On April 2 2012 the Federal Trade Commission (FTC) announced that it had closed its eight-month pre-merger investigation into the proposed combination of Express Scripts, Inc and MedCo Health Solutions, two of the three largest pharmacy benefit managers. The FTC issued a statement explaining the closing, supported by Commissioners Jon Leibowitz, Thomas Rosch and Edith Ramirez. Commissioner Julie Brill issued a dissenting statement. The commission's statement made clear that Leibowitz and Brill supported a remedy that would have prohibited the merged firm from engaging in exclusionary conduct that would hinder expansion by smaller firms, but neither Rosch nor Ramirez agreed, thus creating a two-two deadlock.

The FTC majority voted to close its investigation because it found that, in spite of a combined market share of more than 40%, even using the broadest market definition the merger was unlikely to constrain competition. The FTC found that the evidence gathered during the investigation, which included interviews of customers, competitors, retail and specialty pharmacies, pharmacy trade groups, pharmaceutical manufacturers and benefit consultants, demonstrated that the presumptively anti-competitive market shares did not accurately predict the likely effect of the merger on competition and consumers.

The FTC statement provided insight into how the three commissioners viewed two of the markets considered. First, the FTC made clear that it did not believe that the transaction was likely to have anti-competitive effects on purchasers of pharmacy benefit manager services in the market for the provision of full-service pharmacy benefit manager services to healthcare benefit plan sponsors. In that market, the FTC found that there was sufficient evidence that the merging firms were not each other's closest competitors and that as many as 10 firms beyond the 'big three' had been solicited to bid in the request for proposal processes of large employers. The FTC also indicated that it did not believe that the merger would lead to increased coordination in that market because pricing and bidding are complex and bid prices are not easily comparable even when bidders know each other's bids.

Second, the FTC found that the merger was unlikely to lead to monopsony power in regard to the negotiation of retail dispensing fees with retail pharmacies for three reasons:

  • the combined firm's share of that market is below 30%;
  • there is little relationship between the size of a pharmacy benefit manager and the reimbursement rate paid to the retail pharmacies; and
  • there is little evidence that reduced reimbursements for retail dispensing would curtail output or service.

Brill disagreed. In her opinion, she explained that she believed that the merger would create a duopoly for the provision of pharmacy benefit manager services to large employers. Brill's opinion emphasised that combining two of the big three pharmacy benefit manager firms substantially increased market concentration for that customer segment and created two firms with a combined 73% market share, with the next largest firm having less than a 10% share and relying heavily on one of the largest two firms for a portion of its services. Brill cited the recent Department of Justice victory in H&R Block for the principle that evidence demonstrating that the merging firms are not closest competitors does not prevent a finding of unilateral effects.

This matter was closely watched because pharmacy benefit managers affect so many aspects of the pharmaceutical industry, including specialty pharmacies, mail order and retail distribution, pharmaceutical manufacturers and employers purchasing pharmacy benefits coverage. The FTC majority concluded that with respect to each of these, the merger was unlikely to harm the related competition or consumers. Brill's dissent called on the FTC to conduct a retrospective study of the industry in a few years to determine whether the decision was the right one. Such a call to action serves as a warning that the FTC's interest in the industry, and specifically in this merger, may not end with the consummation of the transaction. In fact, on April 18 2012 SXC Health Solutions Corp and Catalyst Health Solutions, Inc announced an agreement to merge. If this trend continues, a retrospective study is likely to show substantially increased concentration among pharmacy benefit managers.

Before the FTC's announcement, on March 28 2012 the National Association of Chain Drug Stores and the National Community Pharmacists Association, along with several independent and chain pharmacies, filed suit in the Western District of Pennsylvania seeking preliminary and permanent injunctions to prevent the Express Scripts/Medco transaction from closing. One day later, the same plaintiffs filed a motion for a temporary restraining order. The motion was heard by Federal Judge Bissoon on April 10 and was subsequently denied. The judge reasoned that between the time that Express Scripts and Medco closed their transaction (before 8:30 am on April 2) and the hearing, the merging parties had sufficiently integrated to the point that the requested temporary restraining order or hold-separate obligation could not prevent the harm that had already occurred. The decision potentially encourages merging parties to integrate quickly once closing conditions are met in order to make it more difficult for the government or private litigants to challenge consummated mergers.

For further information on this topic please contact Corey Roush or Leigh Oliver at Hogan Lovells US LLP by telephone (+1 202 637 5600) or by fax (+1 202 637 5910) or by email ([email protected] or [email protected]).