Express Scripts Inc will buy rival Medco Health Solutions Inc for $29.1 billion in cash and stock to create a powerhouse in managing prescription drug benefits in the United States, the companies said on Thursday.
Express Scripts will pay $71.36 per Medco share, a 28 per cent premium to its adjusted closing price on Wednesday. Medco shareholders will receive $28.80 in cash and 0.81 shares for each Medco share they own, according to the terms of the deal.
The deal between two of the “Big 3” pharmacy benefit managers would create a clear industry leader and could encounter antitrust hurdles. It also comes as Medco has lost two key accounts and said on Thursday that a third — with insurer UnitedHealth Group Inc — would not be renewed.
“Given the attrition risk Medco faces over the next few years, in regard to the UnitedHealth contract going away in 2013, and other publicised losses, it’s a good deal for Medco and their shareholders,” JMP Securities Constantine Davides said.
The combined company would be the industry’s largest, with 1.6 billion in annual prescription claims, while CVS Caremark would be second at 940 million, Davides said.
“There will be an antitrust hurdle to clear,” Davides said. “It will take a while on the regulatory front, but it’s a consolidating industry.”
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Pharmacy benefit managers, or PBMs, administer drug benefits for employers and health plans and also run extensive mail-order pharmacies.
The sector’s importance has grown with the passage of a new US healthcare law last year that heaped new regulations on the traditional insurance business and prompted insurers to seek new avenues of growth.
In addition, a heightened focus on reducing costs throughout the healthcare system has made PBM services all the more attractive.
Upon completion of the transaction, Express Scripts shareholders are expected to own about 59 per cent of the combined company and Medco shareholders are expected to own about 41 per cent.
The combined company’s corporate headquarters will be in St Louis and Express Scripts chief George Paz will serve as chairman and CEO of the combined organisation. The company’s board of directors will be expanded to include two current independent Medco board members.
It would be the year’s second-largest takeover after AT&T Inc’s planned purchase of T-Mobile USA.
Medco suffered a major setback in May when it lost a big pharmacy benefit contract to CVS Caremark starting next year. The surprise decision on that account followed closely on Medco losing a contract with Calpers, the biggest US public pension fund.
Medco was also facing the possible loss of the massive account with UnitedHealth, worth 17 per cent of its revenues, as the insurer itself looks to be more aggressive in prescription drug benefits. On Thursday, Medco said that its agreement with UnitedHealth, which lapses at the end of 2012, would not be renewed.