeswoman said in a statement late Friday. "The TRO was necessary to maintain the status quo in the event that the FTC concluded its investigation within the next several days or week, thereby allowing ESI and Medco to complete their merger right away."

A key concern of chain drug retailers and independent pharmacies was that a combined Express Scripts-Medco would have such a large influence in the prescription drug marketplace that it could force pharmacies to accept its contract terms, in turn hurting their businesses and patient access to pharmacy services. However, the FTC disagreed.

"The commission also considered whether the proposed acquisition would confer monopsony power on the merged company when it negotiates dispensing fees with retail pharmacies. As a general matter, transactions that allow firms to reduce the costs of input products have a high likelihood of benefitting consumers, since lower costs create incentives to lower prices. Only in special circumstances does an increase in power in negotiating input prices adversely impact consumers," the FTC majority said in its statement. "The commission examined this concern closely but found that the proposed transaction was unlikely to create or enhance monopsony power."

According to the FTC, the merged PBM would have a 29% share of retail pharmacy sales, a smaller percentage than typically deemed necessary to demonstrate monopsony power.

"In addition, the data reveal that there is little correlation between PBM size and the reimbursement rates paid to retail pharmacies. Thus, there is no reason to believe that the merger, even if it exceeded the theoretical threshold for the exercise of monopsony power, would in fact lead to lower reimbursement rates," the FTC majority stated. "Moreover, even if the transaction enables the merged firm to reduce the reimbursement it offers to network pharmacies, there is no evidence that this would result in reduced output or curtailment of pharmacy services, generally."

The commission also disagreed with the contention that the merged PBM wouldn't end up lowering prescription drug costs because the company could just keep the savings it realized from its economies of scale, rather than passing it on to consumers.

"For contractual and competitive reasons, it is likely that a large portion of any of these cost savings obtained by the merged company would be passed through to the PBM’s customers," the FTC majority said. "Although retail pharmacies might be concerned about this outcome, a reduction in dispensing fees following the merger could benefit consumers by lowering health care costs."

In a dissenting statement, FTC commissioner Julie Brill said a merger of Express Scripts and Medco would "create an appreciable danger" for anticompetitive behavior.

"This $29 billion merger — between two of the largest three pharmacy benefit management providers — is a game changer," Brill stated. "I have reason to believe that this merger is, in fact, a merger to duopoly with few efficiencies in a market with high entry barriers — something no court has ever approved. I, therefore, respectfully submit that the commission should have filed a complaint in federal district court seeking to enjoin the transaction pending a full trial on the merits here at the commission."

Brill noted that a combined Express Scripts-Medco would be more than five times larger than the third-largest PBM, CVS Caremark Corp. "Under any definition of the market, this merger will create a highly concentrated market that should be presumed to be likely to enhance market power," she stated.

Brill also called on the commission to conduct a retrospective study on the merger in three years.

In announcing the completion of the merger on Monday, Express Scripts said the combined PBM will drive down the cost of health care by improving patient health through better models of care, including increased adherence to prescribed treatment regimens.

"Our merger is exactly what the country needs now," Express Scripts chairman and chief executive officer George Paz said in a statement. "It represents the next chapter of our mission to lower costs, drive out waste in health care and improve patient health. We remain focused on formulary management, channel management and closing gaps in care, which will allow us to further improve the health of people with chronic and complex medical conditions."

The lawsuit filed against the merger by NACDS, NCPA and the nine pharmacy operators calls for an injunction to block the deal, saying it would violate antitrust law, and seeks relief for the plaintiffs.

"A merger of Express Scripts and Medco would have dire consequences for patients and the retail community pharmacies that serve them," NACDS president and CEO Steve Anderson and NCPA CEO B. Douglas Hoey said in a joint statement on the suit. "We continue to make a strong case to the Federal Trade Commission and state attorneys general about the negative impact this proposed merger will have on patient access to community pharmacy and the health care delivery system."

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