[Federal Register Volume 59, Number 227 (Monday, November 28, 1994)] [Unknown Section] [Page ] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 94-29183] [Federal Register: November 28, 1994] ----------------------------------------------------------------------- FEDERAL TRADE COMMISSION [File No. 941-0102] Eli Lilly and Company, Inc.; Proposed Consent Agreement With Analysis to Aid Public Comment AGENCY: Federal Trade Commission. ACTION: Proposed consent agreement. ----------------------------------------------------------------------- SUMMARY: In settlement of alleged violations of federal law prohibiting unfair acts and practices and unfair methods of competition, this consent agreement, accepted subject to final Commission approval, would require, among other things, an Indiana producer of pharmaceutical products to: Ensure that PCS Health Systems (PCS) maintains an open formulary; appoint an independent Pharmacy and Therapeutics (P&T) Committee of health care professionals to objectively evaluate drugs for inclusion in the PCS open formulary; ensure that PCS accepts all discounts, rebates or other concessions offered by Eli Lilly's competitors for drugs that are accepted for listing on the open formulary, and to accurately reflect such discounts in ranking the drugs on the formulary; and, for five years, obtain Commission approval before acquiring an interest in any firm that provides formulary services to more than 2 million people in the United States. In addition, the consent agreement would prohibit PCS and Eli Lilly from sharing proprietary or other non-public information, such as price data, from competitors whose drugs may be placed on a PCS formulary. DATES: Comments must be received on or before January 27, 1995. ADDRESSES: Comments should be directed to: FTC/Office of the Secretary, room 159, 6th St. and Pa. Ave., NW., Washington, DC 20580. FOR FURTHER INFORMATION CONTACT: Michael McNeely, FTC/S-3308, Washington, DC 20580. (202) 326-2904. SUPPLEMENTARY INFORMATION: Pursuant to section 6(f) of the Federal Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46 and Sec. 2.34 of the Commission's rules of practice (16 CFR 2.34), notice is hereby given that the following consent agreement containing a consent order to cease and desist, having been filed with and accepted, subject to final approval, by the Commission, has been placed on the public record for a period of sixty (60) days. Public comment is invited. Such comments or views will be considered by the Commission and will be available for inspection and copying at its principal office in accordance with Sec. 4.9(b)(6)(ii) of the Commission's rules of practice (16 CFR 4.9(b)(6)(ii)). Agreement Containing Consent Order The Federal Trade Commission (``Commission''), having initiated an investigation of the acquisition by Eli Lilly and Company (``Lilly'') of the PCS Health Systems (``PCS'') business of McKesson Corporation (``McKesson''), and it now appearing that Lilly, hereinafter sometimes referred to as ``proposed respondent,'' is willing to enter into an agreement containing an Order to remedy the alleged lessening of competition resulting from such acquisition, and providing for other relief: It is hereby agreed by and between proposed respondent, by its duly authorized officer and its attorney, and counsel for the Commission that: 1. Proposed respondent Lilly is a corporation organized, existing and doing business under and by virtue of the laws of the State of Indiana, with its office and principal place of business located at Lilly Corporate Center, Indianapolis, Indiana 46285. 2. Proposed respondent admits all the jurisdictional facts set forth in the draft of complaint here attached. 3. Proposed respondent waives: a. Any further procedural steps; b. The requirement that the Commission's decision contain a statement of findings of fact and conclusions of law; c. All rights to seek judicial review or otherwise to challenge or contest the validity of the Order entered pursuant to this agreement; and d. Any claim under the Equal Access to Justice Act. 4. This agreement shall not become part of the public record of the proceeding unless and until it is accepted by the Commission. If this agreement is accepted by the Commission it, together with the draft of complaint contemplated thereby, will be placed on the public record for a period of sixty (60) days and information in respect thereto publicly released. The Commission thereafter may either withdraw its acceptance of this agreement and so notify the proposed respondent, in which event it will take such action as it may consider appropriate, or issue and serve its complaint (in such form as the circumstances may require) and decision, in disposition of the proceeding. 