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MERCK/MEDCO COURT CHALLENGE ALLEGES "BUILT-IN VIOLATION

Executive Summary

MERCK/MEDCO COURT CHALLENGE ALLEGES "BUILT-IN VIOLATION of price fixing" would be created by a merger of Medco into Merck because "Merck will be given instant access to the actual prices charged to Medco by all of Merck's competitors." A class action suit seeking to block the merger asserts was filed by Bacon- Normandi Corp., a Mill Valley, Calif. pharmacy, on behalf of all U.S. community pharmacies in San Francisco federal court Aug. 12. Bacon-Normandi is also a plaintiff in one of four other suits filed in San Francisco claiming price discrimination on the part of certain manufacturers and distributors, including Medco ("The Pink Sheet" Aug. 16, T&G-3). The plaintiffs in all five suits are being represented by former San Francisco Mayor Joseph Alioto. Merck and Medco declared Bacon-Normandi's suit, as well as four shareholder suits filed in Delaware seeking to block the merger, to be "without merit." Because Merck would have access to competitors' prices through Medco, "the defendants will in substance and effect constitute an actual cartel," the suit charges. The proposed merger would cause "an appreciable increase in danger of collusion among drug manufacturers," the suit maintains. Retail pharmacy -- and especially California retail pharmacy - - has been the most prominent source of open criticism of the proposed merger. The California Pharmacists Association, for instance, responded to the merger the same day it was announced by warning Merck to "expect strong opposition from organized pharmacy" if "Medco continues to be an aggressive mail-order drug delivery company" ("The Pink Sheet" Aug. 2, p. 6). The national independent retail pharmacy association NARD publicly announced its discomfort with the proposed arrangement Aug. 12 ("The Pink Sheet" Aug. 16, T&G-4). Merck and NARD met on Aug. 13 to discuss the merger and may meet again in the future. The head of Merck's U.S. human health business, Richard Lane, is understood to have agreed to appear at NARD's annual meeting in October to explain the merger at a town hall forum. Merck is urging pharmacy to wait until the merger is completed and Merck/Medco programs have been implemented before judging the effect of the program on pharmacy. In an Aug. 20 statement, Merck/Medco noted the effort to assuage pharmacy concerns, saying "management from both Merck and Medco are now meeting with retail pharmacists, and with the associations that represent them, to explain how the proposed Merck/Medco merger will enhance their role in pharmaceutical care." Merck also stressed that Medco is not exclusively a mail- order firm but also does business with retail pharmacies through retail panels and the PAID prescription card program. Medco's "volume of prescription business through retail pharmacies is more than double its mail-order business," Merck said. The Aug. 12 suit asks that "the proposed acquisition of Medco by Merck be adjudged to be a violation of Section 7 of the Clayton Act and Section 1 of the Sherman Act." Plaintiff further requests "that a preliminary and a permanent injunction be issued against completion of the transaction" and that "the court enjoin Medco from seeking or accepting any discriminatory price not based on cost or functional justification." The suit does not request specific monetary damages beyond attorneys' fees. In addition to alleging that the merger will give Merck access to competitors' prices, the suit charges that, if the merger were consummated, "the two-tier pricing system herein alleged will be aggravated by Medco's ability to use the vast resources of Merck to continue inequitable cost shifts from the total market to the community pharmacists." A combination of Merck and Medco would place "pressures on manufacturers and wholesalers to maintain the industry's non-competitive two-tier system of pricing," the suit alleges. "Merck's past cosmetic role as a leading manufacturer moderating the evil of a two-tiered price system will be lost by reason of Medco's incentive to accelerate its drive to shift its costs to independent community pharmacies," Bacon-Normandi claims. The merger would cause "an unacceptable increase in concentration in the industry," "an increase in barriers to entry in the mail-order channel of distribution," and "an increased risk that smaller or independent manufacturers of pharmaceuticals will be cut off from a needed sales outlet," the suit claims. "An industry trend to conglomerate integration will be launched or intensified" as a result of the merger, the suit adds.

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