Express Scripts Seen Losing Sales During Antitrust Review

Express Scripts Inc. (ESRX)’s bid for Medco Health Solutions Inc. (MHS) may boost competition in the U.S. marketplace as rivals challenge the merged company’s ability to serve its largest clients and seek to capitalize on a lengthy antitrust review of the deal.

“That becomes an argument for approving the deal,” said Art Henderson, a Jefferies & Co. analyst in Nashville, Tennessee, in a telephone interview. The pharmacy services industry “has always been competitive and, in the short run, this makes it more so.”

Express Scripts, of St. Louis, offered $29.1 billion for Franklin Lakes, New Jersey-based Medco on July 21 in a deal that combines two of the top three U.S. pharmacy services providers, spurring a regulatory review that may take as long as six months to conclude. In the meantime, Express Scripts must plot how to integrate two companies that historically have served different types of clients as 2013 contracts come up for renewal.

Express Scripts in the past has concentrated on midsize clients while Medco and CVS Caremark Corp. (CVS), the No. 2 pharmacy services manager behind Express Scripts, focused on larger companies with different demands, said Helene Wolk, an analyst with Sanford C. Bernstein & Co. in New York.

The Express Scripts-Medco pairing will handle more than 1.2 billion prescriptions annually and Caremark will have about 847 million, according to analyst Helen Wolk. Photo Illustration: Bloomberg Close

The Express Scripts-Medco pairing will handle more than 1.2 billion prescriptions... Read More

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The Express Scripts-Medco pairing will handle more than 1.2 billion prescriptions annually and Caremark will have about 847 million, according to analyst Helen Wolk. Photo Illustration: Bloomberg

“Medco and CVS are much more alike than Medco and Express Scripts, and that may help CVS with customers that want to stay with a Medco-like company,” Wolk said in a telephone interview.

Largest Customers

Some larger companies ask that vendors guarantee that member phone calls be answered within a certain number of minutes, a service smaller clients may not have the muscle to demand, she said. CVS may gain an edge by questioning whether Medco’s capacity to handle larger companies will be as robust once the merger is completed and Express Scripts management is in control, Wolk said.

“There’s no doubt there will be attrition,” Jefferies’ Henderson said. “This opens up an opportunity for CVS in particular.”

Express Scripts, Medco and CVS in Woonsocket, Rhode Island, declined requests for interviews.

More competition among pharmacy benefit managers may satisfy the demands of an antitrust review that will weigh whether rivals offer viable alternatives that can keep prices to customers low, said Robert Maness, a College Station, Texas- based economic and antitrust consultant with Charles River Associates. The more business lost by Medco or Express Scripts during the review, the more it proves that customers have financially attractive options, he said.

Deal Skepticism

“To the extent that employers can easily switch to other PBMs, that would give the Federal Trade Commission some comfort,” Maness said in a telephone interview. “And you can bet when they lose a contract, Express Scripts will be on the phone to the FTC letting them know.”

Investors are skeptical that the deal will be approved, given the spread between the takeover offer of $71.36 a share in cash and stock and Medco’s share price of $53.94 at 4 p.m.

The industry’s focus now is on 2012 when bigger customers will negotiate new deals for contracts expiring in 2013, Wolk said. Coventry Health Care Inc. (CVH) in Bethesda, Maryland, is among the large Medco clients with a contract coming due in early 2013. The agreement involves about $3 billion to $4 billion in revenue and covers the insurer’s Medicare and commercial plan participants, she said.

MedImpact

Other contracts set to renew include agreements with the states of New Jersey and Ohio. The New Jersey contract is valued at about $1.2 billion and the Ohio agreement is estimated at about $500 million, Wolk said.

“Medco customers have always been so loyal,” said John Gardynik, senior vice president of MedImpact Healthcare Systems Inc., a closely held pharmacy benefits manager in San Diego, California. “That’s not the case now, and I have seen Medco customers out in the market looking for alternatives.”

MedImpact fills about 150 million prescriptions annually, Gardynik said, compared with the combined Express Scripts-Medco, which may handle as many as 1.2 billion. The company offers guaranteed per-member, per-month pricing, something the largest pharmacy managers haven’t wanted to do, he said.

Drew Crawford, chief executive officer of closely held Benecard PBF, a pharmacy-services company based in Orlando, Florida, said his phone has been “ringing off the hook since the deal was announced, with questions from customers and potential customers and pharmacists trying to understand what it means for them.”

Acquisitions

Pharmacy benefits managers like Express Scripts charge employers and government for handling worker drug claims and negotiating prices with drugmakers. The more prescriptions a company handles, the more leverage it carries in getting lower prices, and the more ability it gains to present cost-conscious deals to prospective clients and boost revenue.

The merger may also spur consolidation as smaller companies grow concerned they won’t be able to compete, said Eugene Goldenberg, an analyst at BB&T Capital in New York.

Catalyst Health Systems Inc. in Rockville, Maryland, is already looking for potential acquisitions, even as it integrates the pharmacy benefits business of Walgreen Co. (WAG) in Deerfield, Illinois, it bought in June, Goldenberg said. The company fills about 70 million prescriptions, according to Wolk’s data.

UnitedHealth May Benefit

SXC Health Solutions Corp. (SXC) in Lisle, Illinois, handling 40 million prescriptions a year, is also a potential target and acquirer, Goldenberg said. The company announced on Aug. 3 the purchase of a small closely held, for-profit pharmacy unit in San Antonio called PTRx Inc. and SaveDirectRx, its exclusive mail-order pharmacy provider, for as much as $81.5 million.

UnitedHealth Group Inc. (UNH) of Minnetonka, Minnesota, with a pharmacy benefits unit called OptumRx, also may benefit from the Express Scripts-Medco deal, said Maness of Charles River. Medco announced July 21 that an $11 billion contract with UnitedHealth wouldn’t be renewed after expiring in December 2012.

UnitedHealth will take the Medco business in-house, Tyler Mason, a UnitedHealth spokesman, said today in an interview. Analysts had expected the insurer would choose to do so.

With the Medco business, which covered the insurer’s commercial plans, UnitedHealth will fill about 500 million prescriptions annually, Wolk said.

Vulnerable to Attack

Medco, accused of corporate misconduct, already has been vulnerable to attack, losing at least $3.5 billion in contracts this year before the takeover was announced. A report commissioned by the California Public Employees’ Retirement System, the largest U.S. pension system, accused Medco employees of using improper favors to win Calpers’s pharmacy contract.

On Aug. 3, Blue Cross and Blue Shield of North Carolina, its sixth-biggest client, said it also would switch business to rival Prime Therapeutics of Eagan, Minnesota. The contract generates $1.6 billion annually, according to Lawrence Marsh, an analyst at Barclays Capital in New York. The move isn’t connected to Express Scripts’s proposed takeover, said Lew Borman, a spokesman for North Carolina Blue Cross.

Prime Therapeutics fills about 143 million prescriptions, according to Wolk’s data.

“This is a very different market these days,” Benecard’s Crawford said. “Medco isn’t Medco anymore because of the Calpers thing. It was once the consolidator and now it’s getting swallowed up.”

To contact the reporters on this story: Pat Wechsler in New York at pwechsler@bloomberg.net;

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net

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