5. This agreement is for settlement purposes only and does not constitute an admission by proposed respondent that the law has been violated as alleged in the draft of complaint here attached, or that the facts as alleged in the draft complaint, other than jurisdictional facts, are true. 6. This agreement contemplates that, if it is accepted by the Commission, and if such acceptance is not subsequently withdrawn by the Commission pursuant to the provisions of Sec. 2.34 of the Commission's rules, the Commission may, without further notice to the proposed respondent, (1) issue its complaint corresponding in form and substance with the draft of complaint here attached and its decision containing the following Order in disposition of the proceeding, and (2) make information public with respect thereto. When so entered, the Order shall have the same force and effect and may be altered, modified or set aside in the same manner and within the same time provided by statute for other orders. The Order shall become final upon service. Delivery by the U.S. Postal Service of the complaint and decision containing the agreed-to Order to proposed respondent's address as stated in this agreement shall constitute service. Proposed respondent waives any right it may have to any other manner of service. The compliant may be used in construing the terms of the Order, and no agreement, understanding, representation or interpretation not contained in the Order or the agreement may be used to vary or contradict the terms of the Order. 7. Proposed respondent has read the draft of compliant and order contemplated hereby. Proposed respondent understands that once the Order has been issued, it will be required to file one or more compliance reports showing that it has fully complied with the Order. Proposed respondent further understands that it may be liable for civil penalties in the amount provided by law for each violation of the Order after it becomes final. Order I It is ordered, That the following definitions shall apply herein: A. ``Respondent'' or ``Lilly'' means Eli Lilly and Company, its predecessors, divisions, subsidiaries, affiliates, partnerships, joint ventures, successors and assigns, and all directors, officers, employees, agents and representatives of the foregoing. B. ``McKesson'' means McKesson Corporation, its predecessors, divisions, subsidiaries, affiliates, partnerships, joint ventures, successors and assigns, and all directors, officers, employees, agents and representatives of the foregoing. C. ``PCS'' means PCS Health Systems, Inc., its predecessors, divisions, subsidiaries, affiliates, partnerships, joint ventures, successors and assigns, and all directors, officers, employees, agents and representatives of the foregoing. D. ``Commission'' means the Federal Trade Commission. E. ``Formulary'' means a listing, by therapeutic category, of branded and generic ambulatory drug products that are approved for use by the U.S. Food & Drug Administration (``FDA''), and which is made available to pharmacies, physicians, third-party payors, or other persons involved in the healthcare industry, to guide in the prescribing or dispensing of pharmaceuticals. An ``Open Formulary'' is a formulary that allows the inclusion of any ambulatory prescription drug product approved by the FDA for use in the United States, which the P&T Committee (defined below) determines is appropriate for inclusion in such formulary. For purposes of this Order, an Open Formulary may provide truthful information stating or indicating the relative costs or benefits of drugs on the formulary. F. ``Pharmacy Benefit Management Services'' or ``PBM Services'' means services provided by a pharmacy benefits manager, such as formulary services, negotiation of rebates or discounts from pharmaceutical manufacturers, prescription claims processing, and drug utilization review. G. ``Formulary Services'' means the provision, development, establishment, management or maintenance of a formulary by a pharmacy benefits manager. For purposes of this Order, ``management'' of a formulary includes the negotiation and administration of rebate or discount agreements with pharmaceutical manufacturers for drugs included on a formulary. H. ``Lilly Non-Public Information'' means information not in the public domain that is provided to Lilly in its capacity as a pharmaceutical manufacturer by a supplier of PBM Services and that concerns bids, proposals, contracts, prices, rebates, discounts, or other terms or conditions of sale of any person other than PCS. I. ``PCS Non-Public Information'' means information not in the public domain that is provided to PCS in its capacity as a supplier of PBM Services by a manufacturer or seller of prescription drug products and that concerns bids, proposals, contracts, prices, rebates, discounts, or other terms or conditions of sale of any person other than Lilly. J. ``Pharmacy and Therapeutics Committee'' or ``P&T Committee'' means a group of healthcare professionals, such as doctors, pharmacists, and pharmacologists, appointed for the purpose of evaluating prescription drug products for inclusion on a formulary. II It is ordered, That: A. Within thirty (30) days from the date this Order becomes final, Lilly shall cause PCS to maintain an Open Formulary. As of the date this Order becomes final, the PCS ``Clinical Formulary and Prescribing Guidelines 1994-1995,'' a copy of which is attached hereto as Appendix A, on file at the Commission, shall be deemed an Open Formulary that complies with this Paragraph II.A. B. Within thirty (30) days from the date this Order becomes final, Lilly shall cause PCS to appoint an independent P&T Committee with the authority and responsibility to maintain the Open Formulary required by Paragraph II.A above. Such P&T Committee shall make all decisions concerning the inclusion of drugs on such Open Formulary, the exclusion of drugs from such Open Formulary, and the clinical and therapeutic advice and evaluation concerning drugs on such Open Formulary, and shall operate according to the following provisions: 1. Such P&T Committee shall consist of at least nine (9) members, all of whom shall be physicians, pharmacists, pharmacologists, or other healthcare professionals. 