Express Scripts / Medco approved
Panpan Wang
F.T.C. Approves Merger of 2 of the Biggest Pharmacy Benefit Managers
By REED ABELSON and NATASHA SINGER
Despite potential antitrust concerns and vocal opposition by some lawmakers and consumer groups, Express Scripts and Medco Health Solutions, two of the nation’s largest pharmacy benefit managers, said Monday that federal regulators had approved their $29 billion merger.
The decision, by the Federal Trade Commission, to let the merger proceed was not unanimous, indicating conflicting views among the agency’s top regulators over whether to challenge — or impose limitations on — the combined company. After eight months of review, the F.T.C. commisioners voted 3-to-1 to close the agency’s investigation.
The acquisition of Medco by Express Scripts, based in St. Louis, creates what is now the industry’s largest player, with $116 billion in 2011 revenue. CVS Caremark, itself the product of a merger between a large drugstore chain and a benefit manager, is now the second-largest competitor with $107 billion in revenues.
Pharmacy benefit managers, known as P.B.M.’s, manage prescription drug plans for employers and insurers. They serve as middlemen between the drug companies and the payers.
The two companies say their merger will result in significant savings for consumers. “Our merger is exactly what the country needs now,” said George Paz, the chairman and chief executive for Express Scripts, in a statement. “It represents the next chapter of our mission to lower costs, drive out waste in health care and improve patient health.”
But the F.T.C. acknowledged that allowing the merger to proceed without restriction was “not an easy decision,” although there was dissent over even this view.
The agency originally had concerns that the merger of two of the country’s three largest pharmacy managers might substantially reduce competition. Regulators also questioned whether the combined company would have a dominant presence in particular areas, like supplying mail-order drugs to patients with chronic conditions and providing expensive specialty drugs for conditions like H.I.V. infections, rheumatoid arthritis and hemophilia.
But the majority of the regulators concluded that the market was more competitive than it first appeared, with at least 10 significant players whose intense rivalry for customers had driven down prices.
While the merger “will reduce the number of significant competitors to nine (plus a fringe of several dozen smaller firms) and give the merged company a market share of just over 40 percent,” the majority statement said, “ultimately, the evidence fails to demonstrate that the transaction is likely to produce unilateral anticompetitive effects.”
“Other competitors, in the form of smaller P.B.M.’s and those owned by health plans, are current and growing competitors for employer business, and the bidding process frequently includes competitors outside of the Big Three,” the regulators said.
But Commissioner Julie Brill, a former assistant state attorney general in Vermont who was active in state litigation against benefit managers, vehemently disagreed and issued her own statement.
In a strongly worded dissent, she wrote that the proposed merger would be “a game changer” for the benefits manager market and that the F.T.C. should have challenged it in court. She estimated that the combined companies would have a larger share — 45 percent — of the market. Together with CVS Caremark, she said, the companies would account for 73 percent of the benefits manager market.
“I have reason to believe that this merger is, in fact, a merger to duopoly with few efficiencies in a market with high entry barriers — something no court has ever approved,” Ms. Brill wrote.
While some observers expected the commission to take some steps, like requiring the spinoff of some of the specialty drug business, regulators appeared to have been persuaded that the companies play an important role in lowering drug prices for consumers through their ability to negotiate with drug companies, said John Briggs, an antitrust lawyer for Axinn, Veltrop & Harkrider in Washington, D.C. “They love the P.B.M.’s,” he said, and consider them heroes of competition.
Regulators may also be less worried about the competitive impact of the merger because of the presence of many large insurers and many smaller, up-and-coming competitors. UnitedHealth Group recently chose to take its business away from Medco and provide the service directly through an internal benefit manager. The lost contract represented nearly a fifth of Medco’s business. “It demonstrated that a giant can be felled with a new entrant,” Mr. Briggs said.
Some employers “are disappointed” because they would prefer to have more choice, said Edward A. Kaplan, a senior vice president at the Segal Company, a benefits consultancy. While the employers plan to wait and see how the merger affects their existing contracts, there could be increased interest in some smaller players, he said. They “are getting another look,” he said.
Two groups, which represent community pharmacists and chain drugstores that have strenuously objected to the combination, filed a lawsuit last week seeking to block the merger. The National Community Pharmacists Association and the National Association of Chain Drug Stores, which see the combination as problematic for pharmacies, said they planned to pursue their litigation.
In a statement, the groups said they would “continue to push through the Washington gridlock by advancing the litigation we have filed with nine community pharmacy companies, and we urge state attorneys general to take action to block the merger as well.”
Express Scripts said the litigation was without merit.
The controversy over the merger may not end any time soon, particularly given regulators’ scrutiny of the managers’ handling of specialty drugs.
“It’s an important marker that has been placed,” said David Balto, a former lawyer for the F.T.C. who now serves as general counsel for the Independent Specialty Pharmacy Coalition and is sharply critical of the merger.
Kevin Roose contributed reporting.
