Recently, Federal Trade Commission (FTC) requested both Medco Health Solutions (MHS) and Express Script (ESRX) to submit additional information regarding the pending acquisition deal. Under the current circumstances, the completion of the proposed acquisition can get postponed by approximately 30 days. Despite the uncertainty regarding the delay, Medco anticipates to close the deal by the first half of 2012. However, the deal is also subject to approval of the stockholders of both Express Scripts and Medco.
Earlier, in July 2011, Medco announced that it will be acquired by Express Scripts for $29.1 billion in cash and stock. As per the terms of the agreement, each shareholder of Medco will receive $28.80 in cash and 0.81 shares of Express Scripts, representing a total value of $71.36 per Medco share.
With the completion of the deal, Express Scripts Holding Company will be formed wherein 59% of the holding would lie with the shareholders of Express Scripts. The new combined entity will be headquartered in St. Louis, Missouri, the current home of Express Scripts.
Consistent with its series of contract losses over the last few months, in July 2011, Medco failed to renew its PBM contract with one of its biggest client UnitedHealth (UNH) despite arduous negotiations. The existing agreement is set to expire in December 2012.
The recent contract losses include the Federal Employee Program (FEP) contract in May 2011, the Medicare Part D business of Universal American as well as the biggest US public pension fund California Public Employees’ Retirement System (CalPERS), all to CVS Caremark (CVS). The FEP contract generated nearly $3 billion in annual revenues (including approximately 9.8 million mail order prescriptions) or about 4.5% of the company’s total sales in FY10. In August 2011, Medco also lost its PBM contract with Blue Cross and Blue Shield.
Despite undertaking various efforts, Medco was not able to successfully overcome these hindrances. Medco’s proposed takeover by Express Scripts is the biggest in the health care industry. Although we remain concerned about the uncertainty related to the successful completion of the deal based on the potential anti-trust challenges from the FTC, we expect the combined entity to pose a major challenge to its peers by becoming the largest PBM provider, post acquisition.
We are currently Neutral on Medco. However, the upside potential of the stock is limited.
CVS CAREMARK CP (CVS): Free Stock Analysis Report
EXPRESS SCRIPTS (ESRX): Free Stock Analysis Report
MEDCO HLTH SOL (MHS): Free Stock Analysis Report
UNITEDHEALTH GP (UNH): Free Stock Analysis Report
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment