Big pharmacy deal confronts past and now present

September 1, 2011

By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Investors are betting there’s almost no chance trustbusters will approve the $29 billion acquisition of pharmacy benefits manager Medco by rival Express Scripts. Medco shares are trading more than 20 percent below the offer price. That may be overly pessimistic. But two nixed mergers 14 years ago and the U.S. Justice Department’s attempt to stop AT&T’s $39 billion purchase of T-Mobile USA provide good reason for skepticism.

First, consider the past. In 1997, drug wholesalers Cardinal and Bergen Brunswig agreed to combine in a $2.8 billion transaction, followed quickly by a proposed $2.2 billion union of McKesson and AmeriSource. The four companies used similar arguments then to the ones Express and Medco are trying today. They reckoned the market was thriving because of so many smaller competitors. And huge cost efficiencies from the deals could be passed on to customers, providing them helpful relief from rocketing healthcare costs.

The arguments failed to sway the U.S. Federal Trade Commission and courts, which stepped in to block the deals. While the watchdogs agreed on the huge savings, there was no assurance consumers would be the beneficiaries. What’s more, they decided most rivals didn’t have the scale to compete on a national level, meaning the mergers would reduce competition and therefore probably push prices up, not down.

History haunted AT&T. It tried to justify its merger using similar reasoning to the drug wholesalers’, and today’s DoJ has used practically the same reasons to challenge the deal.

That bodes poorly for Medco and Express. While there are many smaller pharmacy benefits managers, competition is limited for big, nationwide clients. Of the Fortune 50 companies, 41 are served by Express Scripts, Medco or CVS Caremark, according to Morgan Stanley. That strengthens the case that the deal is anticompetitive.

Of course, Express could still push its deal through, just as AT&T might. But history provides another lesson. AmeriSource and Bergen wound up merging later when President George W. Bush’s more laissez-faire administration proved more sympathetic to the case for cost savings. Even if past and present cast ominous signs for Medco — and T-Mobile — there’s still hope for the future.

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