2. A majority of the P&T Committee shall consist of persons who are not employees, officers, directors, or agents of, and who have no financial interest in: (a) Lilly, (b) PCS, or (c) any other person who has an ownership interest in Lilly or PCS. Such persons shall be referred to herein as ``independent'' members of the P&T Committee. 3. each independent member of the P&T Committee shall have one vote on all decisions of the P&T Committee. 4. All members of the P&T Committee who are employees, officers, directors, or agents of, or who have a financial interest in, Lilly, PCS, or any other person who has an ownership interest in Lilly or PCS, shall not be entitled to vote on decisions of the P&T Committee. 5. All independent members of the P&T Committee shall be appointed for three-year terms, except that for the initial board, one-third of the independent members shall be appointed for one-year terms, one- third shall be appointed for two-year terms, and the remaining independent members shall be appointed for three-year terms. At the expiration of their terms, or upon the occurrence of a vacancy, members may be reappointed, or new members may be appointed, by a majority of the then-appointed independent members of the P&T Committee. 6. No independent member of the P&T Committee may be removed except for cause by vote of a majority of the independent members of the P&T Committee. 7. In performing its responsibilities in maintaining the Open Formulary, the P&T Committee shall utilize only criteria relating to safety, efficacy, FDA approved indications, side effects, contraindications, pharmacokinetics, patient compliance, physician follow-up requirements, effect on emergency room visits and hospitalizations, laboratory tests, cost, and similar objective factors. Such P&T Committee shall give no preference to the products of Lilly, or of any other person with an ownership interest in PCS, except on the basis of such objective criteria. 8. Lilly shall cause PCS to cover the costs and expenses of the P&T Committee, and Lilly shall cause PCS to indemnify the P&T Committee against any losses or claims of any kind that might arise out of its performance of functions under this Order, except to the extent that such losses or claims result from misfeasance, gross negligence, willful or wanton acts, or bad faith. 9. Such P&T Committee shall maintain written records, for five (5) years from the date thereof, explaining the basis and rationale for all P&T Committee decisions relating to the exclusion of any products from, or the ranking of products on, the Open Formulary required by Paragraph II.A. C. Lilly shall cause PCS to accept all discounts, rebates or other concessions offered by any manufacturer, seller or distributor of pharmaceutical products included by the P&T Committee on the Open Formulary, and Lilly shall cause PCS to ensure that all such discounts, rebates, or concessions are truthfully and accurately reflected in determining relative rankings of products on the Open Formulary. D. Nothing in this Order shall preclude PCS from offering any formulary other than the Open Formulary to any customer. E. Lilly shall cause PCS to provide a copy of this Order to each member of the P&T Committee on or before the date of each such person's appointment to such P&T Committee. III It is further ordered, that: A. Lilly shall not provide, disclose, or otherwise make available to PCS any Lilly Non-Public Information; and B. PCS shall not provide, disclose, or otherwise make available to Lilly any PCS Non-Public Information. IV It is further ordered, That Lilly shall retain all documents, and shall cause PCS to separately retain all documents, that relate to (A) the exclusion of any prescription drug products from the Open Formulary required by Paragraph II.A above, (B) any preference or ranking accorded to any prescription drug product on the Open Formulary required by Paragraph II.A above, or (C) statements or indications of discounts, rebates, or other concessions, as described in Paragraph II.C above, for a period of five (5) years from the date such document is created or received. V It is further ordered, That Lilly shall disclose the availability of the Open Formulary as follows: A. Lilly shall cause PCS to disclose the availability of the Open Formulary to all persons who currently have an agreement with PCS concerning PBM services or concerning the inclusion of pharmaceuticals on a formulary, by providing to each such person a letter containing the following statement within ten (10) days after initiation of contact between PCS