Ziegler blasts proposed PCS acquisition

Drug Store News, Oct 10, 1994 by Ken Rankin

WASHINGTON -- Lilly's proposed acquisition of McKesson's PCS pharmacy benefit management organization is "a threat to the economic viability of the pharmaceutical marketplace," NACDS president Ronald L. Ziegler told federal antitrusters.

In a petition urging the Federal Trade Commission to block that takeover, Ziegler characterized the purchase as an example of "monopolistic vertical integration" that "will ultimately result in higher prices for consumers of pharmaceutical products."

Ziegler also blasted what he described as an "anti-competitive" arrangement related to the PCS purchase which could force drug chains to purchase Lilly products through McKesson.

In the same petition, NACDS also urged FTC officials to take a second look at the competitive effects of other recent moves toward vertical integration by drug manufacturers, including the Merck-Medco merger and SmithKline Beecham's acquisition of Diversified Pharmaceutical Services.

Borrowing heavily from a recent PRIME Institute analysis that is sharply critical of pharmaceutical industry pricing practices, Ziegler reasoned that pharmacy benefit management companies, (PBMCs) such as PCS, Diversified and Medco's PAID, use formularies to force brandname pharmaceutical manufacturers to become more price-competitive.

However, "Lilly, Merck and SmithKline Beecham have chosen to respond to the threat to revenues represented by pharmacy benefit management companies by acquiring the three largest PBMCs in the United States," Ziegler said.

The PCS acquisition alone will give Lilly "direct control over which products will be made available to the 51 million patients enrolled under PCS programs," Ziegler told federal antitrust enforcers.

The petition left no question as to how drug chains might be injured by the exercise of such control by Lilly. Citing a "Memorandum of Understanding" between Lilly and McKesson stemming from the PCS acquisition, NACDS suggested that Lilly may "designate McKesson wholesalers as the sole source for Lilly products."

Such an arrangement could force "most chain drug store companies in this country who do not use McKesson as their sole source for prescription drugs" to use two wholesalers.

Moreover, by gaining an effective monopoly over the distribution of Lilly drugs, "McKesson could add mark-ups of 10 percent [or] even 15 percent to the cost" of pharmaceuticals such as Prozac "since community drug stores would have no alternative source" for these products, NACDS charged.

Also hurts drug makers

In addition, Ziegler argued that the anti-competitive impact of Lilly's PCS acquisition would be felt by other pharmaceutical manufacturers.

Denying a competing manufacturer access to the PCS patient base "would result in the loss of access to nearly one-fifth of the entire United States population," Ziegler explained. Drug makers who do not buy up their own PBMCs may face "the bleak prospect of either going out of business or being acquired by one of the three larger firms."

Indeed, the NACDS petition warned that if current economic conditions continue, within six to 10 years "virtually all the high-volume pharmaceutical products will be dominated by less than 10 single-source and multi-product-line pharmaceutical companies, and there will only be two or three viable manufacturer competitors for any one generic product."