Amazon.com Inc. is seemingly on the brink of entering the prescription-drugs market. Express Scripts Holding Co. shareholders should be pleased that the pharmacy-benefits manager isn't taking this development lying down.
On Tuesday, Express Scripts said it's buying medical-benefits manager EviCore Healthcare for $3.6 billion, its biggest deal since the nearly $30 billion acquisition of Medco Health Solutions in 2012. While few details have been released, the purchase is expected to be accretive to Express Scripts' adjusted diluted earnings per share in its first full year.
While the transaction won't prevent Amazon's entry into prescription drugs (indeed, Express Scripts was downgraded on Monday by at least one analyst concerned about "escalating competitive pressures"), it provides a level of diversification for the $34 billion company's business, which centers around negotiating lower drug prices from manufacturers on behalf of its clients. Express Scripts was recently stung by the loss of its biggest customer, Anthem Inc., which represented almost a third of its 2016 earnings before interest, taxes, depreciation and amortization.
And although other Express Scripts clients are seen as "at-risk," the company's decision to tackle the $300 billion medical-benefit management market should give it a better shot at retaining them. That's because many may already use or be inclined to lean on EviCore's services, which are designed to help them keep a lid on costs for procedures like scans and medical tests. Moreover, Express Scripts' is creating a new revenue stream by adding a value proposition for clients who may otherwise be considering bringing pharmacy benefits in-house or migrating to lower-cost competitors.
The deal is a win for EviCore's private equity backers, and the latest example to provide the proof that scale pays off. Evicore itself was formed by the merger of General Atlantic LLC's CareCore National LLC with TA Associates LP and Ridgemont Equity Partners's MedSolutions Holdings Inc. and it has since made other purchases including QPID Health.
Importantly, EviCore's backers are slated to receive the $3.6 billion in cash, which is a much cleaner exit than accepting payment in cash and stock, especially since the latter currency has haunted private equity sellers in recent years.
Express Scripts still needs to prove it can thrive, and not just survive, over the longer term. At least it's trying to take charge of its destiny.
--With assistance from Gadfly's Max Nisen
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Some of Express Scripts' health insurance clients may already partner with Evicore, which manages the benefits for more than 100 million people.
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