* Big grocery chains ask FTC to block the deal
* FTC collecting evidence aimed at blocking deal-source
* FTC decision could come in weeks-source
* Consumer groups, state AGs have been skeptical of deal
* Express Scripts expects deal to close in early 2012
WASHINGTON, Feb 6 Objections to Express Scripts' $29 billion plan to buy rival pharmacy benefits manager Medco Health Solutions are accumulating as U.S. antitrust regulators weigh whether they have enough evidence to stop the megamerger.
The Food Marketing Institute, which represents the biggest grocery chains, sent a letter to the Federal Trade Commission on Feb. 2 saying the merged company would be able to cut payments to supermarket pharmacies that already operate at very tight margins.
"(We) ask the commission to bring an enforcement action to enjoin the merger," the association said in its letter to FTC Chairman Jon Leibowitz, which was seen by Reuters on Monday.
A source closely watching the deal said that key people at the FTC believe it should be stopped but want to ensure they have adequate evidence to win a court fight to stop it.
A decision on whether or not to sue is expected by the end of February or early in March, the source said.
The FTC said it does not comment on pending investigations.
Pharmacy benefits managers (PBMs) like Medco and Express Scripts are hired by insurance companies to handle prescription drug plans. They sometimes provide drugs by mail order, through their own pharmacies and by contracting with chains and independent pharmacies.
The deal, announced in July, would combine two of the three largest PBMs that are big enough to manage prescription drug benefits for large, nationwide companies. The third is CVS Caremark.
A Medco-Express Scripts merger would create an industry leader with nearly one-third of the market.
The letter from the Food Marketing Institute, which counts Safeway, Giant, Wal-Mart and Supervalu among its membership, adds another opposition voice.
In early January, a coalition of consumer groups, including U.S. PIRG and the Consumer Federation of America, also urged antitrust regulators to stop the deal.
Further, a group of about two dozen state attorneys general are looking at the merger, and could challenge it on their own.
The FTC has been working actively to prevent increases in health care costs. The FTC in late January sued to block Omnicare's $441 million bid to buy rival PharMerica Corp .
Omnicare and PharMerica are the top two companies in the long-term pharmacy services sector, and the FTC said the combination would harm competition and allow Omnicare to raise the price of drugs for the frailest of the elderly.
Express Scripts is remaining optimistic about its own prospects.
Express Scripts has said that the deal is good for the American consumer, and expects it will close in the first half of 2012.
In a show of confidence that the deal will go through, Express Scripts announced on Monday that it was offering a second round of notes aimed at financing the $29 billion transaction.
Medco shares, however, have consistently traded at a discount to Express Scripts' $71.36 per share offer, reflecting investor caution over regulatory approval of the deal. In early afternoon trading on Monday, Medco stock was up 12 cents at $63.73.
FEARING THE SQUEEZE
The Food Marketing Institute said in its letter that "seven of the largest supermarket chains" had met with FTC officials to ask that the deal be stopped but did not identify the chains.
If they are squeezed financially, grocery store pharmacies will be forced to cut back hours, end discounts for generics and stopping giving free antibiotics and other promotions, said the letter, which was signed by FMI vice president Cathy Polley and regulatory counsel Erik Lieberman.
"The merger will allow the dominant PBM to control approximately 40 percent of the overall prescription drug volume in the United States," said the FMI letter.
The FMI argued, in addition, that the PBMs would not likely pass along to consumers any cost savings they would achieve by squeezing supermarket pharmacies.
Small, independent pharmacies, under pressure from big chains, have also complained about the deal, saying that their reimbursement rates from the big PBMs were being reduced to the point that some felt they might not be able to stay in business.