Analysts ponder FTC's 'second request' regarding Caremark Rx/AdvancePCS deal - Federal Trade Commission

Drug Cost Management Report, Oct 24, 2003

Industry analysts are speculating about the reason behind the "second request" filed by the Federal Trade Commission (FTC) regarding Caremark Rx's proposed acquisition of AdvancePCS (DCMR 9/12/03, p. 1). On Oct. 10, the companies announced that they had received a request for additional information about the proposed deal under terms of the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

Essentially, the FTC's action gives the agency more time to review the deal, extending the deadline by several months. Both companies have said they will respond promptly to the agency's requests for more information. The request was not entirely unexpected, given the competitive PBM landscape and the well-publicized concerns of retail pharmacies.

The two PBMs, along with Medco Health Solutions and Express Scripts, comprise what is referred to as the "big four." Medco Health is large enough to be considered a head-to-head competitor with the AdvancePCS/Caremark Rx combination. The combination of AdvancePCS and Caremark Rx would serve 90 million members, compared with Medco Health's 60 million. However, the combination's annual revenues would be almost equal to Medco Health's, as would its annual drug spend. Medco Health's adjusted mail-order scripts are more than twice as high as those of AdvancePCS and Caremark combined, but the combination would have slightly more retail scripts per year than does Medco Health.

In the retail PBM sector, there is reason to believe that Medco Health can hold its own against the combination. Medco Health's strength and its clear lead in the mail-order arena might have been enough to assuage regulators' antitrust concerns if it weren't for the fact that PBMs, and particularly the "big four," are viewed by many observers as having an oligopolistic impact on prescription drug pricing. By any measure, the top four PBMs together have about a 50% market share in this sector.

In the specialty pharmacy arena, however, a combined Caremark Rx/AdvancePCS would have specialty pharmacy revenues of more than $1.3 billion, which is slightly higher than the largest specialty pharmacy provider, Priority Healthcare Corporation. Caremark Rx is already the third largest specialty pharmacy vendor. The existing managed care clients that AdvancePCS brings to the table could theoretically give the new company enough leverage to severely disadvantage other specialty pharmacy players, including CVS ProCare, Accredo Health, Curascript, Chronimed, Option Care and MIM Corporation's Bioscrip unit.

Caremark and AdvancePCS executives have clearly stated their objective of extending Caremark's mail-order capabilities to AdvancePCS' book of business. Caremark's mail-order penetration of 40% is even more impressive than Medco Health's 34% mail-order penetration, and significantly greater than AdvancePCS' 10% penetration. If the combination were able to gain a 40% mail penetration for the AdvancePCS business, retail pharmacies stand to lose an additional 140 million scripts per year to the mail sector.

Merger analysts contacted DCMR when preparing testimony for the FTC, and speculated that the combined companies' anticipated strength in the specialty pharmacy and mail-order sectors might be sufficient to warrant a second request from the commission.

Even without a proposed deal of this size in the offing, the PBM industry is a target for antitrust allegations by virtue of the fact that retail pharmacies feel squeezed under current reimbursement contracts (DCMR 10/10/03, p. 1). All three companies are currently targets of lawsuits alleging anti-competitive practices, and Caremark Rx filings indicate that Florida and possibly several other states are examining the deal as well.

For these reasons, observers say the FTC had no choice but to issue the second request, but most are still optimistic that the deal will eventually go through.

Call Pete Clemens at CaremarkRx, (205) 733-8996 and Leslie Simmons at AdvancePCS, (469) 524-7970.

Figure 1. Market Share of 'Big Four' PBMs

Market Share                          Caremark      Medco Health
Measure                  AdvancePCS         Rx      Solutions

Covered Lives               19%             6%        15%
Prescriptions per Year      15%             5%        18%
Annual Drug Spend           15%             2%        18%

Market Share              Express     Other
Measure                   Scripts      PBMs

Covered Lives               12%        48%
Prescriptions per Year      14%        48%
Annual Drug Spend           16%        49%

Source: AIS's quarterly survey of PBMs, second quarter 2003.