* Cash and stock deal valued at $4.68 billion.
* Includes 10-yr contract to provide services to WellPoint
* Neutral to slightly accretive for Express Scripts in '09
* Deal would create No. 2 pharmacy benefit manager
* WellPoint up 8.6 pct; Express Scripts up 12.6 pct
(Adds analyst comment)
By Lewis Krauskopf
NEW YORK, April 13 Express Scripts Inc (ESRX.O)
will buy health insurer WellPoint Inc's WLP.N 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 MHS.N and CVS Caremark Corp (CVS.N). 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 (UNH.N), Aetna (AET.N) and Cigna (CI.N) 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)