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Market for Specialty Drugs Could Be Vulnerable Under Proposed Merger

By Rebecca Adams, CQ HealthBeat Associate Editor

December 9, 2011 -- Employers and health insurance plans that cover expensive, lifesaving, specialized medicines are worried that a $29 billion deal to combine two big firms that distribute the drugs could lead to higher costs and more restrictions on how patients get their medications.

Express Scripts Inc. has filed an application with the Federal Trade Commission to acquire Medco Health Solutions. The two companies are pharmaceutical benefit managers (PBMs), which act as middlemen that health plans pay to negotiate with drugmakers for the lowest possible prices, passing those savings on to the plans and others. The drug benefit managers also run their own mail-order and specialty pharmacies.

Executives for other specialty pharmacies and consumer groups are concerned that a unified Express Scripts and Medco would dominate the specialty drug pharmacy market.

Such specialty medications are typically costly therapies that require special handling, such as being shipped in dry ice or being refrigerated. Some are biologics derived from living organisms. They include chemotherapy for cancer patients and drugs to treat complex or rare diseases such as hemophilia, multiple sclerosis, Hepatitis C, rheumatoid arthritis, and cystic fibrosis.

These medicines are used to treat many of the nation’s sickest and most vulnerable patients, at a high cost to Medicare, the federal program for senior citizens and the disabled, and Medicaid, the federal–state health care program for the poor.

Specialty medications are the fastest growing sector of the drug industry. By 2014, they are expected to account for 40 percent of all drug spending in the United States, according to a June report by CuraScript Pharmacy, Express Scripts’ specialty drug division. “For specialty medications, many years of unsustainable cost increases appear to lie ahead,” the report said.

Patients who need specialty drugs have fewer options than those who take more commonplace pharmaceuticals. Far fewer drugmakers produce specialty medicines and pharmacies that dispense them are more scarce.

Concerns over the leverage such a large company could yield in the specialty drug market is undoubtedly a top concern of the Federal Trade Commission and could be a major reason behind a move to block the merger. If the agency is concerned about possible antitrust violations, could block the deal or require the two companies to divest some of their operations in the specialty drug market.

Congress does not have power to intercede formally in the decision, but lawmakers can ratchet up pressure on the FTC to stop it, and lawmakers have begun to raise questions.

In a letter to the FTC, Republican Sens. Saxby Chambliss and Johnny Isakson of Georgia and Jerry Moran of Kansas warned of the influence a combined company would have on the specialty and mail order drug markets. “With that type of market concentration, it is important that your agency works to see that access to health care is not limited,” they wrote.

At a Dec. 6 hearing by the Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights, Sen. Herb Kohl, D-Wis., said “no large employer who privately expressed concerns to us wished to testify at today’s hearings, often telling us that they feared retaliation from the large PBMs with whom they must do business.”

Opponents Reach Out to FTC
A Nov. 30 letter from the American Antitrust Institute to the FTC urged the agency to challenge the deal, citing in part the impact on the specialty drug market. The merger “increases the ability and incentive for Express Scripts-Medco to engage in anti-competitive conduct and threatens to increase specialty drug prices and limit patient access to critical medications,” the letter read.

There is dispute about how much market share a combined Express Scripts and Medco would control.

Adam Fein, president of Philadelphia-based Pembroke Consulting Inc., said in a report last year the two firms control about 52 percent of the market—a figure Democratic senators cite.

After the report released, Medco hired Fein as a consultant. This year, he said he erred and revised his estimates to say that the two firms would control only about 31 percent of the market, a figure the two companies point to.

Express Scripts officials say the specialty market is competitive, with more than 100 specialty pharmacies, including some run by big insurers such as UnitedHealth Group. Attorneys concerned about the power of a combined company say either estimate—potential control of a third or a half of market share—is too much.

One risk, they say, is that a unified Express Scripts-Medco could strike a deal with a drug company to become the sole distributor of a drug, giving private and federal health plans no options. The opponents cite the example of a gel used to treat a rare form of epilepsy.

The price of the drug shot up from $1,600 a vial to $23,000 in 2007, after Express Scripts won an exclusive right to distribute it. Express Scripts spokesman Brian Henry said the manufacturer, Questcor Pharmaceuticals, set the price. Questcor executives told The New York Times at the time that market research prompted it to raise the price.

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