The combined company, Express Scripts Holding Co., has about 45% of the PBM market share, as well as 30% of the rapidly growing specialty pharmacy services market.
The pharmacy groups, along with a coalition called Preserving Community Pharmacy Access Now, the American Antitrust Institute, and the American Consumer Institute, are also pushing state attorneys general to take action against the deal. RetireSafe, a senior advocacy group, and the National Black Chamber of Commerce are advocating for action at the state level. No state attorneys general had filed suit against the merger at deadline.
“The FTC was the critical hurdle to clear,” said John Kreger, an analyst with William Blair Co. “Other litigation will probably not carry a lot of weight compared to the FTC.”
However, involvement from the state attorneys general would likely have a greater impact on the merger than the litigation filed by the pharmacy groups, Kreger added. In 1999, the California attorney general sued Sutter Health to block its acquisition of two hospitals after the FTC decided not to challenge the deal. The state attorney general eventually lost the case.
On April 2, the FTC said they had voted 3-1 to approve the merger of Express Scripts and Medco. “This was not an easy decision,” they wrote.
“It's uncommon,” said Jeff Miles, a lawyer with Ober Kaler and a former trial attorney with the Justice Department's antitrust division. “I can't remember a commission split this much.”
What was also unusual, Miles said, was the detailed eight-month investigation that went “well beyond the numbers” and traditional information about post-merger market share.
“While this transaction appears to result in a significant increase in industry concentration, nearly every other consideration weighs against an enforcement action to block the transaction,” the FTC said a statement on its decision. “Our investigation revealed a competitive market for PBM services characterized by numerous, vigorous competitors who are expanding and winning business from traditional market leaders.”
In a dissenting statement, FTC Commissioner Julie Brill said the “game changer” of a merger is a “duopoly with few efficiencies in a market with high-entry barriers—something no court has ever approved.”
Commissioner J. Thomas Rosch, meanwhile, noted in the commission's statement that he disagreed that the decision wasn't easy: “As with the numerous other in-depth investigations conducted by our agency each year that do not reveal any significant competitive concerns, the decision to close this investigation was straightforward.”
Both Brill and Chairman Jon Leibowitz supported a remedy that would have prevented the combined company from “certain forms of exclusionary conduct that might have hindered the ongoing expansion of a significant competitor.”
No conditions were required as part of the FTC's decision.
One competitor cited by the FTC is OptumRx, the PBM owned by UnitedHealth Group. As Medco's largest client, UnitedHealth Group generated 17% of its net revenue, about $11.7 billion, in 2011. Starting in 2012, UnitedHealth Group plans to bring its PBM services in-house to OptumRx, which will have about 12% market share among PBMs.
“This is the key thing that allowed this deal to get approved by the FTC,” Kreger said. “(OptumRx) has the capacity to aggressively compete in this market if they choose to.”
Jesse Juliano, an analyst with Standard & Poor's, said the introduction of OptumRx as a major player in the PBM market may have helped Express Scripts and Medco deal receive clearance on the merger.
However, as Express Scripts' financial risk profile is stretched over the next 18 to 24 months because of taking on additional debt for the merger and the costs of integration, the market may offer opportunities for other PBMs, including OptumRx.
“The closure of the Medco merger and the ongoing dispute with Walgreens should result in a larger pool of new business opportunities for all of the PBMs this year,” William Blair & Co. wrote in a research note. “Moreover, while no asset divestitures were required by the FTC, there remains the possibility that Express Scripts will opt to sell some redundant assets in specialty or mail, with the smaller PBMs as logical buyers.”
