Express-Medco: Just What the Doctor Prescribed

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In perhaps the most obviously beneficial merger ever, Express Scripts (Nasdaq: ESRX  ) announced its plan to buy Medco Health Solutions (NYSE: MHS  ) for $29.1 billion.

That's not to say that I saw this one coming. The rivals in the pharmacy-benefits business didn't seem all that likely to tie the knot, despite the obvious synergies in a bigger-is-better industry. They're rivals, after all.

But then Medco lost contracts with California pension fund Calpers, the Federal Employees Program, and UnitedHealth Group (NYSE: UNH  ) , the latter of which made up 17% of its revenue last year. Suddenly, joining forces seemed a lot more appealing.

Pharmacy benefits managers make their money in volume, especially for their mail-order business. Sharing fixed costs over a larger number of prescriptions is just what the margin doctor ordered. All told, the companies expect to be able to cut $1 billion in costs by combining the two companies.

More importantly -- because that's only 1% of the total costs for the combined company -- the new structure should help the companies win additional contracts. The obvious loser here is CVS Caremark (NYSE: CVS  ) , which was in the No. 2 spot in terms of revenue. UnitedHealth might bring its pharmacy-benefits business back in-house and potentially try to pick up additional contracts, but Express Scripts and Medco are in a better place to handle a challenge by the health insurer as a combined company.

Medco's investors will receive $28.80 in cash and 0.81 shares of Express Scripts in the deal. Given the obvious synergies and the drive to lower health-care costs in this country, I think investors should hold onto those sharez, and perhaps even consider using the cash to buy more shares of Express Scripts.

If you'd like another opinion on what to do with your Express Scripts shares, grab a free trial to Stock Advisor, where Medco has been a pick since 2008.

Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of MedcoHealth Solutions and UnitedHealth Group. Motley Fool newsletter services have recommended buying shares of MedcoHealth Solutions and UnitedHealth Group, as well as creating a diagonal call position on UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On July 25, 2011, at 3:02 PM, blousey wrote:

    The merger between Medco and Express Scripts is a good for both companies. With the current stadgy of CVS dumping drugs at cut rate prices to clients Medco had to do something. They are the market leader in cost containment however that costs money. CVS is selling on price only in order to get people into their retail stores. They could care less if a diabetic comming in buys carmel corn with his RX for insulin. The merger will now give the merged companies buying power. The price only stradgy will now backfire on CVS. The new Express Co. will now have state of the art mail order, expertise with large clients and buying power over CVS. The jurry is out now weather CVS can handle the business they have aquired now. Without price the $29 billion purchase they made of Caremark make look like a hugh miscaluation.

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