One industry analyst has lowered the odds that the U.S. Federal Trade Commission will give its blessing to the proposed acquisition of Medco Health Solutions (NYSE:MHS) by St. Louis-based rival Express Scripts (NASDAQ:ESRX). But the merger, which would create the biggest U.S. pharmacy benefits manager, still looks like it will happen despite protests from consumer and industry groups.
In a note to investors earlier this week, Leerink Swann health care analyst David Larsen cut the likelihood that the merger will close to 60% from 70%. He adjusted the odds after speaking with an FTC specialist.
Whatever the outcome, Medco and Express Scripts aren’t getting off easy. On Tuesday, five consumer-advocacy groups sent a letter to the U.S. Federal Trade Commission stating that combining the companies would restrict patient choice and increase costs.
A joint Express Scripts-Medco would give the merged company incredible dominance over the fast-growing specialty pharmacy market, according to the letter. A merger also could lead to consumers being pushed into highly restrictive pharmacy networks and limit access to new, innovative drugs, the letter added.
The correspondence was jointly signed by Consumers Union — the publisher of Consumer Reports — as well as the Consumer Federation of America, National Consumers League, U.S. Public Interest Research Groups and the National Legislative Association on Prescription Drug Prices.
At a House Judiciary subcommittee hearing Tuesday, the CEOs of both Medco and Express Scripts defended the acquisition, noting the combined company would control less than one-third of U.S. pharmacy-benefits sales. Express Scripts head George Paz said this market share “falls well inside the parameters of mergers which have passed antitrust regulatory review,“ according to the Wall Street Journal.
The combined company would help cut health care costs by extracting lower prices from drug companies and ensuring that more patients take medicines as directed, Paz and David Snow, the Medco CEO, told the panel. The first part of that statement certainly wasn’t music to the ears of the leaders of the world’s biggest drug companies, who also oppose the merger. Already facing the loss of patent protection on some of its bestselling medications, Big Pharma fears the $29 billion purchase will create a pharmacy-benefit management behemoth that will further squeeze drug company profits.
Express Scripts’ customer base would increase 50%, to 135 million, if the Medco purchase is OK’d, according to Arthur Henderson, an analyst at Jefferies & Co. The biggest rival, CVS Caremark Corp. (NYSE:CVS), serves 85 million customers. UnitedHealth Group (NYSE:UNH) is the fourth industry player.
A merger that reduces the number of key competitors from three to two raises significant competitive concerns, according to David Balto, a Washington-based antitrust attorney representing consumer groups, business organizations and specialty pharmacies that oppose the Medco takeover. He said the aggressive rivalry needed to drive down health costs will be lost with only two major specialty pharmacy players in the market.
While the congressional hearing can help influence public opinion, the ultimate decision about the merger is in the hands of the FTC. And when the dust settles, the agency is likely give the merger a thumbs up, according to Steven Halper, an analyst at Stifel Nicolaus & Co. in New York.
In a note to investors cited by Bloomberg, Halper said, “We continue to believe that there is sufficient competitiveness within the broader pharmacy benefit market that there is a good probability that the FTC will not challenge it.”
