26 July 2011


Story first appeared in Bloomberg News.

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 recent closing price of $55.78.

Medco stockholders will receive $28.80 in cash and 0.81 of an Express Scripts share for each Medco share, according to a statement from the companies.

Buying larger Medco would give Express Scripts the scale to dominate the market for contracts to manage drug benefits for corporate and government clients. Medco also said today that it lost its $11 billion contract with UnitedHealth Group Inc., which accounts for 17 percent of its business. The loss would have thrown Medco to the No. 3 rank in the industry, trailing Express Scripts and CVS CareMark.

The takeover would be the largest in pharmacy services in at least a decade, surpassing the $21.7 billion deal that formed CVS Caremark Corp. in 2007. The companies negotiate drug prices for employer and government insurance plans and manage pharmacy claims. Franklin Lakes, New Jersey-based Medco is the largest by revenue, followed by Woonsocket, Rhode Island-based CVS Caremark and Express Scripts, run by Chairman and CEO George Paz.

Lost Contracts

Medco, led by Chairman and Chief Executive Officer David Snow, has lost $3.5 billion in contracts. 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.

Express Scripts is reported to be paying 9.1 times Medco’s 2012 estimated earnings before interest, taxes, depreciation and amortization, excluding the UnitedHealth contract.

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. CVS Corp. paid 12.2 times Ebitda for Caremark Rx Inc. in 2007.

Intense Competition

Medco shares have declined 13 percent since May of 2011, after the company announced the loss of a $3 billion contract covering 9.8 million mail-order prescriptions. Medco in March of 2011 lost the renewal of a $500 million contract with the California Public Employees Retirement System.

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, Connecticut- based Aetna Inc. gave a 12-year, $9.5 billion contract to CVS in July of 2010 and UnitedHealth began investing in its pharmacy benefits unit.

Financial Advisers

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.

Both companies also reported second-quarter earnings. Express Scripts earned 71 cents a share, excluding some items, matching the average analyst estimate.

Medco posted second-quarter profit excluding some costs of 96 cents a share, beating the average analyst estimate of 94 cents.

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