FTC COMPLAINT v. RITE AID/REVCO MERGER WOULD FOCUS ON PBM MARKET; STATE SUIT CONCERNING CASH PAYING CUSTOMERS THREATENED: MERGER CLOSING POSTPONED
Executive Summary
The Federal Trade Commission's arguments against the merger of Rite Aid and Revco focus on the potential for the combined chains to refuse to participate in networks that offer low pharmacy reimbursement rates.
The Federal Trade Commission's arguments against the merger of Rite Aid and Revco focus on the potential for the combined chains to refuse to participate in networks that offer low pharmacy reimbursement rates. FTC approved a motion to block the merger of the drug store chains Rite Aid and Revco, arguing that prices would increase for "retail sales through pharmacy benefit plans," the commission announced April 17. FTC authorized a preliminary injunction motion blocking the merger by a 5-0 vote. "Due to the size of the competitive overlap, the proposed Rite Aid-Revco merger is the first drug store merger where the focus has been on anticompetitive price increases to the growing numbers of employees covered by these pharmacy benefits plans, rather than exclusively focusing on the cash paying customer," FTC stated in its announcement of the complaint. When Rite Aid announced the merger in November, it said the purchase of Revco would strengthen its Eagle Managed Care subsidiary and give the chain a presence to counter drug manufacturer-owned PBMs ("The Pink Sheet" Dec. 4, 1995, T&G-9). Following FTC's announcement that a complaint would be filed, Rite Aid agreed to extend the Hart-Scott-Rodino waiting period through April 24; another extension -- to April 26 -- was announced April 19. "Rite Aid is continuing its negotiations with the FTC in the hope that a successful resolution can be reached prior to the expiration of the Hart-Scott-Rodino waiting period," the chain said. FTC's announcement was spurred by the incipient closing of the merger April 19. Rite Aid had previously agreed to a rolling ten-day extension of the Hart-Scott-Rodino waiting period, but did not agree to grant an extension after April 19 until the commission publicly stated it would file suit. Unless a resolution is reached, FTC's motion for preliminary injunction will be filed in Cleveland federal court, the commission said. Filing of the injunction would be contingent on the incipient closing of the deal, now also scheduled for April 26. As of April 18, 23.6 mil. shares of Revco had been tendered to Rite Aid; Rite Aid is offering $27.50 per share for 35.1 mil. shares of Revco common stock. The effects of the merger on cash paying customers will be addressed by a companion suit, also to be filed in Cleveland by the attorneys general of Ohio, New York and West Virginia. Pennsylvania, Maryland and Indiana could join in on filing the suit. The suit will be filed concurrently with the FTC motion. Under the auspices of the National Association of Attorneys General, the five states (excluding Indiana) began a joint investigation with FTC of the Rite Aid/Revco merger shortly after it was announced. Pennsylvania served as a liaison for the states. Indiana began reviewing the case the week of April 15. If Rite Aid should move forward with the merger, it would face the prospect of defending the action in two venues. If the Cleveland federal court grants FTC's preliminary injunction motion, the merger will not go forward until the conclusion of an administrative trial and any appeals. The commission would have 20 days following the ruling to determine whether to issue an administrative complaint. The state suit could proceed through the courts. The two suits could be settled separately. A key issue for the states, which could settle with Rite Aid individually, will be divestiture of stores to prevent Rite Aid market dominance in particular areas. The states have identified regions where competition could be imperiled by the merger. However, it is understood that Rite Aid has taken part in few negotiations. FTC maintains the "merger would violate federal antitrust laws by substantially reducing competition for prescription drugs sold in retail pharmacy outlets," particularly in Ohio, Indiana, Maryland, Pennsylvania, Virginia, West Virginia, North Carolina, South Carolina and New York. The combined firm would have almost 4,500 stores. FTC's intervention reflects a pattern at the agency of supporting the view that PBM agreements with pharmacies serve a valuable role in saving money for consumers. In 1991, Rite Aid and several other chains signed an FTC consent order after a group of New York chains refused to accept New York's employee prescription plan, run by Medco. More recently, FTC signed a consent order with RxCare of Tennessee prohibiting the state pharmacy association-run network from enforcing a "most favored nation" contract clause that FTC believes would have had the effect of keeping pharmacies from accepting low third-party reimbursement rates ("The Pink Sheet" Feb. 5, T&G-13). A recent clash between Rite Aid and Medco over a contract for Maryland state employees may have encouraged FTC to examine the merger in light of its impact on PBM contracting. FTC has been investigating the actions of Rite Aid and other pharmacies in Maryland in refusing a state employees and retirees plan contract administered by Medco in January ("The Pink Sheet" Jan. 1, T&G-1). Medco also filed suit against the pharmacies ("The Pink Sheet" Feb. 26, T&G-9). Medco responded to the FTC announcement with a statement that the complaint will ensure "access to competitively priced retail pharmacy services." In a lawsuit over the Rite Aid/Revco merger filed in Baltimore Feb. 20, Medco argued for a firewall between Eagle Managed Care and Rite Aid. FTC has used firewalls in past interventions relating to anti- competitive concerns over integration of PBMs with other market players; a consent decree allowing Lilly's purchase of PCS featured a firewall, as did a settlement in Bacon-Normandi v. Merck-Medco. At the time, pharmacy advocates maintained that the Lilly/PCS consent decree was insufficient. The threatened complaint against Rite Aid also suggests that Merck, SmithKline Beecham and Lilly have been savvy in their dealings with FTC following acquisitions of PBMs by the three companies. Lilly signed a consent order involving the acquisition of PCS; Merck and SmithKline Beecham have not yet signed orders, but their ongoing discussions with the agency provide a venue for expressing their point of view. The charges outlined by FTC would likely have an impact beyond the actual Rite Aid/Revco merger on litigation over manufacturer pricing practices. A potential cash settlement of class action litigation alleging violations of the Sherman Act by drug manufacturers was rejected by Chicago federal court Judge Charles Kocoras, who maintains that pharmacies are entitled to some form of injunctive relief ("The Pink Sheet" April 8, p. 3). Rite Aid is the lead plaintiff in a Robinson-Patman suit that could come before Kocoras after the class action suit is resolved. FTC began an inquiry into the Sherman Act claims raised in the class action suit in late March. FTC's action against Rite Aid "only compounds errors the FTC made in allowing multi-billion dollar drug company mergers with pharmacy benefit management companies," the National Association of Chain Drug Stores asserted. "These vertically integrated drug maker PBMs have the power and ability to distort competition in the entire marketplace." NACDS declared that "the Rite Aid/Revco merger will enhance, rather than restrict, competition." |