Express, Medco Antitrust Issues Could Be Bitter Pill

(Express Scipts, Medco deal story updated with analyst commentary)

NEW YORK (TheStreet) -- Aside from the antitrust issues posed by a merger between Express Scripts (ESRX) and Medco Health Solutions (MHS), the deal also would impact drug companies and distributors.

The companies said on Thursday morning that the $29 billion deal, which would create the largest pharmacy benefits manager by far in the U.S., would be great for Americans and reduce pharmacy costs.

Anthony Vendetti, health care analyst at Maxim Group, said distributors and drug companies will line up against the deal.

The impact of the deal on drug distributors was evident on Thursday, as Medco's main distributor, AmerisourceBergen (ABC) declined by 6% on heavy volume, and based on the belief that its position will be weakened if the deal goes through, because Express Scripts' main distributor is Cardinal Health (CAH). Shares of Cardinal Health rose by 2% on Thursday.

"Express Scripts will work more with their preferred distributor or in the least play the distributors off each other, forcing distributors to give more pricing concessions. It 's a market where margins are already thin and my sense is that the distributors will complain," said Vendetti.

The drug companies won't be happy that this PBM behemoth has much more leverage. "'Every drug company will be against this, and that's a powerful lobby," Maxim Group's Vendetti said.

Analysts say the companies may have signaled how significant the extent of the antitrust issues are in the transaction terms: There will be no breakup fee if the deal fails for regulatory reasons, the companies said in a release explaining the deal terms.

"That's somewhat unusual and an acknowledgment of the risk," said Gabelli Securities health care analyst Jeff Jonas.

Ultimately, analysts say the U.S. Department of Justice and Federal Trade Commission review of the deal will hinge on how the category for these companies is defined: Is this a deal that is taking place within the larger pharmaceutical industry, or is the corporate pharmacy benefit manager market an industry that deserves a narrower definition for the purposes of reviewing this deal?

"The question for this deal is are we talking about a marketplace for the PBM that serves corporate employers, or the broader pill market in the U.S.? The threshold for this deal is how the market is defined, and if it is defined narrowly as the PBM market for corporate employers, the deal might be nixed by the FTC," said Dave Shove, health care analyst at BMO Capital Markets. Shove added, "My bias is that the corporate PBM argument fails as a definition, and the FTC will look at the pill marketplace. I don't think Medco and Express Scripts together move the price of generics."

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