Express Scripts Signs Deal to Acquire PBM from SB

Article excerpt

The old business adage that all rumors have a grain of truth to them proved itself recently when SmithKline Beecham revealed that it would sell off Diversified Pharmaceutical Services (DPS), its pharmacy benefit management arm, to Express Scripts, another large PBM. A sale had been rumored for more than a week, although the buyer was expected to be a drugstore chain keen on keeping pace with Rite Aid, which bought PCS from Eli Lilly & Co. in January.

According to Diana Baumohl, v.p.-strategic planning for Express Scripts, DPS was an attractive acquisition prospect because of the volume of business the company has been doing in particular segments of managed care. Combined, Express Scripts and DPS cover approximately 47 million lives and manage nearly $10 billion in annual drug spending. Upon consummation of the deal, the new company will be the third-largest PBM in the country, behind PCS and Merck-Medco.

It was really "a significant step in terms of market share pickup for us," Baumohl said, adding that the combined company would be "the single largest provider of PBM services to the health maintenance organization sector. We think that's important. It's the fastest-growing area within methods of health insurance." The acquisition also strengthens the company's position in negotiating rebates "because HMOs are typically more aggressive in terms of plan design changes and understanding the ramifications of formularies," Baumohl said.

Market conditions indicated that buying DPS might be a good idea, as well; the price ($700 million) was right, as it was when Express Scripts bought ValueRx for $445 million last April. "Therefore [we could] continue to deliver shareholder value. At the same time, we think strategically it positions the company better," she said. "Acquisitions have always been a part of our growth strategy. Most important, we are comfortable enough at this point, given where we were with our integration process of ValueRx, that we could successfully integrate this property into our company.

The deal comes on the heels of Rite Aid's muchpublicized acquisition of PCS from Eli Lilly In spite of the fact that both deals had drugmakers selling their PBM businesses at a loss, Baumohl dismissed the notion that manufacturer ownership may not be feasible in the PBM market. …