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 May
2009 issue
Express Scripts Buys NextRx--
$4.7 Billion Deal Makes ESRX Number Two PBM
Express Scripts is paying $4.7
billion to acquire the NextRx pharmacy benefits manager (PBM) business of
insurer WellPoint.
Read the issue to see how this deal affects the rankings among the top PBM
companies, and to see which other PBM businesses may become the next
acquisition targets.
...
Hospital Mergers
& Acquisitions--
Recent Dealmaking Emphasizes The Middle Market
Our review of the 2008 Hospital merger and
acquisition market shows that deal making was concentrated on the middle
market. Strategic, not financial buyers, dominated.
We discuss in this issue the pricing and acquisition multiples of this
market as compared with comparable figures from recent years.
...
In the Departments
Services
-Health Care Services
-Deal Summaries
-Additional Transactions
-Transaction Updates
Technology
-Health Care Technology
-Deal Summaries
-Additional Transactions
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Articles Archive
Companies Mentioned in this issue:
May 2009
A
ABCM Corporation p7
Adeona Pharmaceuticals p4
Advocate Health Care p8
Aetna p2
Alesco Corporation Ltd. p13
Alvogen Group p14
Amgen p10
Ardea Biosciences p9
Asahi Glass Co. p9
Avant Immunotherapeutics p10
Avista Capital Partners p14
B
Bayer AG p9
Bayer HealthCare p9
Bayer Schering Pharma AG p14
Beckman Coulter p14
Biolab p13
BiPar Sciences p9
Blackstone Group p14
C
Canaan Partners p9
Canon p14
Canon, U.S.A. p14
Cardiome p16
Catholic Healthcare Partners p4
Celldex Therapeutics p10
Cervitech p13
Charles River Laboratories p7
Cigna p2
Citigroup p2
Clarian Health Partners p8
Cleveland Clinic Health System p3
Clinical Data p14
CLW Health Care Services Group p4
Colwell Clinical Laboratories p4
Community Health Systems p1
ComVest Investment Partners III, LP p7
Credit Suisse Group AG p2
Critical Homecare Solutions p3
CVS-Caremark p1
D
Deloitte & Touche Corporate Finance LLC p7
Domain Associates p9
E
Eli Lilly & Co. p10
EmblemHealth p7
Envision p8
EPIX Pharmaceuticals p14
Explain My Surgery.com p13
Express Scripts p1
G
Galapagos NV p9
Genetix Group p14
GlaxoSmithKline p14
Group Health, Inc. p7
H
HCA, Inc. p1
Health Management Associates p8
Health Net p7
Health Net of the Northeast p7
HIP Health Plan of New York p7
Hoya Corp. p14
Humana p7
I
iSonix, LLC p14
J
John Wesley Villas p4
Johns Hopkins Health System p4
Johnson & Johnson p16
JPMorgan Chase & Co. p2
K
Kindred Health Services p4
King’s Daughters Hospital p4
Kohlberg & Co. p3
Kowa Pharmaceuticals America p16
L
Laboratorios Kendrick p16
Lantheus Medical Imaging p14
Lazard p16
Legacy Hospital Partners p8
Les Laboratoires Servier p10
LifePoint Hospitals p8
Lighthouse Capital Partners p9
LMS Medical Systems p13
M
Magen Biosciences p7
Massachusetts Biologic Laboratories p16
Mayer Laboratories p14
MBF Healthcare Acquisition Corp. p3
McKesson Corp. p13
Medarex p16
MedcoHealth Solutions p1
Medical Center Hospital p8
Medina General Hospital p3
Medley p16
Merck & Co. p9
Merck Sharp & Dohme p16
Mercy Health Partners p4
MetCare p7
Metropolitan Health Networks p7
Microline PENTAX p14
Misonix p14
N
National Institutes of Health p4
NationsHealth p7
NicOx, SA p10
NitroMed p10
Novartis p16
NuVasive p13
P
Paramax International p7
Pfizer p16
Pfizer, Ltd. p16
Pharmacyclics p10
Phase Forward p10
Piedmont Research Center p7
Polytechnos p9
PPD, Inc. p7
Prime Healthcare Services p8
Providence Health & Services p8
Q
Quantum Technology Partners p9
R
R-Tech Ueno, Ltd. p16
ReSearch Pharmaceutical Services p7
River View Care Center p7
Robert W. Baird & Co. p16
Rural Healthcare Developers p8
S
Sanofi-Aventis p9
Santen Pharmaceutical Co. p9
Schering-Plough Corp. p9
Scott & White p4
Senior Healthcare of Volusia, P.A. p7
Senior Living Investment Brokerage p7
Share Foundation p4
Skadden, Arps, Slate Meagher & Flom LLP p2
Skilled Healthcare Group p7
SlidePath Limited p14
Starion Instruments Corp. p14
Stiefel Laboratories p14
Suburban Hospital p4
Sucampo Pharmaceuticals p16
T
Tenet Healthcare Corp. p8
The Cedargate p7
The Veranda p4
Triad Hospitals p1
Tyler Memorial Hospital p4
U
UnitedHealth Group p2
V
Ventas p4
Vibra Healthcare p8
Virtual Imaging p14
Vulcan Capital p9
W
Waban Software p10
WellPoint p1
Wyeth p14
Wyoming Valley Health Care System p4
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Express Scripts Buys NextRx--
$4.7 Billion Deal Makes ESRX Number Two PBM
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Email Editor
Somewhat unusually, given recent trends in
the health care M&A market, April’s largest deal occurred in one of the
services sectors. More predictable, however, is that the assets involved
in the deal would be crucially linked with pharmaceuticals. Express
Scripts (NASDAQ: ESRX) announced its acquisition of NextRx, the
pharmacy benefits manager, or PBM, business of the health insurer
WellPoint (NYSE: WLP), for approximately $4.7 billion.
