Express Scripts' power play

The already highly concentrated market shared by

pharmacy benefit managers could consolidate into two

powerhouses if Caremark Rx yields to Express Scripts'

hostile takeover bid of $26 billion.

If so, a superconcentrated PBM market could further

weaken what little control providers maintain over drug

formularies, an expert said.

Express Scripts of Maryland Heights, Mo., one of the

nation's three largest PBMs, said its proposal

submitted last month represented a 15% premium over the

all-stock purchase price in Caremark's proposed

acquisition by CVS Corp. of Woonsocket, R.I. That deal,

announced Nov. 1, 2006, would couple CVS, the nation's

largest retail pharmacy, with Caremark, another of the

nation's three largest PBMs. Medco Health Solutions is

the third national player.

PBMs manage prescription drug benefits for private

health plans, earning much of their revenue by

negotiating rebates on large volume orders with

pharmaceutical companies -- a relationship that has

generated much criticism in recent years.

On Dec. 20, Nashville-based Caremark announced that the

waiting period required by the Hart-Scott-Rodino

Antitrust Improvements Act of 1976 expired without a

request for additional information, effectively giving

the Federal Trade Commission's green light to the deal,

which was expected to close as early as the first

quarter of this year. The agreement includes a $675

million breakup fee.

Express Scripts responded in a news release that it

expected a deal with Caremark would close in the third

quarter of 2007. "The superior value of the Express

Scripts offer for Caremark is clear as evidenced by the

strong support of both Express Scripts and Caremark

stockholders," officials said in the release.

Previously, Caremark said it was bound by the terms of

the CVS merger agreement, while CVS officials said they

had not yet had an opportunity to review the Express

Scripts offer. At deadline, Caremark officials had not

responded to a request for an interview.

In announcing the bid, Express Scripts said the offer

would "generate annual cost synergies" of approximately

$500 million. Company officials also maintained that

the acquisition would benefit health plans and patients

"through greater use of cost-effective generic and

lower-cost brand drugs, specialty pharmacy, home

delivery and flexible retail networks."

The combination of Express Scripts with Caremark would

narrow the market to two players sharing better than

80% of the market, said Stephen Schondelmeyer, director

of the PRIME Institute at the University of Minnesota

at Minneapolis. Either way Caremark goes, retail

pharmacies probably will be on the losing end, getting

squeezed over the distribution of drugs to patients, he

said."This concentrates more power in the hands of

PBMs, which are not known for passing on (savings) to

consumers," he said. "They're known for creating margin

and then keep it in earnings or profits."

This article initially appeared in the Jan. 1 edition of Modern Healthcare magazine.