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April 2, 2012 7:26 PM

Antitrust Lawyers Do Victory Lap as FTC Approves Express Scripts $29.1 Billion Deal for Medco

Posted by Tom Huddleston Jr.

UPDATE: 4/3/12, 2:40 p.m. EDT, A comment from Skadden partner Clifford Aronson, lead antitrust counsel to Express Scripts, has been added in the ninth paragraph.

The Federal Trade Commission said Monday it has cleared the way for Express Scripts to acquire rival Medco Health Solutions in a $29.1 billion deal that will create the largest pharmacy-benefit manager in the United States

In July 2011, St. Louis–based Express Scripts agreed to the stock and cash deal to purchase Franklin Lakes, New Jersey–based Medco in one of the largest announced transactions of last year and the largest consummated deal so far in 2012. The two companies manage prescription drug benefits plans that numerous businesses offer their employees.

As The Am Law Daily has previously reported, Skadden, Arps, Slate, Meagher & Flom acted as lead outside deal counsel to Express Scripts on the matter, while Sullivan & Cromwell advised Medco. (Skadden M&A partners Howard Ellin and Lou Kling earned our Dealmaker of the Week honor at the time the transaction was announced.)

Meanwhile, Dechert partner Mike Cowie and Dechert competition cochair Paul Denis, along with counsel Paul Frangie, helped shepherd the deal through the regulatory process as antitrust counsel to Medco.

Given that it will combine the two biggest companies in the pharmacy-benefits management (PBM) market, the deal drew intense regulatory scrutiny. Among regulators' top concerns, as the FTC noted in Monday's announcement: the combined company's effect on health care insurance and drug costs for both consumers and companies. Objections also came from scores of lawmakers, with more than 70 members of Congress opposing the deal in letters to the FTC.

But an eight-month investigation into the deal, the FTC said, "revealed a competitive market for PBM services" and determined that the transaction would not result in a monopoly in that sector. In issuing its decision, the FTC noted that expansion of other pharmacy-benefits providers will help ensure that Express Scripts and Medco do not wind up with outsized market share.

Dechert's Cowie says the FTC's decision reflects the fact that the agency does not respond to such deals in a knee-jerk fashion.

"The FTC is not stuck in cement on historical positions, or historical market shares," he says. "And, they place a lot of weight on changing industry dynamics. . . . They put a lot of weight on the growth of emerging competitors and rapidly shifting positions in the marketplace."

Skadden partner Clifford Aronson, who was antitrust counsel to Express Scripts, adds that his team anticipated significant scrutiny of the deal and relied heavily on federal guidelines in making a case for the transaction. "Very early on, we took the FTC and [U.S. Department of Justice] merger guidelines and essentially did the econometrics suggested in them, and used that as our approach for the FTC because we knew there would be some reluctance," Aronson says.

The FTC's approval came in the form of a 3-to-1 vote to close its investigation, with commissioner Julie Brill the lone "no" vote. In a dissenting opinion (PDF), Brill expressed fear that the transaction "will create a highly concentrated market" that could prove anticompetitive.

The FTC's decision comes on the heels of multiple high-profile transactions failing to obtain regulatory approval in the United States and abroad over the past year. NYSE Euronext's proposed merger with German exchange Deutsche Börse was squashed by the European Commission two months ago, and the potential tie-up between AT&T and T-Mobile collapsed in the face of DOJ opposition in December.

Coming in the wake of the failure of those deals, the FTC's decision could prove a boon to an M&A market in need of a dose of confidence.

"[The failure of the AT&T/T-Mobile deal] can be misinterpreted as saying that strategic deals have gotten too difficult to get done," Cowie says. "Express Scripts/Medco teaches us that you can get a strategic deal done when you have a well-documented, data-driven story showing it's procompetitive."

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