Recently, Medco Health Solutions (MHS) and Express Script (ESRX) asserted the benefits of their pending merger for patients, public as well as private purchasers before the House Judiciary Subcommittee on Intellectual Property, Competition and the Internet. Through the joint venture, both the companies intend to provide a more safe and affordable pharmaceutical coverage by making prescription drugs more reachable for senior citizens, disabled and working families.
Additionally, Medco and Express Script expect the deal to be beneficial for small businesses and large employers in a difficult global economy. They also expect this to deliver real savings to Medicare and Medicaid beneficiaries and provide a strong base for US economy.
In July this year, 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 Express Scripts’ shareholders will hold a 59% stake in the combined entity. The new combined entity will be headquartered in St. Louis, Missouri, the current home of Express Scripts. If the deal goes through, the combined company will emerge as a dominant player in the PBM segment.
However, uncertainty related to potential antitrust challenges from the Federal Trade Commission (FTC) persists. Recently, FTC requested both Medco and Express Script to submit additional information regarding the pending acquisition deal. Despite the uncertainty regarding the delay, Medco anticipates to close the deal by the first half of 2012.
Consistent with its series of contract losses over the last few months, in July 2011, Medco failed to renew its PBM contract with its biggest client UnitedHealth (UNH) despite arduous negotiations. Other 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).
Despite undertaking various efforts, Medco was not able to successfully overcome these hindrances. Medco and Express Script both retain short-term Zacks #3 Rank (Hold) that corresponds with our long-term ‘Neutral’ recommendation on both the stocks. However, the upside potential of Medco 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
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