Peter Goodson
Pardon my thumbs and typos
Peter Goodson
M&A Class
Howdy
Reminder Ducati due this Friday- Well, well… the EWMBA has become alive on the Google network showing both interest and insight. Let’s see if the can pull of a victory over the FTMBA at the last minute. The day timers have build a substantial lead in graded work but if they slip EW has a shot. Let me know how the TA’s do on the webinar by email- I have asked Phil to take the lead but both will be responding to questions. Most of the Google questions have been very insightful. We warned you day 1 that in business life as well as this class dilemmas are full of ambiguity without all information at hand… not fixed formulas and so carve your own path. Do not necessarily follow a classmates’ sure bet answer. You decide how you want to treat the answers. Everything you need is in the case/primer and acquired in your studies for an MBA if you paid attention.. The primer - as was the practice in each case- is what we work off in terms of the framework and responses we want strong hint. Harvard often has a academic approach and is scared to death of detail- big picture = big bucks to some. I have not found that to be the case in the real world. Slides- let’s see if we can be more articulate with less words this time.
Lexmark- Get into this case an put yourself in the partners chair at CD&R. A bet your franchise investment and not clear that it could be pulled off. Much like all acquisitions risk adventures. We will be doubling the participation credit so be ready with viewpoints. A 2 hour preparation… or it shows…
In class we will be kicking off with the following current events this week so establish a position as I will be calling on you randomly… Questions included…
Current Events- Coty/Avon Situation- Bear Hugs, surprises and mayhem (thanks Mariana Silva)- What started as Avon planning on buying Coty, turned into Coty offering to pay about $10 billion for Avon, a 20% premium over Avon’s closing share price on March 30th. On April 2nd, after having made a verbal offer followed by three private letters last month to Avon,
Coty made a public offer to Avon by sending a bear-hug letter proposing to acquire the cosmetics retailer for $23.25 a share.
Avon says the figure "substantially underestimates" the company (always the first response- no?). What is interesting here is that the bear-hug letter contains the niceties of the hug, but not the bear part of explicit or implicit threat that Coty would try a hostile takeover. Or else what?
· Did Coty act intentionally?
· What is their strategy here?
· What will Avon, a company that is in the midst of regulatory investigation, declining sales and just today named its new CEO, do?
See attached articles…
Current Events on the Illumina (thanks Kevin Krause) ISS released a report today that said Roche's bid … “was not yet demonstrably in the range of a compelling starting point for negotiation..." and that "...the board appears to have acted appropriately in rejecting the Roche bid."
The report was backed up with a similar response from Egan-Jones, another shareholder advisory service. Both groups recommended voting "no" to Roche's offer and to re-elect Illumina's slate of directors. These analyses were largely based on the opinion that the valuations used by Roche only took into account the current state of the company but completely ignored the fact that shareholder value is "enormous" in the long-term.
Subsequently, Roche responded with a statement following Goldman’s advise saying that they would consider a higher offer if the board was willing to negotiate and allow for complete due diligence. A couple of articles out there describing these developments, but here are a few:
· Who is ISS and are they bias? Is the question will shareholders except the Roche bid if nothing higher materializes or is the ISS essentially paid to promote high bids any bidder? think about it
· What is the Goldman Sachs’s tactic of tripping the evaluation range as a condition of a sit down about?
· What is the Roche response and Greenhill’s tactics to capture Roche at the point in the battle?
ISS report:
Roche response:
http://www.ft.com/intl/cms/s/0/5331f8dc-8024-11e1-92d3-00144feab49a.html#axzz1rJPEvgr0
The drama continues...
Peter
Peter Goodson
M&A Class
Last session this week- Several have asked whether there will be a fireside chat for both the FT and EW at Henry’s on Tuesday night after class. Answer- heck yes…You all are invited to stop by.
Current events-“ Instacash sells to Faceflush”… see the attached and come to class prepared to defend or attack Mark ATM Zuckenberg on this deal… at this price.
See you in a few..
Peter
Peter Goodson
M&A Class
Current Events: More on Coty-Avon and further rationale for our Facebook discussion.
Remember the question here on Face book is how you justify the value paid not whether it is a good company to buy which it probably is. Please avoid any opinion diatribes – justify the price rationale in dollars and cents not discussion generalities.
Here is a beginning from Salman from the EW just sent out (exactly the type of thinking I am searching for):
“Facebook bought Instagram's approximate 35 million users for $1 billion, or just over $28 per user. Yahoo acquired Geocities in 1999 for $3.57 billion. At the time, Geocities had around 4.3 million users, meaning Yahoo paid about $830 per user. Skype was acquired by eBay in 2005 for $2.6 billion, working out to roughly $240 per user. Google bought YouTube for $1.65 billion, or nearly $49 per user, and Yahoo acquired Broadcast.com for $5.7 billion at over $10,000 per user. Comparing those numbers to the Instagram acquisition, it appears that Facebook may have got a bargain.”
Does comparing this to Yahoo, the class clown, justify the value paid- I do not think so- but the analysis has comparative value. Give me more to hang my hat on economically if you can for instance a EBIDTDA from Instamatic impact as a operating improvement times the Facebook multiple.
Peter