Analysis: Express Scripts risks culture row with Medco deal

NEW YORK (Reuters) - At their roots, Express Scripts Inc (ESRX.O) and Medco Health Solutions Inc MHS.N share the same goal: Reduce drug and healthcare costs for their clients.

But the similarities largely end there. Before announcing their $29 billion merger, the two U.S. pharmacy benefit managers were pursuing vastly different strategies.

Express Scripts -- the acquirer in the deal that will create the industry's clear leader -- faces some tough choices about Medco's long-term game plan in a deal that is already beset with antitrust concerns.

Medco began to expand in recent years into international markets, gene-based therapy and post-approval drug studies, seeking new money-making opportunities and envisioning itself as a broader clinical company.

Express Scripts doubled down on the U.S. market for managing prescription drug benefits for employers and other clients with a series of deals, while pointedly avoiding some of the areas in which Medco invested.

"There are going to be some cultural challenges to overcome," said Eugene Goldenberg, an analyst at BB&T Capital Markets.

"The Big 3 are probably the most different now than they've ever been," Goldenberg said of Express, Medco and rival CVS Caremark Corp (CVS.N). "The overall goal is to drive generics and to maximize savings for the consumer and the client, but the way in which they go about it is very, very different."

Even Express Scripts concedes the differences could be a problem. In its recent quarterly securities filing, Express cited the risk of "integrating two unique corporate cultures, which may prove to be incompatible."

Problems with integration could lead to service disruptions or the departure of key employees, as well as turn worried clients toward rivals.

St. Louis-based Express Scripts projects $1 billion in cost savings and other synergies from the deal. It may slash jobs at Medco, based in suburban Franklin Lakes, New Jersey. Medco had nearly twice the number of employees -- 24,625 compared with 13,170 at Express -- at the end of 2010.

Express Scripts spokesman Brian Henry said it is too early to speculate on the outcome of the integration, but the companies have "complementary capabilities." He also cited Express's track record in integrating acquisitions. It has struck seven other deals since 1998, including two that doubled its size.

CEO STRATEGIES

The divide is also apparent in Medco CEO David Snow and Express Scripts CEO George Paz.

For example, PBMs are set to benefit greatly from a wave of big-selling medicines going generic over the next few years.

Snow, who served as a health insurance executive before joining Medco in 2003, is already planting the seeds for growth in the latter part of the decade when the generic surge subsides.

Agnes Brady, who worked for Medco for more than 17 years, including as a finance executive, said the company became more innovative under Snow.

"It was a real can-do culture -- jump in and just get the job done," said Brady, now executive vice president in charge of medical products at diabetes supply company NationsHealth.

At Medco, Brady said she was given chances to get involved in healthcare beyond the business of dispensing drugs.

"If we strictly had a PBM/distribution model focus, I don't think I would have had that opportunity," Brady added.

Paz, an accountant by training, was chief financial officer and president before becoming CEO in 2005. His signature move before the Medco deal was acquiring WellPoint Inc's (WLP.N) PBM unit for $4.7 billion -- a deal that added heft to Express's main business and won praise on Wall Street.

"Express has always been very focused on the core PBM functions of claims processing, formulary design, mail-order fulfillment and believed that sticking to the core drove efficiencies and drives results," said George Van Antwerp, who worked for the company from 2001 to 2006, including as senior director of product management.

Van Antwerp, now general manager of pharmacy solutions for Silverlink Communications, described Paz's style as "leadership by results," with a focus on the fundamentals of the business.

"It's a narrow-casting versus a broad approach to what the meaning and value of pharmacy is," Van Antwerp said in contrasting Express Scripts and Medco. "There will be some differences strategically as you blend the two entities."

CONSUMEROLOGY AND CHRONIC DISEASE

Express may also need to reevaluate some of its earlier views. While Medco has struck several deals in Europe, Paz told investors in January he was not "overly excited" about such expansion.

Wall Street may want Express Scripts to keep some of the businesses Medco has been investing in to help ensure growth beyond the generics wave.

"That is part of the allure in the transaction," Goldenberg said. "To walk away from all of that, I think investors would be disappointed if Express chose to do that."

Even in the U.S. drug benefits business, the companies have pursued different strategies.

Express Scripts touts its ability to understand consumer behavior, what it calls "consumerology." Medco focuses on its therapeutic resource centers, in which pharmacists specialize in diabetes and other chronic diseases.

Nadina Rosier, North America pharmacy practice leader for Towers Watson, which helps employers with their benefit plans, said combining these platforms could drive out healthcare waste and lower drug costs.

The issues that "keep employers up at night" about the merger include the fate of customer service, mail-order prescription turnarounds and claims accuracy under a combined company, Rosier said.

"Employers want to ensure that the newly merged organization is not distracted by any of the challenges they face during the integration," she added.

(Editing by Michele Gershberg; editing by Andre Grenon)