Express Scripts-Medco deal approved by U.S. regulators

April 2, 2012

Express Scripts Inc.’s $29.1 billion bid for rival drug benefit manager Medco Health Solutions Inc. won unconditional approval from U.S. antitrust regulators, clearing the way to create the biggest manager of prescription-drug benefits for corporate and government clients.

The FTC’s decision, the result of a three-to-one vote by the commissioners, enables St. Louis-based Express Scripts to complete the purchase of Medco of Franklin Lakes, N.J., that was announced on July 21.

The companies have about 800 employees in total in the Indianapolis area. It is unclear how local consolidation will affect local employment.

The FTC said in a prepared statement that an eight-month investigation of the proposed deal “revealed a competitive market for pharmacy benefit management services characterized by numerous, vigorous competitors who are expanding and winning business from traditional market leaders.”

FTC Commissioner Julie Brill, who dissented, said in a separate statement that the transaction is an industry “game changer” that creates a “merger to duopoly.” She called on the commission to take another look at the pharmacy benefits management market in three years.

George Paz, Express Scripts’s chairman and CEO, said in a statement, “Our merger is exactly what the country needs now. It represents the next chapter of our mission to lower costs, drive out waste in healthcare and improve patient health.”

Shares of Express Scripts gained 5 percent, to $56.91 each, in early trading Monday.

In July, Express Scripts agreed to pay $28.80 a share in cash plus 0.81 Express Scripts share for each Medco share held, the companies said at the time. Including net debt, the acquisition was valued at $34.3 billion, exceeding the $21.7 billion deal that formed CVS Caremark Corp. in 2007 as the biggest in the industry, according to data compiled by Bloomberg.

The companies, known as pharmacy-benefits managers, or PBMs, negotiate prices with drugmakers for health-plan sponsors, manage worker claims and track patients’ use of medicines. Their profits are tied to cutting their clients’ drug costs.

PBMs save health-plan sponsors and consumers as much as $87 billion in annual prescription-drug costs, Compass Lexecon, an economic consulting firm in Washington, D.C., said in a December report funded by Express Scripts and Medco.

A combined Express-Medco would handle 34 percent of prescriptions in the U.S. this year, said Adam Fein, founder and president of Pembroke Consulting Inc. in Philadelphia, who is a consultant for Express Scripts.

That share will shrink to 29 percent next year because UnitedHealth Group Inc. of Minnetonka, Minnesota, the biggest U.S. health plan by sales, switched from Medco to its own pharmacy benefits unit, OptumRx, Fein said.

About 31 percent of specialty drugs -- medicines for ailments such as cancer and HIV that are injected or infused or require special handling -- sold in the U.S. in 2010 passed through pharmacies owned by Express Scripts or Medco, according to Fein.

Scrutiny of the industry is part of the Obama administration’s effort to rein in health-care costs, said Art Lerner, former assistant director for health in the FTC’s Bureau of Competition.

“They view competition and enforcement of the antitrust laws as an important element in trying to make sure health care” is high quality and inexpensive, said Lerner, a Washington-based partner at Crowell & Moring LLP.

In her dissent, Brill said the merger will create “a highly concentrated market” for pharmacy benefit management services and argued that the FTC should have sought an injunction to block the deal.

“The legal presumption against this merger is overwhelming and is not, in my view, sufficiently rebutted by evidence regarding competitive effects or entry,” Brill said.

The majority of commissioners said the merging companies aren’t “particularly close competitors, the market today is not conducive to coordinated interaction, and there is little risk of the merged company exercising monopsony power,” where a large buyer controls the market and drive down prices.

Express Scripts and Medco have told regulators the merged company would help reduce U.S. medical costs, a goal of the 2010 health-care law, in part by extracting lower prices from drugmakers and tracking whether patients take their medicines.

The proposed acquisition drew opposition from drugstore chains and pharmacists, who have said Express Scripts and its competitors have done little to slow drug-price increases.

The National Association of Chain Drug Stores, the National Community Pharmacists Association and independent pharmacies filed a lawsuit March 29 seeking to block the merger in federal court in Pittsburgh, claiming the purchase of Medco by Express Scripts would violate antitrust laws by shrinking competition and raising consumer prices.

“The undisputed fact is that supermarket pharmacies are able to provide lower cost drugs to patients” than pharmacy benefit managers, wrote Cathy Polley, a vice president at the Food Marketing Institute, and Erik Lieberman, the group’s regulatory counsel, in a Feb. 2 letter to FTC Chairman Jon Leibowitz.

The Arlington, Va.-based trade group represents U.S. companies that operate more than 25,000 food stores and almost 22,000 pharmacies that generate $650 billion in revenue annually.

Pharmacists said that Express Scripts-Medco will have an incentive to divert patients from drug stores to the company’s mail-order business.

At a Dec. 6 hearing of the Senate Judiciary antitrust subcommittee, Express Scripts’ George Paz said the company would use its increased size after the acquisition to bargain for better prices from drugmakers and pharmacies.

Express Scripts should ensure “that cost savings will be passed down to customers and just won’t result in higher profits,” said Sen. Al Franken, a Minnesota Democrat.


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