October 2, 2022

DealBook: Express Scripts to Buy Medco for $29 Billion

George Paz, the chief executive of Express Scripts.George Paz, the chief executive of Express Scripts.

6:36 a.m. | Updated

Express Scripts said on Thursday that it would buy smaller rival Medco Health Solutions for $29.1 billion, becoming the biggest pharmacy benefits manager in the country in one of the largest deals of the year.

Under the terms of the deal, Express Scripts will pay $28.80 in cash and .81 of its own shares for each Medco share. As of Thursday morning, that is valued at $71.36, a 28 percent premium above Medco’s Wednesday closing price.

After the deal closes, Express Scripts will own 59 percent of the combined company. George Paz, Express Scripts’ chairman and chief executive, will continue to hold those titles. The new company’s board will be expanded to include two current Medco independent directors.

The merger is only the latest for the health care industry, which has hosted significant consolidation amid the coming overhaul in insurance.

Deutsche Bank analysts called the deal a “highly unexpected marriage of two fierce competitors” that highlighted how much the industry was changing. The analysts, led by Ross Muken, wrote that the transaction “should also help to quell some fears over the sustainability of long-term profit growth.”

Companies like Express Scripts and Medco help employers, health plans, labor unions and government agencies fulfill benefits for prescription drugs, reduce the costs of treatments by negotiating discounts from drug makers, while often running mail-order pharmacies as well.

“The cost and quality of health care is a great concern to all Americans,” said George Paz, head of Express Scripts. “This is the right deal at the right time for the right reasons.”

In Medco, Express Scripts finally has its big drug benefits merger. The company unsuccessfully battled CVS for CareMark Rx and definitively lost four years ago, stymied in part because of antitrust concerns. This time around, Express Scripts stressed that despite buying Medco, it would still face competition from a variety of drug benefits managers.

“On the regulatory front, we expect a drawn out process,” Steven Halper, an analyst at Stifel Nicolaus, wrote in the research note on Thursday. “Five years ago, Express was very confident that it would get regulatory approval for its attempted purchase of Caremark.”

Mr. Muken, of Deutsche Bank, agreed: “Under the Obama administration, the F.T.C. has been significantly more strict” in the deals is approves and rejects, he said in an interview.

“There’s going to be a pretty heavy lobby from the pharma community” against the deal, he said, because Express and Medco were creating “an entity with a lot of power in the supply chain.”

Still, the Deutsche analysts are predicting that the acquisition will complete late in the first half of next year.

Medco, one of the largest pharmacy benefits manager in the country, said in May that it had lost the 2012 contract with the Federal Employees Health Benefits Program to CVS Caremark, a contract that accounted for about $3 billion in yearly revenue. Last month it lost the account of the California Public Employees’ Retirement System to CVS as well. Medco’s stock is down 8.96 percent for the year.

Express Scripts said that it expects to reap about $1 billion of cost savings once the deal is completed, and that it will begin adding to its earnings per share in the first full year after closing.

The merger is expected to close in the first half of next year, pending regulatory and shareholder approval.

Express Scripts was advised by Credit Suisse, Citigroup and the law firm Skadden, Arps, Slate, Meagher Flom. Medco was advised by JPMorgan Chase, Lazard and the law firms Sullivan Cromwell and Dechert.

Article source: http://feeds.nytimes.com/click.phdo?i=8c69de91ba80e5ddba436e5ceb5d8f19

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