Blockbuster transaction

Yesterday, a blockbuster merger of two of the three largest prescription benefit managers -- Express Sripts and Medco -- valued at $29.1 billion was announced.

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.

Medco also disclosed that its $11 billion contract with United Healthcare will not be renewed after December 31, 2012. Assuming that this merger clears federal antitrust review, the big three PBMs in 2013 in order would be ESI-Medco, Caremark CVS, and United Healthcare.  United Healthcare's decision to go its own way may help the merging parties obtain anti-trust approval.

The New York Times has an interesting story about the efforts that the merging parties are making to clear anti-trust hurdles.

In Express Scripts’ case, the parties’ acquisition agreement requires Express Scripts to take substantial steps to obtain antitrust clearance. The primary requirement is that the newly combined Express Scripts-Medco must undertake the following steps to satisfy the F.T.C. if it legally makes such a request (this is Section 5.8(e) of the merger agreement):
1) The divestiture of one mail-order dispensing facility anywhere except St. Louis, where Express Scripts is based.
2) The divestiture of specialty pharmacy dispensing or infusion facilities having a net book value no more than $30 million outside of Indianapolis.
3) The divestiture of contracts that generated collectively earnings before interest, taxes, depreciation and amortization, or Ebitda, not in excess of $115 million during the last 12 months.
The agreement also states that in no event shall Express Scripts be required to divest get more than 35 million individual prescription drug claims

Investors evidently are hedging their bets about anti-trust approval because

Shares in Medco rose again on Friday, up nearly 2.8 percent at $65.61 as of early afternoon. But that’s still well below the $74.98 that Express Scripts’ stock-and-cash offer is now worth.

To be clear, Express Scripts has also reaped some benefits from its offer as well. Its shares were up nearly 3 percent at $57.01 by Friday afternoon.

But there remains significant concern about whether the deal would survive antitrust scrutiny. Express Scripts and Medco are two of the three biggest pure-play pharmacy benefit managers, and such horizontal mergers tend to be looked at more skeptically than other kinds of deals. (Deal aficionados remember that Express Scripts’ attempt to buy Caremark Rx was scuttled largely because of antitrust fears.)

Other analysts believed the deal can still win regulatory approval. 

The anti-trust review process lead by the Federal Trade Commission and the Justice Department is expected to take six months.