Express Scripts, Medco Win Approval for $29 Billion Deal
Express Scripts Inc. (ESRX), the largest U.S. pharmacy benefits manager, received regulatory approval for its $29.1 billion acquisition of Medco Health Solutions Inc. (MHS), a deal that may drive down costs for the company and consumers.
The Federal Trade Commission approved the purchase by a 3-1 vote today. Clearance was unconditional, with the commissioners saying their eight-month review of the deal found “a competitive market for pharmacy benefit management services.”
The combined company will save as much as $1 billion in costs, St. Louis-based Express Scripts said in a statement today. The benefits manager will handle almost one of every three prescriptions written in the U.S. Its size will give it the negotiating power to drive down prices on prescription drugs and from retailers, said Larry Marsh, an analyst with Barclays Capital Inc.
“It’s pretty clear the view here is that in a world where we’re focused on health-care costs, it’s good to try and negotiate lower prices,” Marsh said.
Express Scripts rose 2.4 percent to $55.50 at the close of New York trading. The shares have gained 24 percent this year.
The cost-savings for Express Scripts may be more than $1 billion since U.S. regulators declined to make the two companies divest assets, said Art Henderson, an analyst with Jefferies & Co. in Nashville, Tennessee.
“We’re thrilled,” said Henderson, who has a “buy” recommendation on both companies. “The synergy possibilities between the two companies have gone up significantly,” he said in a telephone interview.
The National Association of Chain Drug Stores, the National Community Pharmacists Association and independent pharmacies sued March 29 to block the deal in federal court in Pittsburgh, claiming the purchase would violate antitrust laws by shrinking competition and raising consumer prices.
The trade groups asked the judge who is overseeing the antitrust lawsuit to block the companies from combining their assets even though the acquisition was completed today.
“It is not in the best interests of patients or consumers,” the two associations said in a statement. The groups “remain deeply concerned that this merger will reduce competition to unhealthy levels in several prescription drug markets that are already highly concentrated,” they said.
Express Scripts and Franklin Lakes, New Jersey-based Medco together had 35,000 employees at the end of last year, according to data compiled by Bloomberg, leaving plenty of room to cut workers, facilities and other expenses to help raise the profit margin of the combined company.
“One of the reasons this transaction makes a lot of sense is that they can squeeze a lot of costs out and pass those savings on,” Henderson said. “Medco and Express Scripts won’t need all those mail facilities that the companies will operate on a combined basis,” he said.
The FTC said in a statement that the investigation of the proposed deal “revealed a competitive market for pharmacy benefit management services characterized by numerous, vigorous competitors who are expanding and winning business from traditional market leaders.”
FTC Commissioner Julie Brill, who dissented, said in a separate statement that the transaction is an industry “game changer” that creates a “merger to duopoly.” She called on the commission to take another look at the pharmacy benefits management market in three years.
George Paz, Express Scripts’s chairman and chief executive officer, said in a statement, “Our merger is exactly what the country needs now. It represents the next chapter of our mission to lower costs, drive out waste in health care and improve patient health.”
Express Scripts agreed to pay $28.80 a share in cash plus 0.81 Express Scripts share for each Medco share held, the two companies said on July 21. Including net debt, the acquisition was valued at $34.3 billion, exceeding the $21.7 billion deal that formed CVS Caremark Corp. (CVS) in 2007 as the biggest in the industry, according to data compiled by Bloomberg.
The companies, known as pharmacy-benefits managers, or PBMs, negotiate prices with drugmakers for health-plan sponsors, manage worker claims and track patients’ use of medicines. Their profits are tied to cutting their clients’ drug costs.
PBMs save health-plan sponsors and consumers as much as $87 billion in annual prescription-drug costs, Compass Lexecon, an economic consulting company in Washington, said in a December report funded by Express Scripts and Medco.
A combined Express-Medco would handle 34 percent of prescriptions in the U.S. this year, said Adam Fein, founder and president of Pembroke Consulting Inc. in Philadelphia, who is a consultant for Express Scripts.
That share will shrink to 29 percent next year because UnitedHealth Group Inc. (UNH) of Minnetonka, Minnesota, the biggest U.S. health plan by sales, switched from Medco to its own pharmacy benefits unit, OptumRx, Fein said.
Express Scripts probably won’t use this acquisition as a push to grab even a larger portion of the country’s PBM business, said Barclays’ Marsh.
“We don’t really view this as a vehicle for them to aggressively go out and take market share,” Marsh said. “That’s one of the reasons FTC looked favorably upon this.”
About 31 percent of specialty drugs -- medicines for ailments such as cancer and HIV that are injected or infused or require special handling -- sold in the U.S. in 2010 passed through pharmacies owned by Express Scripts or Medco, according to Fein.
Scrutiny of the industry is part of the Obama administration’s effort to rein in health-care costs, said Art Lerner, former assistant director for health in the FTC’s Bureau of Competition.
“They view competition and enforcement of the antitrust laws as an important element in trying to make sure health care” is high quality and inexpensive, said Lerner, a Washington-based partner at Crowell & Moring LLP (1385L).
In her dissent, Brill said the acquisition will create “a highly concentrated market” for benefit management services and argued that the FTC should have sought an injunction to block the deal.
“The legal presumption against this merger is overwhelming and is not, in my view, sufficiently rebutted by evidence regarding competitive effects or entry,” Brill said.
The majority of commissioners said Express Scripts and Medco aren’t “particularly close competitors, the market today is not conducive to coordinated interaction, and there is little risk of the merged company exercising monopsony power,” where a large buyer controls the market and drive down prices.
Express Scripts and Medco have told regulators the merged company would help reduce U.S. medical costs, a goal of the 2010 health-care law, partly by extracting lower prices from drugmakers and tracking whether patients take their medicines.