Based in St. Louis,
Missouri, Express Scripts provides pharmacy benefit and medical
information management services; it currently covers 50 million lives. On
a trailing 12-month basis, the company generated $22.0 billion in revenue,
$1.4 billion in EBITDA and $880.0 million in net income.
Until this deal, Express
Scripts ranked third among national PBMs, behind the leader
CVS-Caremark (NYSE: CVS), with its RxAmerica, LLC PBM business,
and the runner-up MedcoHealth Solutions (NYSE: MHS). Comparisons of
the top three are a bit dicey due to the fact that while MedcoHealth and
Express Scripts are pure-play PBMs, CVS has a retail pharmacy segment, as
well. CVS generates about $82.0 billion in revenue, about half of which
comes from its pharmacy services segment while MHS generates annual
revenue of about $51.0 billion. Other competitors include large managed
care organizations (MCOs), which provide proprietary PBM services, or so
the theory goes, to lower costs to the enrollees in their managed care
plans.
But the MCO-PBM hybrids
operate at something of a disadvantage to their pure-play PBM competitors
since an MCO tends to provide PBM services just to its own enrollees, not
to those of other MCOs. After all, competitors are unlikely to contract
for your PBM product just to give you a leg up in the market. Accordingly,
it makes sense to divest if your PBM program isn’t helping drive new
clients to your business. This is probably part of the reasoning that
prompted WellPoint to mull over divesting its NextRx PBM business.
With 25 million members and EBITDA of about $1.0 billion, NextRx is
the fourth largest PBM in the country. WellPoint has found a willing buyer
in Express Scripts: the company was stymied in its attempt two years ago
to acquire Caremark, which ultimately went to CVS in a deal valued at
$26.5 billion and no acquisition premium.
As a result of this
transaction, WellPoint, the country’s largest publicly traded health
insurer by membership, will move that much closer to being a pure-play MCO.
The company plans to use $2.0 billion of the sales proceeds to buy back
stock, $500.0 million to pay down debt and $375.0 million for other
corporate purposes. Express Scripts is offering $4.68 billion consisting
of a combination of cash and up to $1.4 billion in shares of ESRX stock.
The agreement includes a 10-year strategic alliance and contract for ESRX
to provide PBM services to WellPoint’s membership. This will prevent
erosion of the membership that ESRX inherits from WLP and will allow both
parties to benefit from ESRX’s new economies of scale. Once consummated,
ESRX will have 75 million PBM members, an increase of 50% of its
membership that catapults it into second place ahead of MedcoHealth. The
acquisition multiples are 4.7x EBITDA and $187 per member. Citigroup
provided ESRX with financial advice, assisted by Credit Suisse Group AG
and JPMorgan Chase & Co. Legal advice was provided by Skadden,
Arps, Slate Meagher & Flom LLP. The deal has a break-up fee of $50.0
million.
As the dust from this deal
settles, further consolidation within the PBM industry will most probably
avoid a merger among the top three: CVS, ESRX and MHS. Any deal of this
scope is guaranteed to attract the scrutiny—and censure—of federal
antitrust regulators. We therefore expect that M&A activity in this
industry in the near future will most likely involve smaller, add-on
acquisitions.
And the ESRX-WLP deal may
well set the paradigm for future dealmaking. At the very least, we believe
that it will lead other large insurers, such as UnitedHealth Group,
(NYSE: UNH), Aetna (NYSE: AET) and Cigna (NYSE: CIG), to
fire up their calculators, punch in the cost-benefit analysis and ponder
the strategic options for their in-house PBM operations.
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