This morning pharmacy benefit manager Express Scripts (NASDAQ:ESRX) announced that it will buy out rival Medco Health Solutions (NYSE:MHS) for $29.1B in cash and stock, a 28% premium over Medco’s trading price at last close. The deal is the largest merger in the healthcare sector (NYSE:XLV) this year and the second largest overall. Both stocks have benefited from the news, with ESRX up 6.31% and MHS up 16.21%. Assuming the FTC stamps its mark of approval on the deal, what implications does the merger hold for related healthcare companies?
Barron’s report that the stocks of leading drug retailers, Walgreens (NYSE:WAG) and CVS (NYSE:CVS) are moving in opposite directions following the break of the news this morning. CVS stock has jumped 2.65% today while WAG is lagging down -4.59%, so why the split? According to Barron’s, investors think that the merger may give CVS (which has its own benefit management service, ‘caremark’) and opportunity to steal some major contracts from Express-Medco, as it already has won two big deals, with CALPERS and the Blue Cross Blue Shield association, from the two this May.
Walgreens’ on the other hand does not run its own benefit management service, and also has the misfortune of just losing its contract with Express (NASDAQ:ESRX), which means the company might be hard pressed to find a new benefit service going forward.