Express Scripts Inc.'s agreement to buy Medco Health Solutions Inc. for $29.1 billion in cash and stock links together two of the nation's largest pharmacy-benefit managers at a time one of them faces losing its biggest customer.
By joining forces, Express Scripts and Medco will become the largest PBM, with nearly a third of the market. They aim to leverage their newfound heft to lower the cost of prescription drugs—indicating more pressure on pharmaceutical companies at a time they're already facing the loss of patent protection for top products.
"The cost and quality of health care is a great concern to all Americans; this is the right deal at the right time for the right reasons," said Express Scripts Chief Executive George Paz, 55 years old, who will lead the combined company. PBMs help employers and health-insurance companies administer prescription-drug benefits, process claims and control drug costs by securing discounts from drug makers.
Medco—larger than Express Scripts by revenue but smaller by market capitalization—also confirmed that its deal with managed-care giant UnitedHealth Group Inc. won't be renewed when the current contract expires after next year. UnitedHealth, which represents 17% of Medco's sales, is expected to run that business itself.
Medco holders will receive $28.80 in cash and 0.81 Express Scripts shares for each share, valuing Medco at $71.36, a 28% premium to Wednesday's close. In late morning trading Thursday on the New York Stock Exchange, Medco continued to trade below the offer price. The deal—based on Express Scripts trading at $56.25, up 7%—values Medco at $74.36 a share. Medco shares were trading at $63.04, up 13%.
After the deal closes, Express Scripts shareholders are expected to own about 59% of the combined company, and Medco shareholders will have the remainder. The combined company will be headquartered in St. Louis, where Express Scripts is now.
The regulatory review "may be challenging," Sanford Bernstein analyst Helene Wolk said, but the industry's competitive intensity, plus the emergence of UnitedHealth's business, "improve the likelihood of approval." CVS CaremarkMedco has faced intense speculation for the past couple months that UnitedHealth could end its relationship with Medco in favor of its own internal pharmacy-benefit manager, known as OptumRx. While the catalyst for the Express Scripts-Medco deal is "ultimately offensive," it's "initially defensive," Barclays analyst Larry Marsh said. He noted Medco's UnitedHealth loss plus Express Scripts "weaker-than-expected scripts" for the second quarter.
There has already been consolidation in the pharmacy-benefit-management industry. In 2009, it acquired the prescription unit of WellPoint Inc., a health insurer, in a $4.7 billion deal.
In 2007, Express Scripts lost out on acquiring rival Caremark Rx to drug store giant CVS, which acquired Caremark for about $26 billion. At that time, Medco was seen as a possible next target for Express Scripts. Express Scripts, which employs about 13,000 people, also distributes injectible biopharmaceutical products to patients or doctors, and provides cost-management and patient-care services.
Medco, spun out of drug giant Merck & Co. in 2003, provides clinical research and pharmacy services aimed at improving care while reducing health-care costs for private and public employers, union and government agencies. The company took in $66 billion in 2010 net revenue.
Express Scripts reported Thursday that its second-quarter earnings climbed 15% to $334.2 million, or 66 cents a share. Excluding items, per-share earnings were 71 cents. Meanwhile, Medco reported its earnings fell 4% to $342.8 million, or 85 cents a share. Excluding write-downs, per-share earnings rose to 96 cents from 87 cents. Revenue rose 4.1% to $17.07 billion.
The advisers for Express Scripts are Credit Suisse Group AG, Citigroup Inc. and law firm Skadden, Arps, Slate, Meagher & Flom, LLP. Medco is advised by J.P. Morgan Chase & Co., Lazard Ltd., and law firms Sullivan & Cromwell LLP and Dechert LLP.
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