Pharmacy benefits manager Express Scripts buys peer NextRx for $4.68 billion

Shares of pharmacy benefits management companies and health insurers rose Monday after Express Scripts Inc, currently the third largest pharmacy benefits manager (PBM), agreed to buy WellPoint Inc.'s PBM business.

Express Scripts said it will pay about $4.68 billion in cash and stock for WellPoint's NextRx unit. Analysts said similar deals could follow, which would benefit both the pharmacy benefits management companies and the insurers. 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 per cent of the company's total operating profit before taxes.

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.

In terms of prescriptions, the largest PBM in the US is Medco Health Solutions Inc. Express Scripts will become the second largest - eclipsing CVS Caremark Corp. - by buying NextRx.
Shares of both Express Scripts and WellPoint climbed steeply 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 CFO Wayne DeVeydt said.

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.