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National Association of Chain Drug Stores, et al v. Express Scripts

August 27, 2012


The opinion of the court was delivered by: Judge Cathy Bissoon


For the reasons stated below, Defendants' motion to dismiss (Doc. 42) will be granted with prejudice in part, granted without prejudice in part, and denied in part. Additionally, Defendants' motion to take judicial notice (Doc. 44) will be denied as moot.

Defendants Express Scripts, Inc. ("ESI") and Medco Health Solutions, Inc. ("Medco") (collectively "Defendants") are both pharmaceutical benefits management ("PBM") companies. The record reflects that, on July 21, 2011, Defendants entered into an agreement and plan of merger. The Federal Trade Commission engaged in an eight-month-long investigation of the potential merger, but concluded that it would not take action. This decision was communicated publicly on April 2, 2012. Defendants consummated their merger that same day.

On March 29, 2012 -- just prior to the finalization of the merger -- Plaintiffs brought the instant cause of action, alleging violations of Section 7 of the Clayton Act, and seeking injunctive relief and costs pursuant to Section 16 of the same. See 15 U.S.C. §§ 18 and 26, respectively; see also (Doc. 1 at 45, 47). Plaintiffs also filed a motion for temporary restraining order the next day. (Doc. 20). An amended motion for temporary restraining order and brief in support thereof were filed on April 2, 2012. (Docs. 22-23). On the following day, given the appearance of counsel on behalf of Defendants, this Court converted the amended motion for temporary restraining order into one for preliminary injunction. See Text Order of Apr. 3, 2012. Finding that Plaintiffs had not met their burden to show a likelihood of immediate irreparable injury, this Court denied that motion on April 25, 2012. (Doc. 58).

On April 6, 2012, shortly after the initiation of this action, Defendants filed a motion to dismiss, raising a multitude of arguments. See, generally, (Docs. 42 and 43). Plaintiffs responded in opposition thereto on April 9, 2012. (Doc. 49). This motion is ripe for disposition.

I. Plaintiffs' Factual Allegations

Plaintiffs describe PBMs as companies that "administer prescription drug benefit programs for individual plan sponsors, such as HMO plans, self-insured employers, indemnity plans, labor union plans, and plans coving public employees." (Doc. 1 ¶ 15). As such, they are responsible for "processing prescription drug claims, maintaining drug formularies,*fn1 contracting with pharmacies for pharmacy services, and reimbursing retail community pharmacies for dispensing prescription drugs and providing related professional services to patients." Id. PBMs allegedly have become the "primary buyers of pharmacy services (on behalf of plan sponsors and patients)." Id. ¶ 14 (parenthetical in the original). Additionally, PBMs "sell drugs to plan sponsors through PBM-owned mail-order and specialty pharmacies."*fn2 Id. ¶ 15

Prior to their merger, Defendants comprised two of the so-called "Big Three" PBMs, which as a group "cover[ed] approximately 72 percent of privately insured lives in the United States." Id. ¶ 16. Defendants allegedly were competitors in the markets for "the purchase of retail community pharmacy services; the provision of specialty pharmacy services; the provision of full-service, nationwide PBM services to large private employers; and the provision of prescription drugs to beneficiaries of large private employers." Id. ¶ 26.

Plaintiffs allege that they and at least some of their members, which include "tens of thousands of retail community pharmacies nationwide[,]" (Doc. 1 ¶ 30), would suffer anticompetitive injury from Defendants' merger. Thus, Plaintiffs claim, the merger violates 15 U.S.C. § 18 in four ways. As a result, Plaintiffs' factual allegations are most easily organized in the context of the four antitrust violations that they allege.

A. The Purchase of Retail Community Pharmacy Services in State Markets

Plaintiffs who are sellers of retail community pharmacy services allege that Defendants -- as two of the three largest PBMs in the United States -- individually make up large proportions of their sales. Id. ¶¶ 16. It is alleged that the entity created post-merger would give Defendants an even stronger position in this market and, along with it, the power to engage in allegedly anticompetitive acts with respect to their business dealings with these retail community pharmacies. See id. ¶¶ 36-66 (alleging, inter alia, that the merged Medco-ESI entity would make up as much of 60 percent of one retail community pharmacy's sales of prescription medicine). Plaintiffs allege that, while Defendants, as separate entities, allowed them some ability to negotiate favorable reimbursement rates from the large PBMs, see id. ¶¶ 41 and 48, a merged entity would have such potency as a purchaser of retail community pharmacy services that it could force at least some of Plaintiffs and their members to accept reimbursement rates that were "non-competitive, or even below-cost[.]" Id. ¶ 60; see also id. ¶¶ 37, 42, 48, 52, 56, 64. This allegedly would force at least some of Plaintiffs and their members to cut back services and operating hours, lose good will, and possibly lose their businesses altogether as well.*fn3 Id. 38, 42, 45-46, 49-5054, 57-58, 61-62, 65-66.

