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ST. LOUIS and FRANKLIN LAKES, N.J. — Express Scripts Inc. plans to buy Medco Health Solutions Inc. in a cash and stock deal valued at $29.1 billion.
The blockbuster agreement, unveiled Thursday morning, would merge two of the nation’s biggest pharmacy benefit managers (PBMs) into the largest provider of prescription drug benefits, followed by CVS Caremark Corp.
Under the acquisition, Express Scripts will pay Medco shareholders $71.36 per share in cash and stock, or $29.1 billion, based on yesterday’s closing price. Medco shareholders will get $28.80 in cash and 0.81 shares for each Medco share they own when the transaction closes. The companies said the deal has been unanimously approved by their boards of directors.
Executives from Express Scripts and Medco said the merger of the two companies will produce economies of scale that can lower the cost of prescription drugs and improve the quality of health care for Americans.
"The cost and quality of health care is a great concern to all Americans; this is the right deal at the right time for the right reasons," George Paz, chairman and chief executive officer of Express Scripts, said in a statement. "Companies like ours have a responsibility to provide the leadership and resources required to drive out waste in health care and provide the best care in the world. The merger with Medco will accelerate our efforts to create greater efficiencies in the health care system and better protect American families from the rising costs of prescription medicine while improving health outcomes.
"This continues Express Scripts’ commitment to strong growth, both organically and through strategic mergers and acquisitions," Paz added. "The opportunity with Medco represents an attractive strategic combination which will provide the opportunity to move forward with a wide array of tools and resources to accomplish our goals."
David Snow, chairman and CEO of Medco, stated that "the incremental benefits of combining with Express Scripts are both logical and compelling."
"We have each been successful in creating shareholder value because we are both passionate about driving value to our customers through service, innovation and a focus on cost and quality," Snow said in a statement. "We have a shared desire to improve the way health care is delivered in this country, and I believe this creates a strong best-of-breed foundation, culturally, for a very successful merger."
Plans call for Paz to serve as chairman and CEO of the combined organization, whose corporate headquarters will be in St. Louis, where Express Scripts is based. The board will be expanded to include two current independent Medco board members.
The companies said the transaction is slated to close in the first half of 2012, pending regulatory and shareholder approvals plus other customary closing conditions.
Express Scripts and Medco said the merged company will yield greater cost savings for patients and drug plan sponsors while fostering more efficiency in the supply chain. They also stated that the union will optimize their ability to "respond to an increasingly complex Medicare and Medicaid environment" and advance their efforts against fraud, waste and abuse in the prescription drug benefits system.
On the patient side, the deal will help close gaps in care and boost medication adherence through a combined behavioral and clinical approach, according to Express Scripts and Medco. The companies also plan to leverage their collective expertise to better manage the cost and care associated with specialty medications as well as enhance mail pharmacy technology to optimize patient care and satisfaction.
In addition, the companies said their merger will accelerate the research, development and deployment of trend management solutions to address inefficiencies in the marketplace and help advance evidence-based and safety solutions for innovative pharmaceuticals and biosimilars.
The two PBMs reported that, to date, due diligence has identified estimated synergies of $1 billion once they are fully integrated, which represents about 1% of the combined company’s costs.
Once Express Scripts and Medco close their merger agreement, Express Scripts shareholders are expected to own about 59% of the combined company, and Medco shareholders are slated to own about 41%. The agreement calls for Express Scripts to form a new holding company called Express Scripts Holding Co.
The companies reported that based on the closing price of Express Scripts stock of $52.54 as of July 20, the stock component is valued at $42.56 per share which, when combined with the $28.80 in cash, brings the total value per share to Medco shareholders of $71.36, a premium to Medco shareholders of 28% over Medco’s closing share price on July 20.
The deal comes in the wake of some key PBM contract losses by Medco. In late June, the California Public Employees’ Retirement System (CalPERS), one of the nation’s largest pension funds, announced that CVS Caremark would succeed Medco as the administrator of prescription drug benefits for members of its preferred provider organization (PPO) health plans. CalPERS said the three-year pact with CVS represents about $565 million in annual drug spending.
And in late May, CVS Caremark announced that it was picked to provide PBM services for the Blue Cross and Blue Shield Governmentwide Service Benefit Plan, also known as the Federal Employee Program (FEP). CVS Caremark reportedly edged out Medco to win the $3 billion federal contract.
On Thursday, Medco also reported that despite several months of negotiations, its pharmacy benefit services pact with UnitedHealthcare, which lapses at the end of 2012, wouldn’t be renewed.
Express Scripts, meanwhile, has been in a stand-off with Walgreen Co. Late last month, Walgreens announced that it plans to exit Express Scripts’ pharmacy network on Jan. 1 because of unsuccessful contract renewal talks. The drug chain reported that Express Scripts processes about 90 million prescriptions that are expected to be filled by Walgreens in fiscal 2011, representing approximately $5.3 billion in annual sales.
"I would look at the combination of Express Scripts and Medco Health Solutions as shifting the balance of power a bit toward the PBMs," Sanford Bernstein & Co. health care analyst Helene Wolk said when asked what the merger means for the chain drug store sector. "I think this increases the urgency for Walgreens come to terms with Express Scripts, given that it could be Express Scripts’ and Medco’ volume at risk."