and such person regarding renewal or extension of such person's existing agreement with PCS: PCS maintains an Open Formulary that allows, subject to the determination of an independent Pharmacy and Therapeutics Committee, the inclusion of any ambulatory prescription drug product approved by the FDA for use in the United States. This Open Formulary will be provided to you upon request. B. For a period of five (5) years from the date this Order becomes final, Lilly shall cause PCS to provide in writing the statement set forth in Paragraph V.A above to each prospective customer of PCS at the time of PCS's response to such prospective customer's request for proposal, or at the time of PCS's initial written proposal to such prospective customer, whichever occurs first. VI It is further ordered, That, for a period of five (5) years from the date this Order becomes final, respondent shall not, without the prior approval of the Commission, directly or indirectly, through subsidiaries, partnerships, or otherwise: A. Acquire any stock, share capital, equity, leasehold or other interest in any person, corporate or non-corporate, engaged in the providing of Formulary Services in the United States, if such person has more than two (2) million lives covered by its Formulary Services in the United States; B. Acquire any assets used for, or previously used for (and still suitable for use for), the providing of Formulary Services in the United States from any person who has (or had within the two years preceding such acquisition) more than two (2) million lives covered by its Formulary Services in the United States; or C. Enter into any agreement, understanding, or condition with McKesson or any other wholesaler of pharmaceutical products that Lilly will sell or distribute pharmaceutical products bearing any brand or trade name used by Lilly, in the United States or any part of the United States, exclusively through such wholesaler. VII It is further ordered, That respondent shall notify the Commission at least thirty (30) days prior to any proposed change in the corporate Respondent such as dissolution, assignment, sale resulting in the emergence of a successor corporation, or the creation or dissolution of subsidiaries or any other change in the corporation that may affect compliance obligations arising out of the Order. VIII It is further ordered, That: A. Within sixty (60) days after the date this Order becomes final, Respondent shall submit to the Commission a verified written report setting forth in detail the manner and form in which it intends to comply, is complying, and has complied with this Order. B. One year (1) from the date this Order becomes final, annually for the next nine (9) years on the anniversary of the date this Order becomes final, and at other times as the Commission may require, respondent shall file a verified written report with the Commission setting forth in detail the manner and form in which it has complied and is complying with this Order. C. Respondent shall include in its compliance reports a copy of the Open Formulary required by Paragraph II.A above, and all written communications, internal memoranda, and reports and recommendations concerning compliance with the Order. IX It is further ordered, That, for the purpose of determining or securing compliance with this Order, respondent shall permit any duly authorized representative of the Commission: A. Access, during office hours and in the presence of counsel, to inspect and copy all books, ledgers, accounts, correspondence, memoranda and other records and documents in the possession or under the control of respondent relating to any matters contained in this Order; and B. Upon five days' notice to respondent and without restraint or interference from it, to interview officers, directors, or employees of respondent. X It is further ordered, That this Order shall terminate ten (10) years from the date this Order becomes final. Analysis of Proposed Consent Order to Aid Public Comment The Federal Trade Commission has accepted, subject to final approval, an Agreement Containing Consent Order from Eli Lilly and Company (``Lilly'' or ``Proposed Respondent'') in resolution of antitrust concerns arising from Lilly's proposed acquisition of PCS Health Systems, Inc. (``PCS'') from McKesson Corporation (``McKesson''). The proposed consent order (``Order'') has been placed on the public record for sixty (60) days for reception of comments by interested persons. Comments received during this period will become part of the public record. After sixty (60) days, the Commission will again review the Agreement and the comments received and will decide whether it should withdraw from the Agreement or make final the Agreement's proposed Order. The Commission has reason to believe that Lilly's acquisition of PCS would substantially lessen competition in violation of section 7 of the Clayton Act, as amended, 15 U.S.C. 18 and section 5 of the FTC Act, as amended, 15 U.S.C. 45. The Order, if issued by the Commission, would settle the allegations of the proposed Complaint (``Complaint''). The Complaint in this matter alleges that Lilly is engaged in the development, production and