Pharmacy benefits manager Express Scripts Inc.'s (ESRX) $4.675
billion acquisition of health insurer WellPoint Inc.'s (WLP)
in-house drug-benefits operation appears to benefit both companies,
as indicated by the reaction in both stocks Monday.
Despite that, though, potential sellers and industry observers
don't see the deal sparking a consolidation movement in the
fragmented PBM industry.
For Express Scripts, the nation's third-largest pharmacy
benefits manager, the deal narrows the gap with its larger rivals
by acquiring the fourth-largest PBM in the U.S., NextRx, and beefs
up the company's negotiating power with drug manufacturers.
"I think it's a very logical acquisition. I think it's a great
deal for Express Scripts and really solidifies their place among
the top three PBMs," said pharmaceutical supply-chain industry
consultant Adam Fein, president of Pembroke Consulting.
WellPoint, meanwhile, unlocks value for its shareholders by
selling the business at a price that surpassed some Wall Street
estimates and exceeds, on a percentage basis, the business's
contribution to earnings.
On a conference call, WellPoint officials said the deal will add
to earnings per share in the upper-single-digit percentage range in
the first year, including $2 billion in expected stock buybacks the
company plans to make from sale proceeds. WellPoint also expects to
use $1.8 billion in proceeds to pay taxes and for
transaction-related costs, $500 million to pay down debt and $375
million for acquisitions and other corporate purposes.
The deal turns attention on other health insurers with internal
PBMs - Aetna Inc. (AET), Cigna Corp. (CI) and UnitedHealth Group
Inc. (UNH) - although those companies said they don't necessarily
plan to make the same move.
Shares of Express Scripts rose 12.3% to $55.21, while WellPoint
shares climbed 7.8% to $43.50. Aetna shares climbed 5.4% to $27.19,
and other managed-care stocks, their valuations shredded over the
past year, rose a bit as well.
Based on WellPoint comments, Wachovia analyst Matt Perry
estimated the deal will add 30 cents to 50 cents to WellPoint's
2010 per-share earnings. WellPoint indicated its PBM contributed
less than 10% of total company profit, he said, noting that it sold
the business for 24% of market capitalization.
The deal further concentrates PBM market share among the top
three industry players - Express Scripts and its rivals, Medco
Health Solutions Inc. (MHS) and CVS Caremark Corp. (CVS) - although
vast portions of the PBM industry remain outside that group, either
at health insurers, retail chains or smaller independent PBMs.
The big three players have about half of total PBM market share,
based on adjusted prescription claims processed, and fill some 80%
of mail-order prescriptions, according to Fein. NextRx has about 6%
of adjusted claims and 3% of mail-order prescription share, he
said.
The deal, expected to close in the second quarter, includes a
10-year contract for Express Scripts to provide PBM services to
members of WellPoint, the nation's largest health insurer by
enrollment, which could lower WellPoint customers' drug costs. The
transaction includes WellPoint's specialty pharmacy business,
PrecisionRx.
Fein predicted the deal will cause other PBMs owned by insurers
to "take a look at their business." And Oppenheimer analyst Carl
McDonald said in a note that Aetna, Cigna and UnitedHealth will
likely see a boost from the news, although "our impression is that
none of these plans is seriously considering following in
WellPoint's footsteps."
Indeed, Cigna seemed to back that view.
"We consider our PBM business vital to improving the health,
well-being and financial security of our members. Through the PBM
business, we can better manage someone's overall health as we are
aware of all the factors impacting their health," Cigna spokesman
Chris Curran said.
Aetna said through spokesman Fred Laberge that "our PBM is an
important component of our integrated value proposition." He added,
"As we have said, we are always willing to explore options that may
provide value to our customers and shareholders." The company
doesn't comment on other companies' business activities, he
said.
UnitedHealth recently renewed its contract with Medco Health to
provide PBM services for the bulk of its commercial health plan
members; United's in-house PBM, Prescription Solutions, serves
UnitedHealth's Medicare members and commercial members from
acquired PacifiCare plans, and continues to win new commercial
business outside of UnitedHealth, company spokesman Tyler Mason
noted. Prescription Solutions has 10 million members, he said.
That capability works for UnitedHealth right now, Mason said.
"As long as the medical benefit and the pharmacy benefit are well
structured together, that's what you really need to focus on,
that's what the customer cares about," he said.
Some investors might experience "sticker shock" at the deal's
price tag, Jefferies & Co. analyst Arthur Henderson said,
adding, however, that Express Script's management team "is highly
disciplined and will unlikely overpay for acquisitions."
Some industry observers had expected WellPoint's PBM business to
fetch as little as $2 billion. Express Scripts said the acquisition
price includes consideration for the value of a future tax benefit
resulting from the transaction structure.
Wachovia's Perry called the deal a positive sign for the PBM
sector, as it shows a company willing to execute on mergers and
acquisitions when it sees a compelling opportunity, "even in the
face of uncertainty due to health care reform." Express Scripts'
benefits from the deal probably won't be fully reflected in
earnings per share until 2011, Perry added.
-By Dinah Wisenberg Brin, Dow Jones Newswires; 215-656-8285;
dinah.brin@dowjones.com
