On April 2, 2012, the Federal Trade Commission (“FTC”) closed its investigation of Express Scripts, Inc.'s (“Express Scripts”) proposed acquisition of pharmacy benefits manager (“PBM”), Medco Health Solutions, Inc. (“Medco”) Express Scripts consummated its acquisition of Medco on the same day.
On July 20, 2011, Express Scripts entered into an agreement to acquire Medco for approximately $29 billion. After the deal was announced, the FTC issued second requests to the parties to evaluate the competitive effects of the transaction. The FTC considered whether the merger would result in higher prices to plans sponsors, whether the merger might increase the merged entity's bargaining power with pharmacies, and whether the merger might harm consumers of specialty pharmaceuticals for patients with rare, complex or chronic conditions.
After an eight month investigation, the FTC closed the investigation without any action or conditions. The Commission vote on the motion to close the investigation was 3-1, with Commissioner Brill dissenting and issuing a separate statement. Commissioners Rosch and Ramirez and Chairman Leibowitz issued a closing statement on behalf of the Commission. The vote on the motion to issue the Statement of the Commission was 3-0-1, with Commissioner Brill abstaining.
Groups such as the National Association of Chain Drug Stores (“NACDS”) and the National Community Pharmacists Association (“NCPA”) criticized the FTC's decision to close the investigation, alleging that the merger will lead to fewer choices, higher prescription drug costs and diminished competition in the community pharmacy and PBM markets. The NACDS and NCPA, along with several retail pharmacies, filed a law suit in Pennsylvania federal court to block the transaction. However, the lawsuit was filed too late to prevent Express Scripts and Medco from consummating the transaction. The NACDS and NCPA were extremely vocal throughout the FTC's investigation.
In its statement to close the investigation, the Commission explained that the PBM services market is competitive. The statement indicates that there are numerous PBM competitors who are expanding and winning business from the three largest PBMs. The statement explains that even though the Express Scripts/Medco deal combines two of the three largest PBMs in teh United States, the transaction is not likely to harm competition because the merging parties are not particularly close competitors, the PBM services market is not conducive to coordinated interaction, and there is little risk of the merged company exercising monopsony power.
A number of facts suggest that the merger will not result in anticompetitive effects. First, Medco lost one third of its business in the last year. Second, Express Scripts and Medco are not each other's closest competitor. Indeed, the Commission explained that the parties' documents and bid data analysis indicated that they had different customer bases, and diversion rates between Express Scripts and Medco were “substantially lower than the market shares would predict.” Moreover, the dated showed that CVS has won customers from Medco, but, there was little evidence that demonstrated that Express Scripts won customers from Medco or that Medco was winning customers from Express Scripts. Third, the Commission pointed to growing competition from health plan PBMs and stand alone PBMs. During the investigation, United HealthCare, Medco's largest client, announced that it was dropping Medco and entering the PBM space as a formidable competitor and PBM service provider. The FTC also identified two standalone PBMs such as Catalyst and SXC as having recent success winning significant employer accounts. The Commission pointed out that these PBMs usually compete by trying to differentiate themselves from CVS, Express Scripts, and Medco by emphasizing a transparent pricing model, providing more individualized account management support, and offering customized PBM offerings. Fourth, the Commission stated that a coordinated interaction theory is not viable because CVS as a pharmacy retailer has different incentives other PBMs and smaller PBMs do not have the incentive to take part in any collusive efforts.
Commissioner Brill described the merger as an industry “game changer” that creates a “merger to duopoly” between the merged ESI/Medco and CVS Caremark. She claimed that the transaction should have been blocked under both unilateral effects and a coordinated interaction theories. In short, she believed that the totality of the evidence including the market structure, data collected by the FTC, the lack of efficiencies, the fact that Medco was poised to be a maverick in the industry, and the lack of any firm capable of entering and replicating the competition lost by the transaction all tilted in favor of blocking the transaction.
The decision to close the investigation is noteworthy because it demonstrates that the FTC will focus on the facts and the competitive effects analysis rather than complaints made by opponents to a particular transaction. In the face of a great deal of vocal opposition and fierce lobbying efforts by opponents to the deal, the FTC's decision to close its investigation and not to challenge the merger was done with a great deal of thought. Rather than to succumb to political pressure and even what the Commission viewed as an initial concern that the merger between two of the three largest PBMs might harm competition, the Commission and the staff relied on the evidence gathered during its lengthy investigation. Even though an announcement of a merger of two of the three major players in a particular industry may raise eyebrows at the FTC, the FTC staff will keep an open mind when it reviews internal company documents, market analysis and other evidence that parties to a merger may provide to the staff reviewing the deal. The decision also further demonstrates the value of merger parties taking an engaged and proactive approach to the merger review process rather than engaging in a confrontational approach with the staff.