Antitrust Lawyer Blog
On June 4, the FTC entered into a settlement to resolve its concerns relating to Rite Aid Corporation’s proposed $3.5 billion acquisition of the Brooks and Eckerd pharmacies from Canada’s Jean Coutu Group (PJC), Inc. Rite Aid and Jean Coutu were required to sell 23 pharmacies to FTC-approved buyers in order to remedy the alleged anticompetitive impact of the proposed transaction. The stores will be sold to: 1) Kinney Drugs; 2) Medicine Shoppe International, Inc.; 3) Walgreen Co.; 4) Big Y; and 5) Weis Markets.
The consent order with the FTC requires the companies to sell pharmacies in all of the markets where competition would be adversely affected by the proposed. It will ensure that consumers continue to have a choice in where they shop for prescription drugs.
The FTC’s Investigation
The investigation took approximately ten months. The FTC began with the concern that managed care entities might be harmed from the merger (the concerns in the Rite Aid Revco and CVS Revco mergers). The concern was that managed care entities would pay more for the formation of a network of pharmacies because the merged firm would have such a significant market share that it could demand higher reimbursement rates. The FTC investigated the issue at length. Ultimately the parties were able to convince the FTC there was not a problem because no managed care entities complained and Target, WalMart, Costco and supermarket chains were seen as sufficient competitors. In forming a managed care network it is not just a question of the number of stores but the brand reputation of stores (so two or three Target stores might be a significant alternative to a managed care entity). There was no evidence of price discrimination. In other words, Rite Aid was unable to charge more in those markets where it currently has a high market share; nor was there evidence that Rite Aid could price discriminate in the future.
The FTC then dealt with the cash paying customers, which took a majority of time in the investigation. Cash paying customers for pharmaceuticals account for a very small share of the sales of stores (probably less than 5%). These concerns were just in small town markets. There were over 400 markets with these concerns. Eventually, the FTC settled on 23 markets.
The 23 markets were either merger to monopoly or 3 to 2 situations. The geographic market differed in scope, but the FTC basically applied a 5 mile market. In other words, if there was a WalMart within 3-5 miles, there probably was not a concern. Supermarkets were seen as a significant competitive alternative so long as they had a pharmacy counter. The key entry barrier was the fact that the towns had a limited population and were unlikely to attract entry.
The FTC’s Complaint
According to the FTC’s complaint, the proposed acquisition would be anticompetitive without a settlement agreement ordering divestitures. Pharmacy services include the provision of medications by a licensed pharmacist who is able to provide usage advice and other relevant information to consumers. Cash customers are consumers of pharmacy services who do not pay a price negotiated by or paid through a third party, such as an insurance plan or pharmacy benefits manager. This market is similar to cash customer markets defined in other FTC pharmacy services matters.
Each of the 23 local markets identified in the FTC’s complaint is highly concentrated with respect to the retail sale of pharmacy services to cash customers. In all of the markets, Rite Aid and Eckerd/Brooks are two of a small number of pharmacies offering cash services, and combined account for at least half – and up to 100 percent – of the pharmacies in those markets. The complaint alleges that customers view Rite Aid and Eckerd/Brooks pharmacies in these markets as their first and second choices based on location, service, and convenience, and thus the proposed transaction likely would allow Rite Aid to unilaterally exercise market power after its acquisition of Eckerd/Brooks, absent the relief provided by the consent order. If Rite Aid were able to unilaterally exercise market power after the transaction, the FTC contends it would raise the likelihood that the prices paid by cash customers for pharmacy services would increase, and the quality and selection of such services would decrease.
The FTC also contends that entry into the relevant markets would not be timely, likely, or sufficient to prevent the anticompetitive impact of the transaction.
Terms of the Consent Order
The consent agreement and order with the FTC are designed to ensure competition is maintained after the proposed acquisition is completed. Under its terms, the companies are required to sell one store in each of the 23 geographic markets to a FTC-approved buyer. Specifically, the order requires the companies to sell one store in each relevant geographic area to one of five up-front buyers, including: 1) Kinney Drugs; 2) Medicine Shoppe International, Inc.; 3) Walgreen Co.; 4) Big Y; and 5) Weis Markets.
The order requires that the divestitures occur no later than 20 days – or, in the case of the divestitures to Medicine Shoppe, 40 days – after the acquisition is completed, or four months after the date that the companies sign the order, whichever is earlier. All divestitures are subject to approval by the FTC, and if it determines during or after the public comment period that any of the up-front buyers are not acceptable, any consummated divestitures must be rescinded and other FTC-approved buyers must be found.
Robert Doyle
(202) 589-1834
rdoyle@dbmlawgroup.com