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The Federal Trade Commission has given final approval to a consent agreement with Eli Lilly and Company settling charges that its $4 billion acquisition of McKesson Corporation's prescription management business, PCS Health Systems, Inc., would substantially lessen competition in the manufacture and sale of pharmaceuticals, potentially leading to higher prices and reduced quality. Also, citing the potential for anticompetitive results in the rapidly evolving markets for pharmaceutical products and pharmacy benefits management (PBM), the Commission pledged to monitor the industry carefully and cautioned that it might take future action -- including requiring post-acquisition divestitures -- if it concluded there were signs of anticompetitive conduct in the industry.

Lilly's acquisition of PCS is the third recent transaction in which a major pharmaceutical company purchased a pharmacy benefit manager. In previous transactions, Merck & Company acquired Medco Containment Services and SmithKline Beecham P.L.C. acquired Diversified Pharmaceutical Services.

In November 1994, the Commission provisionally accepted a consent agreement, the terms of which were modified to an extent before being finalized by the Commission. The order requires Lilly to take measures to ensure that its drugs are not given unwarranted preference over those of its competitors in the PBM services Lilly will provide after the acquisition. Specifically, the order requires Lilly to ensure that PCS maintains an "open formulary." (A formulary is a list of drugs used as a guide in prescribing and dispensing pharmaceuticals to health plan beneficiaries.) The open formulary must include any drug approved by an independent "Pharmacy and Therapeutics (P&T) Committee," as prescribed by the order. Under the order, the voting members of this independent P&T Committee must not be affiliated with Lilly or PCS, and the Committee must apply objective criteria in evaluating drugs for inclusion in the open formulary. In addition, Lilly is required to ensure that PCS accepts all discounts, rebates or other concessions offered by Lilly's competitors for drugs on the open formulary, and to accurately reflect such discounts in ranking the drugs on the formulary. Another provision of the final order announced today prohibits PCS and Lilly from sharing proprietary or other non-public information, such as price data, from competitors of Lilly whose drugs may be placed on a PCS formulary or from PBM competitors of PCS that must deal with Lilly to complete their formularies.

In a modification of the provisionally-accepted settlement, the final consent order does not contain two provisions requiring Lilly to seek the FTC's approval before acquiring an interest in certain firms that provide formulary services. The final order also modifies a provision that would have required Lilly to obtain FTC approval before entering into any exclusive distribution agreement with McKesson or any other pharmaceutical wholesaler for the distribution of Lilly products. Pursuant to the modification, Lilly would only need to obtain prior approval for an exclusive distribution agreement with McKesson. These changes are in keeping with the Commission's recently-announced policy as to prior-approval provisions.

In its statement accompanying the vote to give final approval to the settlement, the Commission said that based on the evidence to date, approval of the settlement appeared appropriate, but "the Commission remains concerned that this acquisition, together with other vertical integration in these markets, could lead to anticompetitive consequences that require additional relief." It said that it would continue to monitor:

  • whether, and to what extent, products of other pharmaceutical manufacturers, especially those not vertically integrated with a PBM, will be foreclosed from formularies;
  • whether, and to what extent, vertical integration in this industry fosters anticompetitive reciprocal dealing, coordinated interaction, or interdependent conduct among the vertically integrated firms; and
  • whether vertical integration among pharmaceutical manufacturers and PBMs increases prices or reduces choice of pharmaceuticals for consumers.

"If the Commission concludes that competition is being reduced as a result of these vertical arrangements, it will seek appropriate relief against any firms engaged in anticompetitive conduct, including, if necessary, post acquisition divestitures," the statement says.

"The Commission believes that the course of action described here is both prudent and appropriate, given the significant and ongoing changes occurring in this segment of the health care industry," it says.

The consent agreement was announced for a public-comment period on Nov. 3, 1994. The Commission vote to issue it in final form occurred on July 28, and was 3-1, with Commissioner Roscoe B. Starek, III, recused and Commissioner Mary L. Azcuenaga dissenting.

In her dissenting statement, Commissioner Azcuenaga said: "Today, the Commission accepts a consent order that is simultaneously inadequate to remedy the competitive harm from Eli Lilly and Company, Inc.'s acquisition of the PCS Health Systems business of McKesson Corporation and overreaching in that it imposes restrictions on Lilly without a coherent theory of competitive harm. I dissent because the order does not resolve the competitive concern raised by the acquisition and because it encumbers the company with pointless and unnecessary restrictions. The Statement of the Commission, which holds out the possibility of further investigations and monitoring, implicitly reflects a lack of confidence in the remedial value of this order."

Commissioner Azcuenaga said: "Although I support the Commission's promise to continue monitoring the industry, the murky allegations in the complaint and the ineffective order are not an auspicious beginning. The allegation that the Lilly/McKesson agreement to investigate new distribution concepts is unlawful already has done its harm. That peremptory action, which is entirely unnecessary at this time, may cost consumers by blocking the exploration of innovative ideas for distribution."

She observed: "It is at least somewhat amusing that having recently abandoned its prior approval requirement in cases enjoining unlawful mergers (citing as one reason the cost of compliance), the Commission chooses here to impose a prior approval requirement in the context of an acquisition that is being allowed to proceed and on the basis of a separate alleged violation that is only a gleam in the Commission's eye."

NOTE:  A consent agreement is for settlement purposes only and does not constitute 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 by the respon dents. Each violation of such an order may result in a civil penalty of up to $10,000.

A news release summarizing the complaint and consent agree- ment was issued at the time the Commission accepted the consent agreement for public comment. Copies of that release and of the complaint, final order, Commission statement and Commissioner Azcuenaga's statement are available from the FTC's Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 1-866-653-4261. To find out the latest FTC news as it is announced, call the FTC's NewsPhone recording at 202-326-2710. FTC news releases and other materials also are available on the Internet at the FTC's World Wide Web Site at: http://www.ftc.gov

(FTC File No. 941 0102)
(Docket No. C-3594)

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