Plaintiffs allege that their relevant product market for this claim is the sale of retail community pharmacy services, that there are no substitutes from their members' perspectives as sellers, and that the cross-elasticity of this market essentially is nonexistent.*fn4 Id. ¶¶ 83, 84, 89. The relevant geographical markets for this claim are each state individually, and the District of Columbia, due to state licensing requirements for retail pharmacies. Id. ¶¶ 85-86, 89. In the alternative, they allege that the relevant geographical market is the United States, because "pharmacies in the United States cannot sell retail community pharmacy services to PBMs operating exclusively in other countries." Id. ¶ 90.

B. The Provision of Clinical Specialty Drugs in the United States

Plaintiffs begin their factual allegations regarding this claim by fashioning two categories of "specialty drugs." The first is so-called "Designated Specialty Drugs," which, as the name implies, are drugs that are designated by Defendants as being "special" in nature. Id. ¶ 91. Plaintiffs allege that this is done unilaterally by Defendants when they update their formularies.

Id. Plaintiffs allege that Designated Specialty Drugs are given this status by PBMs "often . . . to advance the financial interests of the PBMs' specialty pharmacy subsidiaries,*fn5 and . . . not based on a widely-accepted clinical definition . . . or on the clinical needs of patients." Id. ¶ 93. Plaintiffs assert that retail community pharmacies "are fully capable of competing for the provision of many Designated Specialty Drugs[,]" but are precluded from doing so by the PBMs' reimbursement policies, which are described below. Id. ¶ 94.

The second category of specialty drugs is so-called "Clinical Specialty Drugs." Id. ¶ 91. These "are drugs that should be dispensed through a specialty pharmacy because they require specialized storage, control and security, handling, administration, and patient monitoring to achieve successful clinical outcomes[.]" Id. ¶ 91. Most retail community pharmacies cannot dispense Clinical Specialty Drugs without contracting with a specialty pharmacy. Id. However, many of Plaintiffs' member pharmacies already own or contract specialty pharmacies for this purpose. Id. ¶ 96. Additionally, at least one Plaintiff is itself a specialty pharmacy. Id. ¶¶ 67-68,

97. Plaintiffs allege that these pharmacies compete directly with Defendants for the provision of Clinical Specialty Drugs. Id. ¶¶ 96-97.

PBMs "typically" prohibit retail community pharmacies, "including pharmacies that are licensed to offer specialty drugs and pharmacies with separate specialty drug operations, from seeking reimbursement for" the sale of both categories of specialty drugs to patients who are beneficiaries of one of the PBM's plans. Id. ¶ 92. Instead, PBMs "[n]ormally" allow only their proprietary specialty pharmacies or other specialty pharmacies in their networks to seek reimbursement for dispensing these drugs. Id. "Thus, the PBM's designation of a drug as 'specialty' effectively excludes retail community pharmacies from" selling this drug to a beneficiary of one of Defendants' plans. Id. ¶ 92. As such, it is "much more likely that [a] patient will be forced to receive the drug through the mail without the face-to-face clinical service provided by retail community pharmacies." Id. ¶¶ 93, 95.

Additionally, Plaintiffs allege that Defendants are able to increase their power in this market by entering into exclusive distribution agreements with the manufacturers of Clinical Specialty Drugs.*fn6 Id. ¶¶ 100. These agreements, which allegedly are entered into by the manufacturers because of Defendants' size, and which allegedly will become more attractive to drug manufacturers due to Defendants' increased size post-merger, allegedly create high barriers to new competitors seeking to enter this field. Id. This product market allegedly becomes even more inaccessible due to Defendants' ability to use its claims adjudication process to block competitors from filling prescriptions for specialty drugs. Id.

Plaintiffs claim that the relevant product market for this claim is the provision of Clinical Specialty Drugs. Id. ¶ 162. They allege that there are no reasonably interchangeable substitutes for, or alternatives to, these drugs due to the complexities associated with their provision, and that, as a result, the cross-elasticity of demand in this market is "low to zero." Id. ¶¶ 98-99. They further allege that the relevant geographical market for this claim is the United States. Id.

¶¶ 101-03.

C. The Provision of Full-Service, Nationwide PBM Services in the United States to ...

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