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Express Scripts to buy WellPoint units for $4.68B

NEW YORK – Prescription benefits manager Express Scripts Inc. said Monday it is buying health insurer WellPoint Inc.’s NextRX pharmaceutical benefit management subsidiaries for just under $4.68 billion in cash and stock.

The deal gives St. Louis-based Express Scripts, the third-largest pharmacy benefits manager with about 506 million prescriptions filled in 2008, an additional 265 million. That would pull it close to the No. 1 stand-alone company, Medco Health Solutions Inc.

CVS Caremark, which also operates retail stores and pharmacies, managed about 633 million prescriptions in 2008, and would fall to the No. 3 spot after the deal closes.

The transaction includes a 10-year contract for Express Scripts to provide services to WellPoint following closing of the transaction. The companies expect the deal to close in the second half of 2009.

Shares of both stock rose on word of the deal.

The cash part of the deal includes a mixture of cash on hand and debt financing.

“Our aligned business model, combined with the complementary expertise and capabilities of WellPoint, creates significant opportunities for accelerated growth for both organizations,” Express Scripts Chairman and Chief Executive George Paz said in a statement.

The NextRx subsidiaries provide pharmaceutical benefit management services to about 25 million Americans.

WellPoint is the nation’s largest insurer by enrollment and is coming off of a rough 2008. The company and its peers have been hurt by investment losses and rising unemployment due to the recession. Higher medical costs have also been eating away at profit.

In 2008, WellPoint’s enrollment rose less than 1 percent while profit fell more than 25 percent. The company has warned that rising unemployment and falling enrollment will hurt revenue in 2009.

In February, the company said medical enrollment could fall 3 percent, or by about 1 million members, to 34 million people, while fully insured enrollment would drop by an estimated 6 percent to 15.5 million.

The deal gives WellPoint a good price that bodes well for other insurers with PBM businesses, including Aetna, Cigna and UnitedHealth, said Wachovia Capital Markets analyst Matt Perry in a note to investors.

Express Scripts has been benefiting from the use of generic drugs, which are more profitable for the company than brand-name drugs. During the fourth quarter of 2008, generic drug use rose to 67.3 percent from 63.7 percent for the company. In 2008, profit rose nearly 37 percent.

Pharmacy benefits managers, who manage prescription drug coverage, have generally done well in the recession as more people switch to generics or look to save money by getting 90-day prescriptions filled by mail.

Its key competitor, Medco Health Solutions Inc., also gained ground in 2008, with profit rising 21 percent. The Franklin Lakes, N.J.-based company had nearly double the revenue of Express Scripts in 2008. But, NextRx, which is the fourth-largest prescription benefits manager in the nation, will give Express Scripts another $1 billion in annual gross earnings, the company said.

Express Scripts shares climbed $3.24, or 6.6 percent, to $52.40 in morning trading, while Wellpoint shares gained $2.75, or 6.6 percent, to $43.09.

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