Express Scripts Inc. said on July 21 that it plans to buy its largest competitor, Medco Health Solutions Inc., for $29.1 billion, representing a seismic shift in the pharmacy benefit management marketplace.
The deal, jointly announced by the companies, would see Express Scripts pay $71.36 per share for its Franklin Lakes, New Jersey-based rival, 28 percent more than Medco’s closing stock price on July 20. Medco shareholders would receive $28.80 in cash and 0.81 shares of Express Scripts for each Medco share they own.
If and when the sale is finalized, the combined company would be the single largest player in the pharmacy benefit management industry, representing roughly 34 percent of the total U.S. market and an estimated 1.6 billion prescriptions administered or dispensed in 2013, according to JMP Securities. Its closest competitor, Woonsocket, Rhode Island-based CVS Caremark Corp., would have 20 percent of the market, with an estimated 937 million prescriptions dispensed in 2013, according to the San Francisco-based firm.
“It certainly gives [Express Scripts] additional clout,” said Constantine Davides, a Boston-based senior analyst at JMP Securities. “With the type of market share generated here, they’re going to have significantly increased leverage against pharmaceutical manufacturers and the retailers in their network.”
Whether the deal is completed is at best uncertain, as analysts expressed concern about potential anti-trust challenges from the Federal Trade Commission, which must approve the sale.
The companies would likely argue that the increased bargaining leverage over health care providers, pharmaceutical manufacturers and retailers would result in lower prescription costs for employers, experts said. However, the sale also could result in the merged company gaining increased bargaining power over its customers.
“The anti-trust issue is the key risk to the deal,” Davides said. “Express Scripts is going to have to prove that the deal is pro-consumer.”
In its note to investors regarding the sale, Chicago-based Morningstar Inc. said its analysts were “floored” by news of the proposed deal. The note characterized the deal as having a “less than 50 percent chance” of receiving FTC approval.
“No one thought this deal could get past regulators,” said Morningstar equity analyst Matthew Coffina, adding that the sale also is likely to face opposition from groups representing pharmaceutical manufacturers and retailers.
“I’m sure the companies have done the due diligence on this, and they must think that there’s at least a reasonable chance that they’ll get it through the regulatory review,” Coffina said. “It’s surprising that they’re even trying the deal, and it would be equally surprising if they actually get it done.”
While the government might take issue with one company having more than one-third of the PBM market, analysts said the merged company’s clients ultimately could benefit from its ability to apply pressure on its manufacturing and retail partners and its expanded offering of products and services.
“More likely than not, I would think that employers are going to be better off if the companies are together, to the extent that their ability to squeeze their suppliers will more than make up for any higher margins that they earn,” Coffina said.