Medco-Express Deal Makes PBM Winners & Losers; Antitrust Issues Arise (MHS, ESRX, WAG, CVS, CHSI)

MedcoHealth Solutions Inc. (NYSE: MHS) is a company we have somewhat expected might succumb to consolidation in the arena surrounding healthcare.  Express Scripts Inc. (NASDAQ: ESRX) is offering some $29 billion to acquire Medco in a cash and stock deal.  This deal has antitrust implications, but it is in a strange situation where the acquirer (Express Scripts) is trading higher on announcing the deal and MedcoHealth is trading well under the implied buyout price.

Express Scripts is offering what will come to $71.36 on the merger, and the terms proposed call for $28.80 per share in cash and 0.81 Express shares per Medco share.  The combined entity’s boost comes from massive cost reductions for customers due to efficiencies and from streamlining the combined supply chain.

The pharmacy services and pharmacy benefits manager deal potentially leaves Walgreen Co. (NYSE: WAG) in the lurch.  Otherwise you would not see Walgreen down 3% today.  The acquisition of Drugstore.com is just too small to matter here.

On the flip side, CVS Caremark Corporation (NYSE: CVS) is up 3.3%.  Another hidden winner is Catalyst Health Solutions, Inc. (NASDAQ: CHSI) because of a relative value comparison.  Catalyst is the pharmacy benefits manager that recently acquired a PBM operation from Walgreen.

How this proposed Medco-Express merger will pan out is anyone’s guess in the end.  The company is technically leveraging up and shares are back to within about 10% of highs with a $29.5 billion market cap.  Medco is up almost 15% at $64.00 with a market cap of about $25.5 billion.

On a separate note, Express Scripts basically beat earnings estimates and reaffirmed 2011 guidance with $3.15 to $3.25 EPS on a standalone basis.

JON C. OGG