Protecting competition and consumers, the Federal Trade Commission today announced it is challenging Rite Aid Corporation’s proposed $3.5 billion acquisition of the Brooks and Eckerd pharmacies from Canada’s Jean Coutu Group (PJC), Inc. To remedy the alleged anticompetitive impact of the proposed transaction, the Commission has entered into a consent agreement and order with Rite Aid and Jean Coutu under which they are required to sell 23 pharmacies to Commission-approved buyers. The stores will be sold to: 1) Kinney Drugs; 2) Medicine Shoppe International, Inc.; 3) Walgreen Co.; 4) Big Y; and 5) Weis Markets.
“The consent order with the Commission requires the companies to sell pharmacies in all of the markets where competition would be adversely affected by the proposed transaction,” said Jeffrey Schmidt, Director of the FTC’s Bureau of Competition. “Its strong terms will ensure that consumers continue to have a choice in where they shop for prescription drugs.”
The Commission’s Complaint
According to the FTC’s complaint, the proposed acquisition would be anticompetitive and in violation of Section 5 of the FTC Act and Section 7 of the Clayton Act, as amended, in the relevant product market – the retail sale of pharmacy services to cash customers in local markets. Pharmacy services include the provision of medications by a licensed pharmacist who is able to provide usage advice and other relevant information to consumers. Cash customers are consumers of pharmacy services who do not pay a price negotiated by or paid through a third party, such as an insurance plan or pharmacy benefits manager. This market is similar to cash customer markets defined in other FTC pharmacy services matters.
Each of the 23 local markets identified in the Commission’s complaint is highly concentrated with respect to the retail sale of pharmacy services to cash customers. In all of the markets, Rite Aid and Eckerd/Brooks are two of a small number of pharmacies offering cash services, and combined account for at least half – and up to 100 percent – of the pharmacies in those markets. The complaint alleges that customers view Rite Aid and Eckerd/Brooks pharmacies in these markets as their first and second choices based on location, service, and convenience, and thus the proposed transaction likely would allow Rite Aid to unilaterally exercise market power after its acquisition of Eckerd/Brooks, absent the relief provided by the consent order. If Rite Aid were able to unilaterally exercise market power after the transaction, the Commission contends it would raise the likelihood that the prices paid by cash customers for pharmacy services would increase, and the quality and selection of such services would decrease.
The FTC also contends that entry into the relevant markets would not be timely, likely, or sufficient to prevent the anticompetitive impact of the transaction.
Terms of the Consent Order
The consent agreement and order with the Commission are designed to ensure competition is maintained after the proposed acquisition is completed. Under its terms, the companies are required to sell one store in each of the 23 geographic markets to a Commission-approved buyer. Specifically, the order requires the companies to sell one store in each relevant geographic area to one of five up-front buyers, including: 1) Kinney Drugs; 2) Medicine Shoppe International, Inc.; 3) Walgreen Co.; 4) Big Y; and 5) Weis Markets. The Commission’s analysis to aid public comment on the consent agreement and order, which can be found as a link to this press release on the FTC’s Web site, contains detailed information on each of these buyers and their ability to maintain competition in the relevant markets after their divestiture. A list of the specific pharmacies that are being divested can be found in Schedule A, which is an attachment to the consent order on the Web site.
The order requires that the divestitures occur no later than 20 days – or, in the case of the divestitures to Medicine Shoppe, 40 days – after the acquisition is completed, or four months after the date that the companies sign the order, whichever is earlier. All divestitures are subject to approval by the Commission, and if it determines during or after the public comment period that any of the up-front buyers are not acceptable, any consummated divestitures must be rescinded and other Commission-approved buyers must be found.
In addition, the order contains a separate order to maintain assets designed to: 1) maintain the full economic viability and marketability of the assets to be sold pending their divestiture;
2) minimize any risk of loss of competitive potential for such businesses; and 3) prevent the destruction or deterioration of the assets prior to their sale. The order also allows the FTC to appoint a divestiture trustee if necessary to satisfy the terms of the order and states that the Commission can seek civil penalties for non-compliance.
Finally, for 10 years from the date the order becomes final, the companies must provide the FTC with written notice before acquiring or leasing any interest in a facility that has operated as a pharmacy within the previous six months and is within five miles of any store divested under the order. This requirement does not, however, bar the companies from building new pharmacies in the relevant markets or from leasing facilities that have not been operated as pharmacies within the previous six months.
The Commission vote to approve the consent agreement and order was 5-0. The order will be subject to public comment for 30 days, until July 9, 2007, after which the Commission will decide whether to make it final. Comments should be sent to: FTC, Office of the Secretary, 600 Pennsylvania Ave., N.W., Washington, DC 20580.
The FTC would like to thank the states of Maryland, New Jersey, New York, Pennsylvania, Vermont, Virginia, and Maine for their assistance in conducting the investigation into the proposed transaction and developing the resulting consent agreement.
NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.
The FTC’s Bureau of Competition works with the Bureau of Economics to investigate alleged anticompetitive business practices and, when appropriate, recommends that the Commission take law enforcement action. To inform the Bureau about particular business practices, call 202-326-3300, send an e-mail to firstname.lastname@example.org, or write to the Office of Policy and Coordination, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, DC 20580. To learn more about the Bureau of Competition, read “Competition Counts” at http://www.ftc.gov/competitioncounts.