sale of pharmaceutical products, including Prozac, an antidepressant (specifically, a selective serotonin reuptake inhibitor); Humulin, an injectable insulin; Ceclor, an oral antibiotic; and Axid, an anti-ulcer product (specifically, an H2 antagonist). It further alleges that through its subsidiary PCS, McKesson is engaged in the business of providing pharmacy benefit management (``PBM'') services to insurance companies, third party payors, and other members of the healthcare industry. The Complaint further alleges that a relevant line of commerce within which to analyze the effects of this acquisition is the provision of PBM services by national full-service PBM firms, and any narrower markets contained therein. Other relevant lines of commerce within which to analyze the effects of this acquisition are the development, manufacture and sale of pharmaceutical products in specific therapeutic categories, and narrower markets contained therein (including, but not limited to, the markets for injectable insulin, selective serotonin reuptake inhibitors, H2 antagonists, and anti-ulcer drugs). It further alleges that the relevant market for PBM services by national full-service PBM firms, as well as the relevant markets for pharmaceutical products in specific therapeutic categories, are highly concentrated. The Complaint further alleges that there are substantial entry barriers into the relevant markets. Even if new entry were to occur, it would take a long time, during which time substantial harm to competition could occur. The Complaint further alleges that as part of its PBM services, PCS maintains a drug formulary, which is a listing, by therapeutic category, of ambulatory drug products that are approved for use by the U.S. Food & Drug Administration, and which is made available to pharmacies, physicians, third-party payors, and other persons, to guide in the prescribing and dispensing of pharmaceuticals. Lilly pharmaceutical products are included on the PCS formulary. PCS provides a variety of other PBM services, including claims processing, drug utilization review, pharmacy network administration, and related services. PCS negotiates with pharmaceutical manufacturers, including Lilly, concerning placement on the PCS formulary, rebates, discounts, prices to be paid for pharmaceutical products purchased pursuant to pharmacy benefit plans managed by PCS, and other issues. PCS thereby influences the prices of pharmaceutical products and the availability of such products under the PCS pharmacy benefit plans. The Complaint further alleges that the Agreement and Plan of Merger contains a Memorandum of Understanding (``MOU'') in which Lilly and McKesson agreed to investigate closing Lilly's distribution centers and having McKesson handle physical distribution of Lilly products to wholesalers and possibly be the sole distributor of Lilly products. Implementation of this MOU would force wholesalers to deal with McKesson to obtain Lilly products or deny them access to Lilly products. The Complaint further alleges that the effects of the proposed acquisition of McKesson by Lilly may be substantially to lessen competition in the relevant markets in violation of section 7 of the Clayton Act, as amended, 15 U.S.C. 18, and section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. 45, in the following ways, among others: (a) Products of manufacturers other than Lilly are likely to be foreclosed from the PCS formulary; (b) Reciprocal dealing, coordinated interaction, interdependent conduct, and tacit collusion among Lilly and other vertically integrated pharmaceutical companies will be enhanced; (c) PCS will be eliminated as an independent negotiator of pharmaceutical prices with manufacturers; (d) Incentives of other manufacturers to develop innovative pharmaceuticals will be diminished; (e) Entry into the relevant markets may be more difficult because it will require entry at more than one level; (f) Competition among drug wholesalers may be reduced because of the competitive advantage that control over Lilly drugs will provide McKesson; and, (g) The price of pharmaceuticals is likely to increase and the quality of the pharmaceuticals available to consumers is likely to diminish. The Complaint further alleges that the proposed acquisition of McKesson by Lilly would, if consummated, violate section 7 of the Clayton Act, as amended, 15 U.S.C. 18, and section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. 45. It further alleges that the Agreement and Plan of Merger between Lilly and McKesson violates section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. 