Express wins FTC clearance, closes Medco buy
(Reuters) - Express Scripts Inc (ESRX.O) won U.S. antitrust clearance on Monday for its purchase of rival Medco Health Solutions Inc MHS.N following a contentious eight-month review, creating the clear leader in managing prescriptions for Americans.
The U.S. Federal Trade Commission announced it had closed its investigation into the roughly $29 billion deal, first announced in July, that combines two of the three largest U.S. pharmacy benefit companies, or PBMs. Separately, the companies announced they completed the deal.
Express Scripts shares rose 3.1 percent in Monday trading on Nasdaq. Before Monday's trading session, Medco shares were converted into Express Scripts shares and cash, based on terms of the deal.
Acquiring Medco more than doubles Express Scripts revenue base, and makes it significantly bigger than its closest rival CVS Caremark (CVS.N) in terms of processing prescriptions.
PBMs like Express and Medco are supposed to cut the cost of medicines for their employers and health plan clients, in large part by encouraging more use of generic drugs.
But with generics already comprising about 75 percent of prescriptions, the combined company is going to need to show other ways they can give value to customers, Jefferies & Co analyst Arthur Henderson said.
"It is a space that is radically changing, and it is going to continue to radically change," Henderson said. The merger, he said, "will give them more tools to work with to figure out how to continue to deliver lower costs to their customers."
With the deal now cleared, Express Scripts would set out to start evaluating Medco more intensely, Express Chief Medical Officer Steve Miller said. It did not set a timetable for making decisions, such as on potential facility closings.
"We're going to do a thoughtful evaluation of all those assets," Miller said in an interview.
Express Scripts Chief Executive George Paz was on site at Medco's headquarters in Franklin Lakes, New Jersey on Monday to hold a town hall meeting with employees.
NO ASSET SALES REQUIRED BY FTC
Express Scripts and Medco have maintained that a combined company with more clout would benefit consumers by driving down prescription costs, while critics countered that the deal would lead to higher prices and worse service for patients.
The FTC voted 3-1 to close its investigation into the deal, and did not impose any conditions or asset sales on the companies.
The majority of commissioners stated that their investigation revealed a "competitive market for PBM services characterized by numerous, vigorous competitors who are expanding and winning business from traditional market leaders."
"The acquisition of Medco by Express Scripts will likely not change these dynamics," the statement said.
In her statement dissenting with the majority, Commissioner Julie Brill called it a "merger to duopoly with few efficiencies in a market with high entry barriers -- something no court has ever approved.
"I therefore respectfully submit that the Commission should have filed a complaint in Federal district court seeking to enjoin the transaction pending a full trial on the merits here at the Commission," Brill said.
Combined, Express Scripts and Medco posted revenue of $116 billion last year and had more than 33,000 employees. They processed 1.73 billion prescriptions, on an adjusted basis, and although Medco's total was set to take a hit with the impending loss of its biggest account, insurer UnitedHealth Group (UNH.N), the combined company is still well ahead of CVS Caremark.
Express Scripts said it still expected $1 billion in cost savings and other synergies from the acquisitions. The deal is expected to slightly add to earnings per share in the first year after closing, Express Scripts said.
Investors may have been bidding up Express Scripts shares in part because the FTC did not force any divestitures, such as of a specialty pharmacy, which had been assumed in the cost-savings estimates, Henderson said.
"With that not the case, presumably the synergy number goes up," Henderson said.
THREE MEDCO EXECS JOIN EXPRESS
The deal's approval comes after months of tension for traders anxious to know if the deal would go through. At one point, shortly after the deal was announced, Medco's share price was 27 percent below the offer value, and some analysts initially called it a coin flip over whether it would win regulatory approval.
Large grocery chains, many of which operate their own pharmacies, community pharmacies and some consumer groups, opposed the deal, saying a combined Express-Medco would gain too much power in the market and would squeeze them financially.
Last week, the National Association of Chain Drug Stores, the National Community Pharmacists Association, and nine retail pharmacy companies filed a lawsuit in the U.S. District Court for the Western District of Pennsylvania seeking to stop the deal.
Express Scripts now poses a larger competitor for CVS, as well as for smaller PBMs such as Catalyst Health Solutions CHSI.O and SXC Health Solutions SXCI.O, and UnitedHealth, which is building up its pharmacy business.
As part of the transition, three Medco executives joined the senior leadership team at Express Scripts, expanding that group to 13 people. The Medco additions are: Brian Griffin, who ran Medco's international business; Timothy Wentworth, president of sales and account management; and Glen Stettin, senior vice president for clinical, research and new solutions.
Medco's CEO, David Snow, and chief financial officer, Rich Rubino, are among the executives who have left the company, Express Scripts said.
Miller indicated on Monday that Express Scripts may be interested in following through with Medco's efforts to build an international business, an area where Paz had previously expressed skepticism.
"We definitely want to look at these assets," Miller said. "Healthcare doesn't respect borders, so we're very excited to see what they have been doing outside the United States."
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