Express Scripts Inc will buy health insurer WellPoint Inc's NextRx prescription business for $4.68 billion, becoming the No. 2 U.S. pharmacy benefit manager while gaining more leverage in driving down drug prices.
Express Scripts also stands to gain by converting prescriptions sold at drug stores into more lucrative ones it delivers by mail.
From a long-term perspective ... I think it's going to be very good for the company, said Jefferies & Co analyst Arthur Henderson. It enhances their size to give them long-term viability as an independent.
Adding No. 4 pharmacy benefit manager NextRx would give third-ranked Express Scripts new clout against rivals Medco Health Solutions and CVS Caremark Corp. The deal comes more than two years after Express lost out to CVS in a high-stakes bidding war for Caremark.
Analysts have long speculated on the possibility of health insurers divesting their drug-benefit units. In recent months, talk has heated up as Wall Street has valued independent pharmacy benefit managers far more highly than health insurers.
WellPoint's move may increase pressure on rivals UnitedHealth Group, Aetna and Cigna to explore options for their PBM units.
Pharmacy benefit managers, or PBMs, have been among the standout healthcare performers in recent years. Their expertise in driving usage of low-cost generic drugs and mail-order prescriptions has helped their employer and health-plan clients cut costs as well as boosting their own bottom lines.
The Express-NextRx deal promises to cut wasteful spending, according to the companies, as U.S. lawmakers weigh reform measures to control the country's spiraling healthcare costs.
WellPoint shares were up 8.6 percent at $43.81 on the New York Stock Exchange on Monday afternoon, while Express Scripts shares were up about 12.6 percent at $55.35 on the Nasdaq.
NextRx provides pharmacy benefits management services to about 25 million Americans and manages more than 265 million adjusted prescriptions annually. Express Scripts handled 506 million prescriptions last year.
The deal will generate more than $1 billion of incremental earnings before interest, taxes, depreciation and amortization within 12-18 months after closing, Express Scripts said.
By comparison, Express Scripts reported $1.38 billion in EBITDA in 2008.
At less than five times EBITDA, the purchase price is attractive, said Jeff Jonas, portfolio manager with the Gabelli Healthcare and Wellness Trust.
I think it's a great deal for Express Scripts, Jonas said. They can really improve they operations of the WellPoint PBM, and they're getting it for a pretty low purchase price.
The deal includes a 10-year contract for Express Scripts to provide services to WellPoint, the largest U.S. health insurer by membership. WellPoint will retain control of medical policy and aspects of designing the drug benefits.
The NextRx purchase price will be a mixture of cash and up to $1.4 billion in Express Scripts common stock.
Express Scripts said it expected the deal to be neutral or add slightly to 2009 earnings, and to add moderately in 2010. The St. Louis-based company expects a tax benefit of $800 million to $1.2 billion from the deal over the next 15 years.
PBMs often derive much of their profits through their mail-delivery prescriptions. NextRx has only about 10 percent of its prescriptions handled using mail order.
With the WellPoint deal, Express Scripts has a nice opportunity here to convert people from that retail side to the mail, Henderson said.
WellPoint said it expected the sale to add to earnings in the upper single digit percentage range in the first year after it closes. The companies expect to complete the deal in the second half of the year.
Indianapolis-based WellPoint plans to use $2 billion of the proceeds to buy back its stock, $500 million to pay down debt and $375 million for other corporate purposes. It expects to use $1.8 billion for taxes and other costs tied to the deal.
WellPoint has used acquisitions to expand its health plans, and BMO Capital Markets analyst Dave Shove said the insurer may be ready to pounce again.
I think that they are ready to do another health plan deal, Shove said. Although the talk is all share buyback, the shares aren't bought until they're bought and the money's sitting there waiting to be used.
WellPoint's PBM represented less than 10 percent of its profits, while the deal represented 24 percent of its market value, Wachovia analyst Matt Perry said.
WellPoint unlocked a significant amount of value through the deal, in our view, Perry said in a research note.
WellPoint Chief Executive Angela Braly said the insurer's members would benefit from the greater drug discounts the newly enlarged Express Scripts would be able to secure.
The company said Express Scripts might have to pay a breakup fee of $50 million if the deal fails.
Health insurers endured a tough 2008, marked by profit warnings and questions about their financial positions in a shaky economy, and their shares have yet to recover amid uncertainty over U.S. health reform measures.
(Additional reporting by Franklin Paul in New York, Jessica Wohl in Chicago and Ajay Kamalakaran in Bangalore; Editing by Derek Caney, Lisa Von Ahn and Matthew Lewis)