A proposed merger of Express Scripts and Medco, two of the largest pharmaceutical benefits managers (“PBMs”) in the United States, is likely to draw a prescription for significant antitrust scrutiny from federal regulators.
PBMs contract with health insurers and employers to manage health insurance plan pharmaceutical benefits, among other ways by negotiating with pharmaceutical manufacturers and pharmacies to lower drug costs.
Express Scripts is seeking to acquire Medco for $29.1 billion in the contemplated transaction, which the FTC will review for compliance with federal antitrust laws.
A combined Express Scripts-Medco company would control at least 30 percent of the drug benefit administration market, followed by CVS Caremark with around 18 percent. Some estimates place the combined company’s number of covered lives at 135 million Americans. The transaction would create the largest PBM by far in the U.S., with estimated annual sales of over $100 billion. CVS Caremark’s PBM would be a distant second at around $60 billion in annual sales, and UnitedHealthcare’s PBM would be far behind the others with only about $30 billion in revenue.
The deal is already drawing fire from pharmacy retailers, who think Express Scripts would use its enlarged market power anticompetitively. Pharmaceutical manufacturers also have cause for concern given the combined entity’s tremendous market power.
On the flip side, Medco and Express Scripts almost certainly will attempt to defend the deal by arguing that the combined company will lower health care costs by using its size to push down drug prices, particularly for generic drugs. The merging parties also are likely to argue that UnitedHealthcare constitutes a fourth big competitor in the market, meaning that the PBM business is shrinking from four to three providers rather than from three to two.
Whether the FTC views a possible post-merger market as being dominated as two or three big players could be crucial to the deal. As Constantine Cannon partner Ankur Kapoor commented in The New York Times, “[t]hree-to-two mergers have historically been quashed by the antitrust agencies.”
The acquisition agreement requires Express Scripts to take steps to obtain antitrust clearance, including, if the FTC requests such actions, divesting a mail-order dispensing facility, certain specialty pharmacy dispensing or infusion facilities, and certain contracts worth up to $115 million in annual earnings. The question is whether these steps will be sufficient to satisfy the FTC’s antitrust concerns.
Regulatory review of the proposed merger could take as long as a year because of the size of the deal and its effects on public health. Thus, there is plenty of time for the different industries and interest groups that may be affected by the deal to make their voices heard.