IBJNews

UPDATE: Medco acquisition could lead to local consolidation

Back to TopCommentsE-mailPrintBookmark and Share

It’s not yet clear how Express Scripts Inc.’s $29.1 billion acquisition of rival Medco Health Solutions will affect the companies’ central Indiana operations—or their 800-plus employees at two facilities here.

St. Louis-based Express Scripts announced the deal to create the nation’s largest pharmacy-benefits manager Thursday morning. In a conference call, Chairman and CEO George Paz said he’s not sure what consolidation will result from the purchase.

“Medco, we compete with them everyday,” Paz said. “They’ve got incredible people, incredible systems, incredible approaches. … I think I’ve got pretty good ones, too. And now the question is, how do I put them both together and get the best of the best?”

New Jersey-based Medco has 430 workers at a $140 million automated pharmacy and distribution center in Whitestown. It planned to ramp up Boone County employment to 1,300, but fell short of that goal after losing some large contracts.

Express Scripts, which acquired WellPoint Inc.’s pharmacy benefits subsidiary in 2009, said last year it had 400 employees at a specialty drug distribution facility near Indianapolis International Airport and planned to add 180 positions there by 2012.

Both facilities opened about four years ago.

Buying Medco gives Express Scripts the scale to dominate  the market for contracts to manage prescription drug benefits for corporate and government clients.

Medco also said Thursday that 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,” Art Henderson, an analyst at Jefferies & Co. in Nashville, Tenn., said 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 likely will examine the deal closely, he 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.

The $71.36-a-share cash-and-stock offer 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 from the companies.

Pharmacy-benefit managers negotiate drug prices for employer and government insurance plans, and manage worker claims.

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, based in Rhode Island, 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 Paz said the deal wouldn’t have been struck “unless we thought it would be approved. We believe we will work our way successfully through the regulatory approval process,” he said.

Medco, led by Chairman and CEO David Snow, already had 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.

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. In March, Medco 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, analysts said.

Competition intensified among pharmacy-benefits managers after Express Scripts acquired Indianapolis-based WellPoint’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 Connecticut-based Aetna Inc. gave a 12-year, $9.5 billion contract to CVS last July and UnitedHealth began investing in its pharmacy benefits unit.

“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.

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 Thursday.

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.

Both companies also reported second-quarter earnings. Express Scripts had a profit of 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.

 

ADVERTISEMENT

Post a comment to this story

COMMENTS POLICY
We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
 
You are legally responsible for what you post and your anonymity is not guaranteed.
 
Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in IBJ editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
 
No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
 
We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.
 

Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

Sponsored by
ADVERTISEMENT

facebook - twitter on Facebook & Twitter

Follow on TwitterFollow IBJ on Facebook:
Follow on TwitterFollow IBJ's Tweets on these topics:
 
Subscribe to IBJ
  1. So much for Eric Holder's conversation about race. If white people have got something to say, they get sued over it. Bottom line: white people have un-freer speech than others as a consequence of the misnamed "Civil rights laws."

  2. I agree, having seen three shows, that I was less than wowed. Disappointing!!

  3. Start drilling, start fracking, and start using our own energy. Other states have enriched their citizens and nearly elminated unemployment by using these resources that are on private land. If you are against the 'low prices' of discount stores, the best way to allow shoppers more choice is to empower them with better earnings. NOT through manipulated gov mandated min wage hikes, but better jobs and higher competitive pay. This would be direct result of using our own energy resources, yet Obama knows that Americans who arent dependent of gov welfare are much less likely to vote Dem, so he looks for ways to ensure America's decline and keep its citizens dependent of gov.

  4. Say It Loud, I'm Black and Ashamed: It's too bad that with certain "black" entertainment events, it seems violence and thuggery follows and the collateral damage that it leaves behinds continues to be a strain on the city in terms of people getting hurt, killed or becoming victims of crimes and/or stretching city resources. I remember shopping in the Meadows area years ago until violence and crime ended make most of the business pack you and leave as did with Lafayette Square and Washington Square. Over the past 10 to 12 years, I remember going to the Indiana Black Expo Soul Picnic in Washington Park. Violence, gang fights and homicides ended that. My great grandmother still bears the scares on her leg from when she was trampled by a group of thugs running from gun fire from a rival gang. With hundreds of police offices downtown still multiple shootings, people getting shot downtown during Black Expo. A number of people getting shots or murdered at black clubs around the city like Club Six on the west side, The Industry downtown, Jamal Tinsley's shot out in front of the Conrad, multiple fights and shootings at the skating rinks, shootings at Circle Center Mall and shooting and robberies and car jackings at Lafayette Mall. Shootings and gang violence and the State Fair. I can go on and on and on. Now Broad Ripple. (Shaking head side to side) Say It Loud, I'm Black and I'm Ashamed.

  5. Ballard Administration. Too funny. This is the least fiscally responsive administration I have ever seen. One thing this article failed to mention, is that the Hoosier State line delivers rail cars to the Amtrak Beech Grove maintenance facility for refurbishment. That's an economic development issue. And the jobs there are high-paying. That alone is worth the City's investment.

ADVERTISEMENT