Omnicare Inc.’s eight-month pursuit of acquiring PharMerica Corp. finally crumbled recently under the weight of the Federal Trade Commission’s lawsuit. If successful, Omnicare’s post-acquisition market share would have been 57 percent of the long-term care pharmacy (LTC pharmacy) market. The FTC stepped in to stop what it believed would have been a resulting anti-competitive advantage that would hurt the health care market, its patients and the taxpayers “who foot much of the bill under Medicare.”

As alleged in the FTC’s complaint, Omnicare is a Delaware corporation headquartered in Kentucky. In 2010, it generated total revenues of approximately $6.1 billion. PharMerica is a Delaware corporation that is also headquartered in Kentucky. In 2010, PharMerica had total annual revenues of approximately $1.8 billion. Omnicare is the nation’s largest LTC pharmacy followed by its rival, PharMerica. Omnicare owns and operates approximately 204 LTC pharmacies in 44 states, while PharMerica owns and operates approximately 97 LTC pharmacies in 43 states.

The FTC lawsuit concerns the federally subsidized Medicare Part D plans, which help pay for the medications of 29 million elderly or disabled participants. About 1.6 million Part D plan participants reside in the over 16,000 skilled nursing facilities (SNFs) in the United States. As LTC pharmacies, Omnicare and PharMerica compete for exclusive contracts with skilled nursing facilities to provide those participants with their medications. Sponsors of Part D plans (Part D sponsors) reimburse LTC pharmacies such as Omnicare and PharMerica pursuant to the contracts that they negotiate directly with the Part D sponsors.

Significantly, the Centers for Medicare and Medicaid Services (CMS) require that Part D sponsors provide “convenient access” to LTC pharmacies for Part D plan participants. For this reason, the SNF contracts are exclusive to one LTC pharmacy. The larger the LTC pharmacy, the more likely it is to satisfy the “convenient access” requirement and the more likely CMS is to require a Part D sponsor to include that LTC pharmacy in its network. The metric for an LTC pharmacy’s size is the number of SNF beds served.

After Omnicare and PharMerica, the next largest LTC pharmacy has a 2 percent market share. The remaining 41 percent market share is distributed among many smaller firms. Thus, Omnicare and PharMerica together represent a 57 percent market share. Omnicare’s CEO recently explained that it “‘basically control[s] 50 percent of the patient … population in the nursing home agencies … So with that type of leverage and market share, you know, we’re in a different and unique position when we’re negotiating our contracts with [Part D Sponsors],’” according to the FTC complaint. A successful merger of Omnicare and PharMerica would give the resulting entity a 57 percent market share as well as control and operation of over 300 pharmacy facilities.

Omnicare’s pursuit of PharMerica has been nothing short of tumultuous. Omnicare reportedly began courting PharMerica in July 2011 and offered a $15 a share unsolicited bid for PharMerica. On Sept. 7, 2011, Omnicare publicly announced its hostile cash tender offer “to acquire all outstanding shares of PharMerica to obtain ownership and control of the company.” The FTC valued the proposed transaction at approximately $760 million. However, PharMerica’s board of directors rejected the offer and publicly stated that “‘antitrust clearance to combine competitors with #1 and #2 market share in institutional pharmacy is likely to be difficult to achieve and involve lengthy administrative and court proceedings,’” according to the FTC complaint.

According to news reports, the board’s rejection of the offer was not without consequences. First, Omnicare filed a lawsuit in Delaware alleging that PharMerica’s board members breached their duties by rejecting the offer. Second, PharMerica shareholders swiftly lodged a putative class action against the company hoping to pressure the company into accepting the offer. Third, according to PharMerica, another shareholder lawsuit was instituted in Kentucky, but was dismissed in October. Omnicare extended at least three more acquisition offers, but PharMerica maintained its opposition. In fact, PharMerica reportedly adopted a shareholder-rights plan to defend against a hostile takeover.

On Jan. 27, the FTC filed an administrative complaint to block Omnicare’s acquisition of PharMerica. In its complaint, the FTC alleged that the merger “would violate Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. § 45 and Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18.”

The FTC’s complaint paints a dark picture of Omnicare’s pre-acquisition business practices. Pre-acquisition, the FTC said, Omnicare already flexed its muscle in negotiating contracts with Part D sponsors. The FTC alleged that because “Omnicare serves far more SNF beds than any other LTC pharmacy, it is often able to extract higher prices and other more favorable contract terms from Part D sponsors.” More bluntly, the FTC alleged that “Omnicare’s standard negotiating practice is to threaten to terminate its participation in the Part D sponsor’s LTC pharmacy network,” which would hamper the Part D sponsor’s ability to provide the CMS-mandated “convenient access.” Allegedly, Omnicare would go further and threaten to “bring the impasse to CMS’s attention” thereby placing “the sponsor’s entire Part D business at risk.” The FTC claims to have knowledge that Omnicare employed these tactics in “a number of recent negotiations.”

