MedoCo/Express Scripts AG investigators list revealed

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More than half of the nation’s state attorneys general are looking into the merger Medco (NYSE: MHS) and Express Scripts (NASDAQ: ESRX) with a “wary eye,” National Community Pharmacists Association CEO B. Douglas Hoey told dealReporter.

The large number of state investigations comes as some antitrust sources argue the antitrust review of the deal may hinge on whether second tier pharmacy benefits managers (BPMs) are starting to compete with Medco and Express Scripts.

Last month, it was widely reported that a coalition of state attorneys general was formed to scrutinize the merger of two of the largest PBMs, but only now has this news service obtained a full list of states involved in the coalition.

The leaders of the coalition, according to NCPA, include: Pennsylvania, California, Texas, and Ohio. Other states involved in the coalition include: New York, Florida, Washington, Oregon, Rhode Island, Maryland, Arizona, Illinois, Minnesota, Wisconsin, Massachusetts, Connecticut, Tennessee, Virginia, West Virginia, Louisiana, Arkansas, Missouri, South Carolina, Colorado, Michigan, Iowa, Kansas, and Hawaii.

A spokesperson for the Connecticut Attorney General, George Jepsen said that their office is among the leading states behind the investigation of the proposed merger and is coordinating closely with the Federal Trade Commission (FTC). A spokesperson for the Virginia Attorney General Ken Cuccinelli said that they are taking their investigative role seriously as to whether this merger will create any anticompetitive consequences in the prescription drug market.

As well, a spokesperson for the Ohio Attorney General confirmed that Attorney General Mike DeWine is taking an active role in the investigation. A spokesperson from Express Scripts claimed that it is normal and customary that people, such as the state attorneys general, would review the merger. Other states mentioned declined to comment.

A spokesman from Medco argued that the PBM market will remain competitive if the Federal Trade Commission clears the deal. On a 26 October earnings call, Medco CEO David Snow said that there are at least ten PBMs serving the largest national employers in the Fortune 50. According to a Morgan Stanley Research report from July of this year, Medco and CVS/Caremark (NYSE: CVS) have the lion’s share of the nation’s largest ten employers, and this merger is unlikely to alter that duopolistic dynamic.

However, while it may be the case that more than ten PBMs have contracts with Fortune 50 companies, Medco, Express Scripts, and CVS/Caremark exclusively serve about 80% of these companies, suggesting the merger would leave a highly consolidated market with the second tier players possessing relatively small market shares, according to the Morgan Stanley Research report.

A crucial aspect of the FTC’s review may be a focus on the bidding process for these contracts, according to an antitrust consultant and antitrust attorney, both following the situation. They agreed that the FTC investigation will seek to determine whether second tier PBMs are beginning to more actively compete for the large, national employer contracts. Right now, the second tier players have focused on the middle market, but they both agree that such a shift may be occurring. “You can be sure the FTC is well aware of that dynamic,” the antitrust consultant added.

The consultant pointed to a recent disclosure that Catalyst Health(NASDAQ: CHSI), which self-proclaims to be the nation’s fastest growing PBM in the United States, secured new PBM business with large, publicly traded companies Hertz (NYSE: HTZ) and MGM Resorts International (NYSE: MGM) and managed care plans, such as Health Alliance Medical Plans.

The FTC will be querying the human resources departments of large, national employers to assess whether or not they consider proposals from these two tier PBMs, and how many proposals they consider prior to making a decision, the consultant and attorney explained. The attorney added that “you’ll find a number of large employers actually getting proposals from many PBMs, arguably eight or nine catering to large employers…it’s not about who wins [the contract], but who they consider.”

A spokesperson for NCPA claimed that second tier companies cannot compete because they are not able to offer comparative rebates that the larger companies do, given they do not have the same leverage in negotiations with pharmaceutical manufacturers.

However, the consultant and attorney argued that while the rebates might not be as competitive, many of the second tier companies, unlike the largest PBMs, offer transparency as to the level of the discount they are extracting from the pharmaceutical companies, allowing the customer to see how much they are saving. “That transparent pricing model is how the tier two PBMs differentiate themselves and some customers are receptive to that,” the antitrust consultant said.

“It helps to have these second tier guys climbing up, coupled withUnited Health’s (NYSE:UNH)) OptumRX entry, that really helps [the merging parties’ case]. And you can be sure the companies are touting this to the FTC,” the antitrust consultant predicted.

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