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St. Louis-based Express Scripts to buy WellPoint subsidiaries for $4.68 billion

Monday, April 13, 2009 | 4:11 p.m. CDT; updated 5:01 p.m. CDT, Monday, April 13, 2009

INDIANAPOLIS — Express Scripts Inc. stands to gain considerable negotiating clout from its $4.68 billion deal to buy the pharmacy benefits management businesses of health insurer WellPoint Inc., and experts say that could mean savings for customers buying prescription drugs.

St. Louis-based Express Scripts said Monday it planned to buy WellPoint's NextRx subsidiaries in a cash-and-stock deal. Express Scripts is the third-largest pharmacy benefits manager, and the deal likely would vault it past No. 2 CVS Caremark and push it close to the top stand-alone company, Medco Health Solutions Inc., based on prescriptions managed.

The increased bargaining power that comes from that size should translate into better pricing for existing employer customers and more aggressive pricing for prospective new ones, said David Dross, a principal with the human resources consulting firm Mercer.

That could help employees by lowering co-payments for drugs or softening increases in the contributions they have to make to their health plans. But Dross said that depends on how or if the employer passes along any savings.

Pharmacy benefits managers pay prescription drug claims through large networks of chain pharmacies and independent drug stores. They also manage mail-order businesses that ship drugs directly to patients, a practice that is becoming popular for people who need steady medications to deal with chronic conditions.

Shares of both Express Scripts and WellPoint climbed Monday after the deal was announced, as several analysts said they saw positives for both companies.

WellPoint will receive at least $3.28 billion in cash and the balance in Express Scripts stock. The insurer will use about $2 billion of that to buy back shares.

"The expected share buyback program reflects our belief that our stock is undervalued based on the company's fundamentally strong financial position, including predictable earnings, including predicable earnings with strong cash flow from operations," WellPoint Chief Financial Officer Wayne DeVeydt said during a conference call with analysts.

The transaction also includes a 10-year contract for Express Scripts to provide services to WellPoint following closing of the transaction.

The NextRx subsidiaries provide services to about 25 million WellPoint customers. WellPoint executives declined to say how much revenue the business generates, but they did say it represented less 10 percent of the company's total operating profit before taxes.

Investors smiled on the deal. Express Scripts shares rose 15.5 percent, or $7.64, to close at $56.81 Monday. WellPoint stock climbed more than 8 percent, or $3.24, to $43.58.

Deutsche Bank analyst Scott Fidel said in a Monday morning note that investors have never given managed-care organizations much value in their stock prices for pharmacy benefits businesses. He said this deal "should help unlock some value for (WellPoint's) stock."

Express Scripts could grow from about 500 million annual prescriptions filled to as many as 750 million, noted Arthur Henderson, an analyst with Jefferies & Co.

"That's a huge amount of purchasing leverage that can benefit your entire book of business," he said.

Analysts also say Express Scripts should increase the percentage of NextRx business delivered through the mail. That cuts out retail pharmacy costs like dispensing fees and improves the management of chronic conditions.

Express Scripts has been "fantastic" at moving patients from branded medications to less-expensive generic versions, said Tony Perkins, who covers the company with First Analysis Securities Corp. He expects the company to apply that skill to its new customers from WellPoint.

Henderson said the generic conversions will help employers as well as the employees on a company-sponsored health plan.

"You save money and then your employer saves money because they're not having to spend the amount that's pre-stipulated for that branded medication," he said. "This (deal) really makes sense."

During the fourth quarter of 2008, generic drug use rose to 67.3 percent from 63.7 percent for Express Scripts. In 2008, profit rose nearly 37 percent.

Express Scripts expects the deal to produce $1 billion in annual earnings before interest, taxes, depreciation and amortization. The company will use cash on hand, debt financing and up to $1.4 billion in stock to pay for the deal, said David Myers, vice president of investor relations.

The companies expect it to close in the second half of 2009.


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