The companies manage prescription drug benefits and look for ways to cut
costs for health plan sponsors and members. Combined, they handled more than 1.7
billion prescriptions in 2010 and reported almost $110 billion in revenue. The
new Express Scripts Holding Inc. could use its size to negotiate bigger
discounts on drug prices, although it would also have less competition than
Medco and Express Scripts individually.

Express Scripts of St. Louis, will buy its rival for $71.36 per share.
Medco’s shareholders will get $28.80 per share in cash and 0.81 shares of
Express Scripts for each share they own. That’s a premium of 27.9 percent based
on Medco’s closing price of $55.78 Wednesday. Shares of the Franklin Lakes, New
Jersey, company have traded between $43.45 and $65.39 in the last year.

Medco shares rose $10.20, or 18 percent, to $65.98 in early trading, while
Express Scripts shares gained $3.81, or 7.3 percent, to $56.35.

The surprise announcement follows a string of contract losses for Medco, the
largest PBM in terms of revenue. On Thursday the company said it has booked
about $800 million in new business for 2012, which is far less than the business
it has lost. It also announced that UnitedHealthcare decided not to renew a
contract that ends on Dec. 31, 2012.

So far this year, Medco has said the Federal Employees Health Benefit
Program, the California Public Employees’ Retirement System, and a Universal
American unit would take their business elsewhere after their current contracts
expire. The federal employee benefits contract alone brought Medco about $3
billion in annual revenue.

The deal is expected to close in the first half of 2012, pending approval
from regulators and from shareholders of both companies. Express Scripts
shareholders will own 59 percent of the new company, which will be based in St.
Louis. Express Scripts Chairman and CEO George Paz will lead the larger Express
Scripts, and the board of directors will expand to include two independent Medco
directors.

Including the Medco acquisition, Paz said Express Scripts has made seven
major deals since 1997, when his tenure began. He said three of those deals
doubled the size of the company.

The companies said they have identified $1 billion in potential cost savings
from the combination, which amounts to 1 percent of the combined company’s
costs. They said the deal will boost their profits slightly in the first full
year after closing if integration costs and other expenses are excluded. The
benefit is expected to increase in future years.

Express Scripts’ largest competitor after the deal would be drugstore and PBM
CVS Caremark Corp., which handled about 585 million claims in 2010.

Both Express Scripts and Medco also reported quarterly results.