Express Scripts has announced a merger agreement with its pharmacy benefits management competitor Medco. The deal between the two PBM giants is valued at $29.1 billion.
"The cost and quality of healthcare is a great concern to all Americans; this is the right deal at the right time for the right reasons," said George Paz, chairman and CEO of Express Scripts in a statement announcing the deal. "The merger with Medco will accelerate our efforts to create greater efficiencies in the healthcare system and better protect American families from the rising costs of prescription medicine while improving health outcomes.”
The basic tenet behind combining the two companies, which combined for more than $110 billion in revenue, is to create a pharmacy benefits behemoth that can potentially demand better pricing out of pharmaceutical companies and be better positioned to serve both public and private payers, as they look for ways to squeeze costs out of the system.
One potential loser in the deal is the pharmacy chain Walgreens, which has been stymied in attempts to negotiate a new contract with Express Scripts. A combination of Medco and Express Scripts would leave Walgreens with few options of PBMs with a national footprint, as the next largest player in the market after the merger would be CVS-Caremark which operates as both PBM and a direct retail pharmacy competitor.
In a conference call detailing the deal this morning Paz noted he talks regularly with Walgreens CEO Greg Wasson and that he is “hopeful that we’ll come to a conclusion on this.”
With a merger of such size, also come regulatory concerns. Officials at both companies are confident the merger will be able to clear regulatory hurdles, though terms of the deal perhaps give a nod to the potential for difficulty: if the deal fails due to regulator objections, there will be no “break-up fee” as is customary in mergers.
“That's somewhat unusual and an acknowledgment of the risk," Gabelli Securities health care analyst Jeff Jonas told The Street.
According to industry watchers, the ultimate test with Washington regulators may be in how the FTC defines the companies, not on the sheer size of the deal. If regulators are inclined to define the merger in terms of the companies being a benefits management company, the merger could fail according to Dave Shove, health care analyst at BMO Capital Markets. If the FTC takes a broader look and defines the companies as sellers of pills and medications, then the deal stands a much greater chance of gaining approval.
