Express Scripts Expansion

If the potential merger between Express Scripts and MedcoHealth passes the antitrust approval process it will be good news for customers, but bad for pharmaceutical companies and drugstores.

This article published with permission from InvestmentU.com.

(Nasdaq: ESRX) announced this week that it will potentially combine forces with rival MedcoHealth (NYSE: MHS) to form one massive pharmacy benefit management (PBM) company.

Express Scripts

Express Scripts looks to carry much more weight in future negotiations as it absorbs its largest competition and doubles its market share to approximately 30%. CVS Caremark (NYSE: CVS) would run the next largest PBM with a 15% market share.

The

Wall Street Journal

The move will generate antitrust attention and will take some time to finalize, but an approved deal would send ripples through the pharmaceutical industry. reported that the two companies process about 35% of all U.S. prescriptions.

Express Scripts and MedcoHealth: The Facts

Here are some notes on the potential Express Scripts—MedcoHealth deal:

  • Reuters reports the antitrust approval process will take about six months. According to the same report, some analysts are skeptical that the deal will be finalized, comparing the move to a merger of MasterCard (NYSE: MA) and Visa (NYSE: V).
  • On the flip side, The Wall Street Journal’s report sees little opposition from antitrust regulators, considering that overall drug output isn’t likely to be affected and consumers may actually benefit. Drugstores may be the biggest obstacle, as they’ll stand to be hurt the most.
  • Express Scripts will issue about $14 billion in new debt to help finance the $29.1 billion deal. Some of the costs will be countered by Express Scripts saving about $1 billion in annual costs due to the merger. MedcoHealth was actually slightly larger than Express Scripts in 2010, but it recently lost out in renewing contracts with two of its biggest customers.
  • The profitability of PBMs is supposed to increase between 2012 and 2015. This is due to a slew of name-brand drugs, such as Lipitor, being eligible for generic production. The horizon doesn’t look so green after 2015 though, which is why Express Scripts feels it needs to combine its efforts with MedcoHealth.

What Does This Mean for Investors?

Last month, we talked about how Walgreen Co. (NYSE: WAG) ended its relationship with Express Scripts over a dispute in medication pricing. Express Scripts, which provides nearly 7% of Walgreen’s business, was trying to get the drugstore to lower its margin on medicine.

Walgreen’s declined and decided to look elsewhere for a PBM relationship. Now drugstores like Walgreen’s may have much less choice in who they deal with. Increased clout and size would shrink margins for drugstores like Walgreen Co. and Rite Aid Corp. (NYSE: RAD).

The Wall Street Journal

The merger would also hurt pharmaceutical company margins. reported that MedcoHealth reportedly collected $5.8 billion in rebates from manufacturers. Express Scripts likely collected a similar amount. With combined resources and less competition, these rebates may balloon further. Companies like Pfizer (NYSE: PFE) and Merck (NYSE: MRK) would likely see shrinking profit margins.

Good for Customers, Bad for Business

Express Scripts vies that this merger would be good for the customer. It would allow the company, which serves as a middleman, to have much more clout in negotiations with “Big Pharma” and drugstores. While this may help consumers, it will hurt businesses and ultimately their investors.

If this deal does finalize it may be time to reassess investments in pharmaceutical companies and drugstores and potentially hop on the PBM bandwagon.

Justin Dove is a part of the Research Team at InvestmentU.com.See more articles by Justin here.