45. The Order requires Lilly to maintain an open formulary, and provides that the existing open PCS formulary will comply with this provision. A copy of this formulary is appended to the Order. For the purposes of the Order an open formulary is defined as a formulary that allows the inclusion of any ambulatory (i.e., non-hospital) prescription drug product which the PCS independent Pharmacy and Therapeutics Committee (``P&T Committee) determines is appropriate for inclusion in such formulary. The Order requires that Lilly appoint an independent P&T Committee to administer the open formulary. This committee will make all decisions concerning the inclusion and exclusion of drugs on the open formulary. The order sets forth the parameters under which the P&T Committee is to operate. The Order also requires that Lilly cause PCS to accept all discounts, rebates or other concessions offered by any other manufacturer of pharmaceutical products on the open formulary, and requires that all such discounts, rebates and concessions be truthfully and accurately reflected in determining relative rankings of products on the open formulary. Nothing in the Order prohibits Lilly from offering closed formularies as well as the open formulary. The Order also prohibits Lilly and PCS from providing, disclosing, or otherwise making available to each other Non-Public Information. This includes information concerning other persons' bids, proposals, contracts, prices, rebates, discounts, or other terms and conditions of sale. The Order also requires Lilly to retain all documents, and cause PCS to separately retain all documents, for five years, relating to the exclusion of any prescription drugs from the open formulary, any preference or ranking accorded to any prescription drug on the open formulary, and statements or indications of discounts, rebates or other concessions. The Order also requires Lilly to make known the availability of the open formulary to persons who currently have a PBM service agreement of formulary agreement with PCS, and (for a period of five years) to prospective customers. The Order also prohibits Lilly, for a period of five (5) years from the date the Order becomes final, from: Acquiring, without the prior approval of the Commission, any stock, share capital, equity, leasehold or other interest in any person, corporate or non-corporate, engaged in the providing of Formulary Services in the United States, if such person has more than two (2) million lives covered by its Formulary Services in the United States; acquiring any assets used for, or previously used for (and still suitable for use for), the providing of Formulary Services in the United States from any person who has (or had within the two years preceding such acquisition) more than two (2) million lives covered by its Formulary Services in the United States; or entering into any agreement, understanding, or condition with McKesson or any wholesaler of pharmaceutical products that Lilly will sell or distribute pharmaceutical products bearing any brand or trade name used by Lilly, in the United States or any part of the United States, exclusively through such wholesaler. The Order also compels Lilly to fulfill certain standard notification, reporting and inspection requirements. The Order terminates ten years from the date it becomes final. It is anticipated that the Order would resolve the competitive problems alleged in the Complaint. The purpose of this analysis is to facilitate public comment on the Order, and it is not intended to constitute an official interpretation of the agreement and Order or to modify it in any way. The proposed consent order has been entered into for settlement purposes only, and does not constitute an admission by the respondent that the law has been violated as alleged in the complaint. Donald S. Clark, Secretary. Joint Statement of Chairman Janet D. Steiger and Commissioner Christine A. Varney in Eli Lilly/McKesson, File No. 941-0102 We voted in favor of the proposed consent agreement with Eli Lilly and Company (``Lilly'') in connection with its acquisition of PCS Health Systems, Inc. from McKesson Corporation. We believe the consent agreement offers immediate effective relief, avoids protracted litigation, and represents the best non-structural relief available to remedy the potential anticompetitive consequences of the transaction. Moreover, the proposed consent achieves these goals and allows potential efficiency gains to be realized. However, we remain concerned about the overall competitive impact of vertical integration by drug companies into the pharmacy benefits management market. Through monitoring this proposed order and through analysis of these evolving markets, the Commission intends to assess all the ramifications of vertical integration here. Dissenting Statement of Commissioner Mary L. Azcuenaga Eli Lilly and Company, Inc., File No. 941-0102 Today, the Commissioner accepts a consent order for public comment that exudes a lack of conviction in the underlying theory of competitive harm on which the order is based. The order does not cure the competitive problems alleged in the complaint. Three of the four primary provisions in the order are inadequate, and the fourth, which addresses a memorandum of understanding between Lilly and McKesson, is based on no colorable factual showing of a violation of law. In addition, there is no justification for making the duration of the order half that of other Commission orders. Finally, imposing this order without addressing similar acquisitions raises a question of evenhandedness and leaves unanswered the broader question of the competitive effect of vertical integration in this industry. I dissent. [FR Doc. 94-29183 Filed 11-25-94; 8:45 am] BILLING CODE 6750-01-M