Based on this alleged conduct, the FTC’s complaint cautions as to the effects of the proposed transaction. Generally, the FTC alleges that the proposed acquisition “threatens to increase substantially Omnicare’s negotiating leverage with Part D sponsors, and is likely to result in higher reimbursement rates paid by the Part D sponsors, their beneficiaries, and ultimately, American taxpayers who subsidize the vast majority of the Part D plans’ costs.” The FTC asserts that CMS agrees with this outcome and that it is “confirmed by the testimony of a number of the largest Part D sponsors.” As Omnicare and PharMerica represent 57 percent of the market share, “post-acquisition, the combined firm’s only competitors would be small, regional and local pharmacies, none of which currently possesses substantial market share or operates in more than a few states.” Accordingly, the FTC alleged that the proposed acquisition was “presumptively unlawful” under the Federal Trade Commission Horizontal Merger Guidelines.

The Horizontal Merger Guidelines measure market concentration on a point system using the Herfindahl-Hirschman Index (HHI). When post-merger HHI exceeds 2,500 points and the merger or acquisition increases the HHI by more than 200 points, the merger or acquisition is presumed likely to create or enhance market power and presumed illegal. Pre-acquisition, the FTC alleged that Omnicare’s HHI was at least 1,849, which fell short of the 2,500 point HHI threshold. Post-acquisition, however, the FTC alleged that the new entity’s HHI level would be at least 3,253, with an increase of 1,404, which far exceeds the HHI’s market concentration thresholds.

In response to the FTC’s complaint, PharMerica’s CEO, Gregory S. Weishar, said: “As we have said from the beginning, we believed antitrust clearance would be difficult to achieve and, with that belief now confirmed, we hope that Omnicare will end its hostile pursuit of PharMerica.” As to the merits of the merger, Weishar previously stated that “it undervalues Pharmerica. … Reasonable success in our growth strategy will lead to greater shareholder value than the $15″ per share offer.

For a time, Omnicare’s pursuit of PharMerica remained steadfast, perhaps relying on the success of its acquisition of NeighborCare in 2005. The FTC allowed that takeover noting that Omnicare had many competitors in the area and that the market was easy to enter. Referencing that deal, Omnicare issued a statement in response to the FTC’s complaint concerning the proposed PharMerica acquisition saying that “the FTC has already examined the institutional pharmacy industry, noting the numerous players and explaining how the ease of entry and other market conditions facilitate competition. … The institutional pharmacy business is competitive and Omnicare is confident it would remain so after the transaction.” However, Omnicare’s pursuit of PharMerica did not last through this winter.

On Feb. 21, Omnicare announced that it allowed its tender offer to acquire PharMerica to expire the previous Friday. The company said in a statement that “while we continue to strongly disagree with the FTC’s decision to seek to block the proposed transaction, we do not believe it is prudent to invest significant time and money in a lawsuit at this time.”

In a press release, FTC Chairman Jon Leibowitz said: “We’re gratified that Omnicare abandoned its efforts to acquire PharMerica. One of the [FTC's] core missions is protecting competition in the health market, which helps keep prices down and the quality of care up.” On Feb. 23, the FTC voted 4-0 to dismiss its complaint against Omnicare.

For now, it seems there will be no union of the No. 1 and No. 2 LTC pharmacies in the United States. While Omnicare certainly did not express complete abandonment of a potential acquisition in the future, the FTC made Omnicare well aware of its position on the proposed merger. Moreover, while PharMerica referenced antitrust concerns, it seemed more focused on Omnicare’s undervaluing of PharMerica. Although Omnicare could make a more persuasive offer, the FTC’s stated concerns regarding the proposed acquisition still would not be addressed.

In the wake of Omnicare’s failed attempt to acquire PharMerica there is still a question about the other smaller and more regional LTC pharmacies that make up the remaining 43 percent of the market share. It remains to be seen whether Omnicare will test the waters by pursuing the smaller fish in the LTC pharmacy market. Stay tuned.

Carl W. Hitinger is the chairman of DLA Piper’s litigation group in Philadelphia, where he concentrates his practice in complex commercial trial and appellate litigation with particular emphasis on antitrust and unfair competition matters. Hittinger is also a frequent lecturer and writer on antitrust issues and has extensive experience counseling clients on all aspects of civil and criminal antitrust law. He can be reached at 215-656-2449, or

Patrick Castañeda is an associate in the firm’s Philadelphia office, where he concentrates his practice on complex commercial litigation. He can be reached at 215-656-3378 or