Express Scripts, Inc. (NASDAQ: ESRX) and Medco Health Solutions, Inc. (NYSE: MHS) today announced that they have entered into a definitive merger agreement. Under the agreement, Medco shareholders will receive $71.36 per share in cash and stock, or $29.1 billion, based on yesterday's closing price. Medco shareholders will receive $28.80 in cash and 0.81 shares for each Medco share they own upon closing of the transaction. The agreement has been unanimously approved by the boards of directors of both companies.
The merger will combine the expertise of two complementary pharmacy benefit managers (PBMs) to accelerate efforts to lower the cost of prescription drugs and improve the quality of care for Americans.
"The cost and quality of healthcare is a great concern to all Americans; this is the right deal at the right time for the right reasons," said George Paz, chairman and CEO of Express Scripts. "Companies like ours have a responsibility to provide the leadership and resources required to drive out waste in healthcare and provide the best care in the world. The merger with Medco will accelerate our efforts to create greater efficiencies in the healthcare system and better protect American families from the rising costs of prescription medicine while improving health outcomes.
"This continues Express Scripts' commitment to strong growth, both organically and through strategic mergers and acquisitions. The opportunity with Medco represents an attractive strategic combination which will provide the opportunity to move forward with a wide array of tools and resources to accomplish our goals."
David Snow, chairman and CEO of Medco, commented: "Our organizations represent two great success stories in American business. We have each been successful in creating shareholder value because we are both passionate about driving value to our customers through service, innovation and a focus on cost and quality. We have a shared desire to improve the way healthcare is delivered in this country and I believe this creates a strong best-of-breed foundation, culturally, for a very successful merger.
"We continue to have great confidence in moving forward as a stand-alone business, however, the incremental benefits of combining with Express Scripts are both logical and compelling."
Driving Out Pharmacy-Related Waste Creates Value for the Nation's Employers, Health Plans, Unions and Government Agencies
Express Scripts and Medco believe the transaction will deliver value to clients and their members, shareholders, and other stakeholders by:
- Generating greater cost savings for patients and plan sponsors
- Creating more efficiency in the supply chain
- Closing gaps in care and achieving greater adherence through our combined behavioral and clinical approach
- Utilizing our collective expertise to better manage the cost and care associated with specialty medications
- Optimizing our ability to respond to an increasingly complex Medicare and Medicaid environment
- Enhancing mail pharmacy technology to optimize patient care and satisfaction
- Accelerating the research, development and deployment of trend management solutions to address inefficiencies in the marketplace
- Continuing to advance evidence-based and safety solutions for innovative pharmaceuticals and biosimilars
- Advancing our efforts against fraud, waste and abuse
- Attracting other leading healthcare entities to collaborate on next-generation solutions
Continuing a Legacy of Consumer Advocacy
Express Scripts has a history of serving American families and providing affordable benefits to businesses in a globally competitive marketplace to lower the cost of medications and to ensure their safety and accessibility. For example, by 2014, spending for specialty medicines for diseases such as cancer, multiple sclerosis and hepatitis is estimated to comprise 40% of U.S. drug spend. By combining each organization's innovative specialty patient care programs, Express Scripts will be well positioned to meet the challenges in this critical area of healthcare.
The pharmaceutical landscape is dynamic and complex. Change is constant and challenges remain in product safety, efficacy, distribution channels and the overall economics. Consumer advocacy is required. The combined company will be well equipped to create more efficiency in the supply chain to better serve employers and the American families that utilize their pharmacy benefit.
Market Dynamics / Competition
Express Scripts and Medco believe they will be successful working through the regulatory review process. Competition in the pharmacy benefit management (PBM) business is intense. Competition comes from several sources, including retail pharmacy PBMs, managed care PBMs, independent PBMs and specialized PBMs. The PBM business will continue to remain competitive after this transaction, as PBMs will continually drive for greater efficiencies to provide better service and pricing to their customers.
Terms of the Transaction
Under the terms of the agreement, Express Scripts shall form a new holding company called Express Scripts Holding Company. Medco shareholders will receive $28.80 in cash and 0.81 shares of Express Scripts Holding Company for each Medco share they own upon closing of the transaction, and Express Scripts shareholders will become shareholders of Express Scripts Holding Company receiving one share of the new holding company for each share of Express Scripts that they own upon closing. Based on the closing price of Express Scripts stock of $52.54 as of July 20, 2011, the stock component is valued at $42.56 per share, which, when combined with the $28.80 in cash brings the total value per share to Medco shareholders of $71.36. This represents a premium to Medco shareholders of 28 percent over Medco's closing share price on July 20, 2011. Upon closing of the transaction, Express Scripts shareholders are expected to own approximately 59 percent of the combined company and Medco shareholders are expected to own approximately 41 percent.
The transaction provides certain value to Medco shareholders through the cash component, as well as continued participation in the future prospects expected to result from the combination through their ownership of approximately 41 percent of Express Scripts Holding Company shares.
The merger is subject to regulatory clearance and Express Scripts' and Medco's shareholder approvals and other customary closing conditions. The terms of the merger agreement provide for the payment of termination fees in certain circumstances, but not in connection with the failure to obtain regulatory clearance. The transaction is expected to close in the first half of 2012.
The corporate headquarters will be in St. Louis and George Paz will serve as chairman and CEO of the combined organization. The Board of Directors will be expanded to include two current independent Medco board members.
The new company will draw upon the collective talent at both companies. The combination of Express Scripts and Medco will create a best-of-breed enterprise that will harness the experience and expertise of each organization to ensure that customers and patients benefit fully from their complementary capabilities to lower the total cost of healthcare, drive quality outcomes and accelerate the delivery of advanced healthcare solutions.
Financial Considerations
Due diligence to date has identified estimated synergies of $1 billion once fully integrated, which represents approximately 1% of the combined company's costs. The transaction is expected to be slightly accretive to EPS (excluding integration and deal-related costs and charges) in the first full year after closing and moderately accretive once fully integrated.
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