CVS To Divest 120 Revco Drug Stores in VA, NY To Settle FTC Charges...

CVS Corporation has agreed with the Federal Trade Commission to divest a total of 120 Revco drug stores or pharmacy counters -- 114 stores in Virginia and six pharmacy counters in the Binghamton, New York, area -- in order to maintain a level of competition that otherwise would have been substantially reduced by the CVS/Revco merger, the FTC said today. The FTC alleged that the $3.7 billion merger would have created a 4,000 store chain that would have violated federal antitrust laws by allowing the firm to raise prices for pharmacy services to health insurance companies and other third-party payors. Under the settlement, CVS has agreed to divest 114 Virginia Revco stores to Eckerd Corporation, a subsidiary of J.C. Penney Company, Inc., and six Binghamton pharmacy counters to Medicine Shoppe International, Inc. Eckerd and Medicine Shoppe will operate the divested assets in competition with CVS.

CVS, based in Woonsocket, Rhode Island, operates nearly 2,600 stores in 17 Midwestern, Southeastern and Eastern states. It had $5.4 billion in 1996 sales. Revco D.S., Inc., based in Twinsburg, Ohio, operates more than 1,400 stores in 14 states and the District of Columbia, and had $5.5 billion in 1996 sales. The two companies announced the proposed merger in February. It would create the nation's largest drug store company by number of stores, and the second largest in terms of sales.

According to the FTC complaint detailing the alleged antitrust law violations in this case, the CVS/Revco merger will give the combined entity a dominant position both in the state of Virginia and in the Binghamton metro area. The combined firm would have the ability to increase prices for the retail sale of pharmacy services to third-party payors because there are insufficient competitive retail pharmacy alternatives in these markets. The FTC also alleged that new entry by other firms is not likely to be timely enough or on a scale necessary to offset these anticompetitive effects.

The retail sale of pharmacy services to third-party payors refers to prescription drugs sold by drug stores, including chains, independent pharmacies, and supermarkets with pharmacy departments, to third-party payors that include insurance companies, health maintenance organizations, preferred provider organizations and private employers. Third-party payors provide retail pharmacy service benefits to their beneficiaries typically through firms called pharmacy benefit management (PBM) firms. PBMs create and administer retail pharmacy networks on behalf of third-party payors whereby third-party payor beneficiaries may go to any pharmacy participating in the network to have prescriptions filled. To establish these pharmacy networks, third-party payors rely on competition among pharmacy chains to keep the cost of pharmacy services competitive. In the two geographic markets at issue, concentration among pharmacy chains is high and the likelihood of new entry is low, the FTC alleged. Thus, according to the FTC complaint, the combined firm could increase prices and restrict products or services to third-party payors and their beneficiaries.

The proposed consent agreement that the FTC has negotiated to resolve these charges would replace the lost competition resulting from the merger by requiring CVS to sell enough drug stores or pharmacy counters to maintain competition in each of the two alleged markets. The consent agreement is being announced today for public comments, after which the Commission will determine whether to issue the order in final form.

In the Virginia market, all assets of the 114 Revco drug stores would have to be sold four months after the Commission's initial acceptance of the consent for public comment, or 10 days after the proposed consent order is finalized, whichever is later, to Eckerd Corporation of Largo, Florida. Eckerd recently was acquired by Plano, Texas-based J.C. Penney, and includes the former Thrift and Fay's pharmacy chains. (See Dec. 9, 1996 news release regarding FTC action to resolve antitrust concerns in the J.C. Penney/Eckerd acquisition.) The stores to be divested are primarily in the areas of Norfolk/Virginia Beach/Newport News, Richmond-Petersburg, and Charlottesville. (See list of stores attached to legal documents accompanying this news release.)

In the Binghamton market, pharmacy assets of six Revco drug stores are to be sold, within the same time frame as the Eckerd divestiture, to Medicine Shoppe, which is a wholly-owned subsidiary of one of the nation's largest wholesale distributors of pharmaceuticals, Cardinal Health. Medicine Shoppe is based in St. Louis, Missouri, and currently operates no stores in Binghamton. (See list of stores attached to accompanying legal documents.)

If the deals with Eckerd and Medicine Shoppe do not go through, the settlement would give CVS three months after the consent order is finalized to find and obtain FTC approval for new buyers. If either divestiture is not completed on time, the order would permit the FTC to appoint a trustee who would have the right to divest all 234 Revco drug stores in Virginia and the 11 CVS drug stores in the Binghamton, New York, metropolitan area, whichever applies. CVS and Revco also have signed an asset maintenance agreement requiring them to preserve the viability and competitiveness of the assets to be divested.

The consent agreement also contains various record keeping and reporting provisions designed to assist the FTC in monitoring the respondents' compliance.

The Attorney General's offices in both New York and Virginia assisted the FTC in its investigation of this matter.

The Commission vote to announce the proposed consent agreement for public comment was 5-0.

An announcement regarding the agreement will be published in the Federal Register shortly. The agreement will be subject to public comment for 60 days, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580.

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.

Copies of the complaint, consent agreement and an analysis of the agreement to assist the public in commenting are available from the FTC's web site at http://www.ftc.gov and also 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. Consent agreements subject to public comment also are available by calling 202-326-3627. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.

(FTC File No. 971 0060)