- The Washington Times - Monday, April 13, 2009

NEW YORK (AP) - Prescription benefits manager Express Scripts Inc. said Monday it is buying health insurer WellPoint Inc.’s NextRX pharmaceutical benefit management subsidiaries for just under $4.68 billion in cash and stock.

The deal will give St. Louis-based Express Scripts, the third-largest pharmacy benefits manager with about 506 million prescriptions filled in 2008, an additional 265 million. That would pull it close to the No. 1 stand-alone company, Medco Health Solutions Inc., and could help give Express Scripts pricing power when it buys drugs.

CVS Caremark, which also operates retail stores and pharmacies, managed about 633 million prescriptions in 2008, and would fall to the No. 3 spot after the deal closes.

The companies expect the deal to close in the second half of 2009. Express Scripts will use cash on hand, committed debt financing and up to $1.4 billion in stock to pay for the deal, said David Myers, vice president of investor relations.

Investors greeted the news positively. Express Scripts shares rose more than 9 percent, or $4.46, to $53.63 in Monday morning trading. WellPoint shares rose more than 5 percent, or $2.15, to $42.55.

WellPoint Chief Financial Officer Wayne DeVeydt said his company 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 repurchase shares and about $1.8 billion on taxes and costs tied to the deal.

About $500 million will go toward paying down debt, and $375 million will be slated for “general corporate purposes,” which include product development and acquisitions.

“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,” DeVeydt said during a conference call with analysts.

The NextRx subsidiaries provide pharmaceutical benefit management 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 gain.

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

Analysts have said the WellPoint business generated a lower margin than larger pharmacy benefits competitors.

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.”

The deal gives WellPoint a good price that bodes well for other insurers with PBM businesses, including Aetna, Cigna and UnitedHealth, said Wachovia Capital Markets analyst Matt Perry in a note to investors.

Express scripts expects the deal is expected to produce $1 billion in annual earnings before interest, taxes, depreciation and amortization.

WellPoint is the nation’s largest insurer by enrollment and is coming off of a rough 2008. The company and its peers have been hurt by investment losses and rising unemployment due to the recession. Higher medical costs have also been eating away at profit.

In 2008, WellPoint’s enrollment rose less than 1 percent while profit fell more than 25 percent. The company has warned that rising unemployment and falling enrollment will hurt revenue in 2009.

Express Scripts has been benefiting from the use of generic drugs, which are more profitable for the company than brand-name drugs. During the fourth quarter of 2008, generic drug use rose to 67.3 percent from 63.7 percent for the company. In 2008, profit rose nearly 37 percent.

Pharmacy benefits managers, who manage prescription drug coverage, have generally done well in the recession as more people switch to generics or look to save money by getting 90-day prescriptions filled by mail.

Its key competitor, Medco Health Solutions Inc., also gained ground in 2008, with profit rising 21 percent. The Franklin Lakes, N.J.-based company had nearly double the revenue of Express Scripts in 2008.

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AP Business Writer Tom Murphy in Indianapolis contributed to this report.

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