Express Scripts Will Buy Medco For $29 Billion
12 CommentsBy Ed Silverman // July 21st, 2011 // 7:38 am
In a deal that appears likely to prompt significant regulatory scrutiny, Express Scripts has agreed to pay $29.1 billion to buy Medco Health Solutions, one of its biggest rivals in the behind-the-scenes world of pharmacy benefits management. The merger comes amid a huge overhaul of the US healthcare landscape in which more Americans will be covered by health insurance.
However, the move comes just as Medco, which is the largest PBM, lost an important $11 billion contract with UnitedHealth Group that accounted for 17 percent of its business. Medco has also lost other big contracts recently, including one with the Federal Employees Health Benefits Program to CVS Caremark and another with the California Public Employees Retirement System, or Calpers amid a scandal that prompted the Securities and Exchange Commission to issue a subpoena (see here).
For those interested in dollars and cents, Medco shareholders will receive $71.36 per share in cash and stock or, put another way, $28.80 in cash and 0.81 shares for each Medco share they own. After the deal is done, Express Scripts shareholders will own about 59 percent of the combined company. Of course, passing muster with regulators may not be easy, given these are two of three largest PBMs.
For that reason, Express Scripts ceo George Paz wrapped himself - and the deal - in the flag in a statement touting the virtues of the acquisition. “Companies like ours have a responsibility to provide the leadership and resources required to drive out waste in healthcare and provide the best care in the world. The merger with Medco will accelerate our efforts to create greater efficiencies in the healthcare system and better protect American families from the rising costs of prescription medicine while improving health outcomes.”
Whether Express Scripts can win over the Federal Trade Commission - and at what price - remains to be seen. The PBM executive team is, of course, expressing optimism in discussions with key investors and Wall Street analysts today, but will have a harder selling job in Washington, where consumer and employer groups can be expected to register their own views.
“This is a big surprise. I did not expect to see these two companies come together, strictly because of FTC issues,” Jeffries & Co. analyst Art Henderson tells us. “Express Scripts management told us they consulted with counsel and will get through the process. I imagine this will be the single biggest concern of investors and industry participants, though.”
Nonetheless, the deal makes sense, he adds, because both PBMs were set to face what he calls “pretty significant headwinds,” given the large number of brand-name prescription drugs that are losing patent protection. Now, though, they will be better positioned to negotiate rebates. “These companies are much better situated together than apart. From a Wall Street perspective, people should love it. From a competitor’s standpoint, this will be a formidable entity.”
Indeed, in talking up the deal, Paz points to greater savings for plan sponsors and more efficiencies in its own supply chain, which includes mail order. And he pointed to Medco initiatives to evaluate medicines based on comparative effectiveness; one such deal was recently struck with Sanofi (read here).
As for cost savings, Paz estimates the deal can cut about $1 billion in expenses, or roughly 1 percent of the expenses of the combined companies. What this will mean for jobs is unclear, at the moment. As of the end of 2010, Medco employed 23,425 people, and about 27 percent belong to unions. Express Scripts employed 13,170 people, but only 6 percent are represented by unions.
merge pic thx to scazon on flickr
Observer
The snow in the graphic is a nice touch - given the weather - and a contrast to this piece of “hot news!”
PBurns
I wonder what it is that Express Scripts is buying that is actually permanent? What is the REAL asset here, and will that asset really last at this level?
P
whitestone
The $1 billion synergy will come from streamlined distribution, purchasing, admin consolidation and all those other essential functions but of course it means job cuts through ‘improved efficiencies’. Somehow increasing shareholder value usually equates to misery, financial hardshp and fear for the workers. Tough concept.
Jim
Ed-
It will be interesting to see whether the skirmish between Walgreens and ESI plays into the FTC review of this merger. Any thoughts?
Ed Silverman
Hi Jim,
That’s a good question and I imagine that the spat can’t help - can’t help Express Scripts, that is. Whatever the particulars, the nature of the dispute underscores its clout and ability to dominate a key segment of the market. Of course, I’m speaking in very broad terms here. But I have to bet this would be looked at as part of the broader portfolio.
Thanks for writing in,
ed
pharma insider
This merger will not be in the best interests of the American consumer. Diopolies and Monopolies rarely are. Having said that, I’m disappointed, in general, with the the disconnect between the rhetoric we heard in the recent elections on corporate greed/control/misdeeds/need to police and what has actually transpired. It seems to me corporations are clearly not being held accountable. Quite the contrary.
Pharman
Ummm….let’s not forget about the waste these PBMs create by supplying 90 days supplies only to have the drug dose changed before the 90 days are up. Also, given all of the prescription errors that I’ve seen from e-scripts at our community pharmacy, I can only imagine how many of these erroneous RXs get filled by mail order and sent to patients. With volumes over 5,000 RXs/day, there is no way PBMs catch all of the errors before they get mailed. I catch them before they’re dispensed because I KNOW our patients. I’d love to see just how much money is wasted by these yahoos. Do employers know about these PBM-generated costs? Probably not…
Salient point
Pharman-If the waste is as bad as you say, it must be more than compensated for by the economies of scale. I’m pretty sure employers choose to insure via PBM’s because they cost less.
Salient point
pharma insider-Not sure what you mean by “recent elections,” but in the most recent one the anti-Washington rhetoric was pretty strong & seemed to win the day.
Of course, if prices start rising due to M&A, we may move back into a pro-regulatory mind set. We Americans are a reactive sort.
JaT
Pharman,
All pharmacies and insurers I have used dole out 3 months at a time for maintenance drugs. It would be quite hectic otherwise. It also (pharma is gonna love this) insures adherence and reduces the number of times per year you need to concern yourself with it. I wouldn’t want it any other way.
But you are correct too. The time I got 3 months worth of Lamictal before I found I had an allergy to it was extremely wasteful (hundreds of dollars).
Insurers should limit drugs to one month prescriptions when first prescribed - until someone has done well on them for a couple of months and dosages are adjusted.
That is more an across the board thing rather than singling out any one insurer/provider.
Outsider
It is virtually assured that the FTC will ask for additional information before the expiration of the30 day Scott-Hart-Rodino waiting period.
The investigation WILL take time — 6 months seems like a minimum.
It will unlikely come down to a simple “yes or no”. Rather, the FTC will say either “no” or “yes, with these conditions”.
The interesting question is what conditions might the FTC impose that are BOTH within their scope to do so AND might promote this new PBM behemoth to behave competitively.
It seems to me right off that there is no simple spin off of assets that might do the job. Maybe, force Express Script to give NextRx back to Wellpoint (and in turn, force Wellpoint to merge NextRx into Prime)
Better, make the behemoth sign off on more transparent business practices: (1) no retail spread (2) published rebate retention rates (3) mandatory 90 day retail (4) no copay differentials between 90 day retail and 90 day mail order (5)have the Department of Labor review all contracts between Taft-Hartley plans and PBMs.
Outsider
Additions:
(6) Force the behemoth to disclose all fees (aka kickbacks) it pays to PBM contract consultants (Aon, Hewitt, Pharmaceutical Strategies Group, etc)