Express Scripts' Buy Of WellPoint's PBM Benefits Both Cos

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 solifides 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 9.8% to $54, while WellPoint shares climbed 6% to $42.80. 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 has 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.

A UnitedHealth representative wasn't immediately available for comment.

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 earnigs per share until 2011, Perry added.

-By Dinah Wisenberg Brin, Dow Jones Newswires;215-656-8285; [e-mail]