Can Express Scripts Capitalize on Medco Buy?

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 |  Includes: CVS, ESRX, MHS, UNH, WBA
by: Dana Blankenhorn

The business of handling corporate drug plans seemed to become a two-man game today as Express Scripts (NASDAQ:ESRX) announced it would buy Medco Health Solutions (NYSE:MHS) for $29.1 billion, about one-third of it cash. Medco stockholders will receive $28.80 in cash and 0.81 of an Express Scripts share for each Medco share, a 28% premium on Medco's Wednesday close of $55.78. The result will give Medco shareholders more than one-third of the combined company.

Express Scripts rose 9.2% in pre-market on the move, as investors bet it can use its new position to squeeze drug companies for the best prices, and big health plans for the best deals. Medco was under pressure to do something after UnitedHealth said it would leave the company for its own OptumHealth plan in 2013.

The other big player in this game is CVS's Caremark unit. The line-up – CVS, Express Scripts, OptumHealth – is a good illustration of how this business is changing, squeezed between big retailers like CVS on one side and health plans like UnitedHealth (NYSE:UNH) on the other.

Walgreens (WAG), the other big drug store chain, has a long-running feud with Express Scripts, with Walgreens announcing just last month it would drop Express Scripts after it buys Drugstore.com.

ExpressScripts thinks that cross-industry competition will win it a green light from regulators but it may not win it a free hand.

Walgreens may now cooperate with smaller chains to fight efforts aimed at cutting them out of the managed drug business. Data, not drugs, is the lifeblood of this business, and protecting data means accepting regulation. Express Scripts itself got a taste of the need for this in 2008, when a blackmail attempt was made against it.

Regulation is the bearish case for the deal, but there is also a bullish case few are mentioning. That's because Medco has made a series of deals over the last few years aimed at exporting its business model to Europe, claiming it can cut insurers' drug costs there.

If Medco can execute its global strategy on behalf of Express Scripts, it won't matter much what U.S. regulators do. The deal will look brilliant.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.