Top Stories
Top Stories
Health and Science

Express Scripts' $3.6 billion deal is 'a necessity' to fend off competition

Key Points
  • Express Scripts shares fell nearly 2 percent Tuesday after saying it would buy medical benefits firm eviCore for $3.6 billion.
  • The deal is aimed at bolstering Express Scripts' position in a tough benefits market.
  • The acquisition helps Express Scripts expand beyond its prescription drug benefit services.
Tim Wentworth, CEO of Express Scripts.

Shares of Express Scripts came under pressure Tuesday, after the nation's largest pharmacy benefits manager announced a deal to buy medical benefits firm eviCore for $3.6 billion in an effort to bolster its position in a tough benefits market.

Express Scripts said the acquisition will allow it to expand beyond its prescription drug benefit services. EviCore does medical benefit cost management for a number of major insurers covering 100 million people; the services it targets include radiology, cancer treatment and post-acute care benefits.

"Together with eviCore, Express Scripts will be an even more powerful partner in managing costs for patients and payers," said CEO Tim Wentworth in a statement announcing the deal. "By further strengthening our independent model and creating numerous opportunities for growth, the acquisition… will deliver value for our clients, patients, providers, and shareholders."

Analysts have long speculated that Express Scripts could be involved in some sort of merger deal, but more likely as an acquisition target rather than as an acquirer. Amazon has been among those mentioned as a potential suitor; sources have told CNBC the retail giant is considering entering the pharmacy benefits market.

But beyond the competitive pressure from new entrants and old rivals like CVS and UnitedHealth's Optum Rx, Express Scripts faces a major contract headwind in 2019. That's when it is expected to lose health insurer Anthem as a customer, after a continuing dispute over pricing. Anthem's business accounted for 17 percent of Express Scripts' revenues last year.

The pharmacy benefits manager also faces four other key renewals with large regional Blue Cross/Blue Shield insurers in 2019. Analysts say the eviCore deal would serve as a strategic defensive move to bolster Express Scripts' ability to win over clients with added services.

"We believe the acquisition will help position [Express Scripts] for the continued shift to a value- based care world and view the added platform and lives as a significant positive… heading into the 2018 selling season which is looking to be a competitive period," wrote David Larsen, a Leerink Partners analyst, who rates Express Scripts shares at market perform.

"We believe eviCore is a good fit," said RBC analyst George Hill in a note to clients. "The deal should enable cross-selling opportunities in both [Express Scripts'] and eviCore's customer bases, though we note that the eviCore therapeutic end markets are much more fragmented."

While the company expects that the deal will close in the fourth quarter of this year and add to earnings in 2018, analysts say the earnings boost may not be as lucrative to shareholders in the short run as share buybacks.

"While we agree that share repurchase is likely more accretive to 2018 EPS, [Express Scripts'] more pressing challenge is business growth, making deals like eviCore a necessity," said RBC's Hill, who has a sector perform rating on Express Scripts shares.

Express Scripts is buying eviCore from private equity investors that include General Atlantic, TA Associates, and Ridgemont Equity Partners. The company says it will offer more details on the acquisition during its earnings conference call later this month.

WATCH: Express Scripts in line with expectations

Express Scripts in line with expectations