By
Brian Orelli
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April 13, 2009
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Acquisitions in the health-care space just keep on coming, but at least this one looks a lot healthier for the acquiring company than the recent big pharma buyouts by Pfizer (NYSE: PFE ) and Merck (NYSE: MRK ) .
Today, Express Scripts (Nasdaq: ESRX ) announced that it was buying WellPoint's (NYSE: WLP ) NextRx pharmaceutical benefit management subsidiaries for almost $4.7 billion. At about 4.7 times EBITDA, it looks like a great deal for Express Scripts, which will pay for the purchase with as much as $1.4 billion of its own stock. Express Scripts is up almost 14% so far today, while WellPoint's shares have climbed nearly 7.5%.
As part of the deal, Express Scripts got a 10-year contract to provide pharmacy benefit management to WellPoint. The acquisition will increase the number of prescriptions Express Scripts fills by about 50%, pushing it ahead of rival CVS Caremark (NYSE: CVS ) and fairly close to Medco Health Solutions (NYSE: MHS ) . The resulting improved economy of scale should help Express Scripts increase margins, and it could stand to convert a fair amount of WellPoint's business into higher-margin mail-order prescriptions, further increasing profits.
WellPoint's sale of NextRX still looks shortsighted to me. Sure, WellPoint is trading at much lower multiples than it has in the past, and the insurer expects to use some of the windfall it gets from selling off NextRX to buy back shares. But it'll miss out on the continued rise of pharmacy benefit management. President Obama's plan to decrease the cost of health care -- including increasing the use of generics -- plays right into the hands of pharmacy benefit managers. UnitedHealth Group (NYSE: UNH ) , Aetna, and other insurers with in-house pharmacy benefit management should consider the long-term benefit of holding onto the business, rather than following WellPoint's lead -- despite the pressure from Wall Street.
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