It’s highly likely that CEOs of Big Pharma are sitting down now to compose letters they plan to fire off to the U.S. Federal Trade Commission strongly opposing the acquisition of Medco (NYSE:MHS) by St. Louis-based rival Express Scripts (NASDAQ:ESRX). Of one thing you can be certain: Their motivation isn’t altruistic, although the letters probably will refer to the detrimental impact of the combination on the American health care consumer.
No, major pharmaceuticals’ opposition is strictly driven by self-interest. The leaders of the world’s biggest drug companies are downright scared the $29 billion purchase will create a pharmacy-benefit management behemoth that will further squeeze the profits of an industry already facing the loss of patent protection on some of its biggest-selling medications.
And these pharmaceuticals have good reason to be fearful. If the acquisition goes through, the combined company will control about 30% of the market. That would give it the extraordinary purchasing power — leverage it undoubtedly would use to extract rebates from the pharmaceutical companies in exchange for buying their brands of medication.
The drug manufacturers already have some allies in their crusade to block the deal. Trade groups representing drugstore chains and independent pharmacists said the takeover would create a company that’s “too big to play fair.” In a strongly worded statement, they emphasized the combination “will monopolize control of the supply line for brand and generic prescription drugs, threaten access to pharmacy patient care, and is a bad deal for America, for healthcare plans, for pharmacies, and — most notably — for patients.”
Not surprisingly, officials from Medco and Express Scripts disagree. They said they are going to “work very hard to show the government the value this brings to patients and members as we drive those costs out of the system.” Skeptics refute this claim, noting the deal fails to introduce a key component necessary for reform: transparency. This, they say, means the combined company will have carte blanche to line their own pockets with any savings.
So what is the FTC likely to do? If the past is prologue, the deal is as good as done. In a 2008 report on competition policy, the American Antitrust Institute pointed out that over a period of seven years up to that date, there had been more than a dozen mergers within the PBM space, and the FTC had not initiated any enforcement activity to limit that consolidation.
As a consequence, there were only three major PBMs left, with a total 80% market share, and Medco and Express Scripts were two of them. Since the deal was announced, rumors have surfaced that the No. 3 PBM player, CVS Caremark (NYSE:CVS), might be offered for sale, although the company denies it.
That leaves a group of regional and specialty companies as potential takeover targets, including Catalyst Health Solutions (NASDAQ:CHSI) and the pharmacy unit of Cigna (NYSE:CI).
Major pharmaceuticals clearly have a lot of pull in Washington, but it’s unlikely they can mount enough opposition to kill this deal. If the acquisition goes through, only time will tell if the combination is good for anyone other than the companies.