The Health Care M&A Monthly: Express Scripts Eyes Top Spot--
Lays Out $29.1 Billion For Medco Health Solutions
For as long as we can remember, the drive to contain escalating health care costs has been a recurring theme in the industry, not the least in the M&A market. Perhaps no other item has garnered as much attention as skyrocketing prescription drug costs, which have been exacerbated as much by an aging population as by technological innovation. The government’s Medicare D program was enacted to tame costs for end-users, but its unfunded status has only contributed to debt and the raucous, rancorous debt-ceiling debate. As is so often the case, business got there first, offering market-based solutions to squeeze out costs in the supply chain from drug maker to consumer. Pharmacy benefit managers, or PBMs, have many retail tools to slash costs: among various strategies, they negotiate volume discounts with drug makers and, where possible, transition consumers to cheaper generic drugs. And while they generally operate behind the scenes, one recent mega-deal brought them back into the public eye in a big way.
Express Scripts (NASDAQ: ESRX) announced that it is buying competitor Medco Health Solutions (NYSE: MHS) for approximately $29.1 billion. Based in St. Louis, Express Scripts provides PBM and allied medical information management services; the company currently covers 50 million lives. On a trailing 12-month basis, it generated revenue of $44.9 billion, EBITDA of $2.5 billion and net income of $1.3 billion. Express Scripts operates in a highly competitive environment, which includes CVS-Caremark (NYSE: CVS) as well as Medco Health.
Express Scripts has been a very active player in the M&A market, making at least eight deals between 1998 and 2009; the largest of these was its 2009 $4.7 billion acquisition of NextRx from insurer WellPoint (NYSE: WLP). In 2006, it vied with CVS to acquire Caremark Rx, but was thwarted at the time, in part, by antitrust issues. Stung by that experience, the company has been on the hunt ever since for a transformative deal that could propel it into the top spot in the PBM industry.
Spun out of drug maker Merck & Co. (NYSE: MRK) in 2003, Medco provides PBM, specialty pharmacy and allied services to 65 million members. On a trailing 12-month basis, the company generated revenue of $66.7 billion, EBITDA of $3.0 billion and net income of $1.4 billion. Recently, however, MHS encountered a series of setbacks. It lost business with UnitedHealth Care (NYSE: UNH), which accounts for 17% of its current business. Seeking to go it alone, UNH will not renew its contract after 2012. MHS also lost its contract with California’s Calpers. Both have weighed heavily on MHS’s stock price but in so doing, have made the company a more attractive acquisition target at a cheaper price.
Enter Express Scripts with a solution for Medco’s problems. It is making an offer to buy MHS for $29.1 billion in cash and stock. Under terms of the offer, each share of MHS stock is to be exchanged for $28.80 in cash and 0.81 shares of ESRX common stock. On closing, ESRX and MHS shareholders will own 59% and 41%, respectively, of the combined company...Want to read more? Click here for a free trial to The Health Care M&A Monthly and download the current issue today