Express Scripts-Medco deal will shake up pharma distribution

There have been three big retail pharmacy chains (CVS, Walgreens, Rite-Aid), three big PBMs (Caremark, Medco, Express Scripts) and three major wholesalers (McKesson, Cardinal, AmerisourceBergen). The lineups got a little strange in 2007 when CVS and Caremark merged (with CVS beating off a competing offer from Express Scripts); now it gets even more fraught as Express and Medco hook up, in the just-announced $29.1-billion deal, expected to close in the first half of 2012.

Express Scripts (actually the smaller company by revenue) will absorb Medco, with Express Scripts shareholders being the majority owner of the combined company. The headquarters will remain at Express Scripts’ in St. Louis, and George Paz, CEO of Express Scripts, will run the combined company. Express Scripts expects to wring $1B in supply chain efficiencies through the consolidation—and it’s worth noting that Medco has nearly twice as many employees as Express Scripts. When (and if) the dust settles on the deal, the combination will process a third of all US prescriptions, while CVS Caremark will have around 21%, according to Wall Street analysts. While such supply chain efficiencies are undoubtedly achievable, the bigger opportunity is pressuring manufacturers on drug costs.

The musical-chairs dance among these trios is already under way. Walgreens and Express Scripts had earlier announced an end to an agreement where Express Scripts prescriptions could be filled at Walgreens retail outlets. Medco had lost a couple major contracts (to CVS Caremark) leading up to the merger announcement. Medco also lost a contract with UnitedHealth, a leading managed-care organization that will operate its pharmacy benefits program on its own (a fact that will be cited in justifying the merger to the Federal Trade Commission, looking at the antitrust aspects of the deal). Express Scripts has been served primarily by Cardinal Health, while Medco has been served primarily by AmerisourceBergen (and represents fifth of its business). Steve Collis, newly appointed CEO of AmerisourceBergen, told the 1,600 independent-pharmacy attendees at its National Healthcare Conference this week that “we will help you navigate the PBM claims-processing volatility.”

Ross Muken, a Deutsche Bank analyst, told the New York Times that “there’s going to be a pretty heavy lobby from the pharma industry” against the deal, in part because it creates “an entity with a lot of power in the supply chain,” but still expected the deal to go through.