Express Scripts' Medco Purchase May Be Delayed by Potential Suit
By Jeff Bliss and Sara Forden – Mar 19, 2012 12:01 AM ET
Attorneys general in New York, Pennsylvania, Ohio, Texas and California are waiting to see if the U.S. Federal Trade Commission approves the $29.1 billion proposed deal, said two people familiar with the matter, who weren’t authorized to speak publicly and asked not to be identified.
State officials are concerned the FTC will approve the deal with conditions that don’t guard against rising prescription prices and decreased pharmacy services, the people said. Should the acquisition be cleared by the FTC, a lawsuit by the states may slow the formal close of the merger, said Les Funtleyder, a health strategist and portfolio manager at Miller Tabak & Co., which owns Express Scripts shares.
“This signals the states think the Federal Trade Commission is going to green-light the deal,” Funtleyder said. “Whether or not five states are enough to scuttle the deal, that would seem unlikely since that’s the Federal Trade Commission’s job.”
The gap between Medco’s share price and the value of Express Scripts’ cash-and-stock bid narrowed to $2.53 on March 16, about the smallest difference since the deal was announced in July, according to data compiled by Bloomberg. That indicates traders betting on the deal’s outcome now have more confidence it will close than they did a few months ago, Funtleyder said. Medco closed at $70.29 on March 16.
More than 25 states, including the five considering a lawsuit, are investigating the deal for possible antitrust violations, the people said.
Two pharmacy groups opposing the acquisition said March 9 that the FTC asked them to suggest ways to revise the deal so it wouldn’t harm competition. The request may indicate the agency will approve the deal with conditions, said Jeffrey Schmidt, a former director of the FTC’s Bureau of Competition.
The states may seek a temporary delay in the acquisition’s close and a court order to permanently prevent the deal’s consummation, said Billy Vigdor, an antitrust lawyer with Vinson & Elkins LLP in Washington who represents investors with an interest in the deal.
Difficult to Win
A 1990 Supreme Court case, California v. American Stores Co., endorsed the states’ ability to challenge acquisitions that federal antitrust regulators had approved. In that case, California sued to block American Stores’ purchase of Lucky Stores Inc. after the FTC had approved the deal on the condition the company sell several supermarkets.
It can be difficult for states to win when the FTC has allowed a deal to go through, said Andrew Gavil, an antitrust law professor at Howard University in Washington.
Any conditions the FTC imposes before approving a deal — such as selling parts of a business — show the agency had concerns over the acquisition as originally proposed, he said.
In that case, the “issue becomes the adequacy of the remedy to solve” the anticompetitive nature of the deal, Gavil said.
Pharmacy-benefits managers like Express Scripts and Medco negotiate prices with drugmakers for health-plan sponsors, manage worker claims and track patients’ use of medicines. Their profits are tied to cutting their clients’ drug costs.
Spokesman for the attorneys general of the five states and Cecelia Prewett, an FTC spokeswoman, declined to comment.
A combined Express-Medco would handle 34 percent of prescriptions in the U.S. this year, according to Adam Fein, founder and president of Pembroke Consulting Inc. in Philadelphia.
That share will shrink to 29 percent next year because UnitedHealth Group Inc. (UNH) of Minnetonka, Minnesota, the biggest U.S. health insurer by sales, switched from Medco to its own pharmacy-benefits unit, OptumRx, Fein said.
The question for regulators is whether the combination will create a near-monopoly leading to higher consumer prices or whether rivals can provide enough competition.
A decision by the FTC has been expected by the end of the month, though the time frame can be extended if necessary, according to one of the people. Express Scripts has said it expects the transaction to close in the first half of the year.