WASHINGTON – Express Scripts Inc. agreed to buy Medco Health Solutions Inc. for $29.1 billion to become the largest pharmacy-benefits manager in the U.S.
The $71.36-a-share offer in cash and stock is 28 percent more than Medco’s closing price of $55.78 Wednesday. Medco stockholders will receive $28.80 in cash and 0.81 of an Express Scripts share for each Medco share, according to a statement Thursday from the companies.
Buying Medco, of Franklin Lakes, N.J., gives St. Louis-based Express Scripts the scale to become dominant in the market for contracts to manage prescription drug benefits for corporate and government clients. Medco also said Thursday it lost an $11 billion contract with UnitedHealth Group Inc., accounting for 17 percent of its business. The loss drops Medco to No. 3 in the industry, trailing Express Scripts and CVS Caremark Corp.
“Wow, I didn’t see this coming,” said Art Henderson, an analyst at Jefferies & Co. in Nashville, Tenn., in an e-mail Thursday. “There are unbelievable synergies here, but I am sure this will go through a lengthy” review by U.S. regulators.
The U.S. Federal Trade Commission will likely review the deal closely, Henderson said. The takeover would be the largest in pharmacy services in at least a decade, surpassing the $21.7 billion deal that formed CVS Caremark in 2007.
30% of Market
Pharmacy benefit managers negotiate drug prices for employer and government insurance plans, and manage worker claims. Medco is the largest by revenue, followed by Woonsocket-based CVS Caremark and Express Scripts.
A company that combines Medco and Express Scripts would control about 30 percent of the market by 2013, said Helene Wolk, an analyst at Sanford Bernstein in New. CVS CareMark will be “in the low 20s,” while UnitedHealth will grow to the “low teens,” she said.
“It will be challenging to get this past the FTC, but with the growth of UnitedHealth,” an insurer with its own pharmacy benefit unit, “we will be back to having three dominate players,” Wolk said. “This is a business that is hyper price competitive, and the competition is what the FTC worries about losing. If anything, as it has consolidated, the market has only gotten more competitive.”
Express Scripts CEO George Paz, on a conference call, said the two companies wouldn’t have been combined “unless we thought it would be approved. We believe we will work our way successfully through the regulatory approval process,” he said.
Lost Contracts
Medco, led by Chairman and CEO David Snow, has lost $3.5 billion in contracts since March. The loss of additional business would have increased the pressure on Medco executives to fill in the revenue gap, because scale matters so much in the industry, Wolk said in June.
David Larsen, an analyst at Leerink Swann & Co. in Boston, estimated in a note today that Express Scripts, led by Chairman and CEO George Paz, is paying 9.1 times Medco’s 2012 estimated earnings before interest, taxes, depreciation and amortization, excluding the UnitedHealth contract and potential cost savings.
About $1 billion in cost savings has been identified to date and the deal is expected to be “slightly accretive in the first year after the deal close and moderately accretive once fully integrated,” he said in the note. CVS Corp. paid 12.2 times Ebitda for Caremark Rx Inc. in 2007.
Express Scripts rose 69 cents to $52.54 Wednesday in Nasdaq Stock Market trading. Medco advanced $1.25 to $55.78 on the New York Stock Exchange.
Declining Shares
Medco shares have declined 13 percent since May 26, the day before the company announced loss of a $3 billion contract covering 9.8 million mail-order prescriptions. Medco in March lost the renewal of a $500 million contract with the California Public Employees Retirement System. The stock also was weighed down by investor concerns the company would lose the UnitedHealth contract, Larsen said.
Express Scripts had declined 2.8 percent this year before Thursday, while CVS had risen 6.3 percent.
Competition intensified among pharmacy-benefits managers after Express Scripts moved forward with integrating Indianapolis-based WellPoint Inc.’s pharmacy-benefits unit with 25 million members. CVS, in the past year, grabbed a contract with Capital Blue Cross of Pennsylvania from Express Scripts and the federal workers plan from Medco.
The number of potential targets dwindled after Hartford, Conn.-based Aetna Inc. gave a 12-year, $9.5 billion contract to CVS last July and UnitedHealth began investing in its pharmacy benefits unit.
‘Wildest Speculation’
“People in their wildest speculation thought that, maybe in 2013, after Medco lost UnitedHealth, it could merge with Express Scripts, but frankly no one put a lot of stock in it,” Bernstein’s Wolk said.
Credit Suisse AG and Citigroup Inc. provided financial advice to Express Scripts, while Skadden, Arps, Slate, Meagher & Flom, LLP gave legal counsel. Medco’s co-lead financial advisers were JPMorgan Chase & Co. and Lazard, with Sullivan & Cromwell LLP as legal adviser and Dechert LLP as regulatory counsel.
The deal for Medco would be the second-largest this year, after AT&T Inc.’s $39 billion planned acquisition of T-Mobile USA Inc. The Wall Street Journal reported the transaction earlier today.
The combination of Express Scripts and Medco won’t be an easy one because the two companies have different cultures, Wolk said. Medco is more strategic and takes a long-term approach to business while Express Scripts tends to have a short-term, financially driven vision, she said.
Earnings Reported
Both companies also reported second-quarter earnings. Express Scripts earned 71 cents a share, excluding some items, matching the average analyst estimate compiled by Bloomberg. The company reaffirmed its forecast for this year of $3.15 to $3.25 a share. Analysts are predicting $3.19, the average of 25 estimates compiled by Bloomberg.
Medco posted second-quarter profit excluding some costs of 96 cents a share, beating the average analyst estimate of 94 cents.