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TheStreet Open House

5 Big Deals That May Flop in 2012

5. Medco Health Solution's $29 billion sale to Express Scripts.

In July, Express Scripts (ESRX - Get Report) announced a deal to buy Medco Health Solutions (MHS) for $29 billion in a deal to combine two of the largest pharmacy benefits managers in the U.S. However, the deal is facing antitrust scrutiny, which jeopardizes its outcome.

Currently, Medco's stock is more than 10% below the $71.36 a share purchase price, signaling investor uncertainty over the deal, or an easy stock return if it's completed.

In September, a House of Representatives subcommittee opened hearings to look at potential anti-competitive concerns raised by the tie-up, which would create the largest U.S manager of prescription drug benefits and eliminate one of Express Script's biggest competitors. The Congressional scrutiny prompted Medco shares to drop below $50 a share, over 30% below the offer price.

In December, Senate Judiciary Committee held a panel to look at the merger. Ahead of the hearing, Sen. Saxby Chambliss (R., Ga) and Sen. Johnny Isakson (R., Ga) urged regulators like the Federal Trade commission to do a "thorough and complete investigation" in their merger review.

However, during the Senate hearing, Express Scripts CEO George Paz argued that the company would have a sub 30% market share of corporate and government drug benefit plans and that the merger was prompted by Medco's loss of its key Federal Employees Health Benefits Program and California Public Employees' Retirement System accounts.

Nevertheless, the tie up would create a benefits giant with more than 115 million customers and one out of every three prescriptions in the U.S. The combined company would also have $110 billion in annual revenue, eclipsing the industry second CVS Caremark's (CVS - Get Report) $96 billion in annual revenue.

To antitrust calls about the merged company's customer base and earnings power, Medco Chief Executive David Snow and Paz of Express Scripts maintain that the pharmacy benefits manager business is highly fragmented and that the combination will lower costs for consumers, a key point in antitrust dealings.

In January, Deutsche Bank analyst Ross Muken wrote that he expected the merger to be approved, occurring in the vicinity of Mar. 31, slightly ahead of management's end of June deal closing estimate. Meanwhile, UBS analyst Steven Valiquette raised his 2013 price target for Express Scripts to $66 on increasing earnings per share a result of the deal, which he expects will be completed.

Nevertheless, the fear of an antitrust war remains, especially as the largest merger in 2011 was iced and others face inquiry.

Concentration battles have also been waged in the benefits sector. In 2007, Express Scripts ended a $26 billion battle for Caremark Rx on antitrust concerns, paving the way for the company's merger with CVS. In January, CVS Caremark agreed to pay $5 million to settle charges by the FTC that after the merger, the company unfairly increased prescription drug costs. In the settlement, the FTC did not find that the merger led to anticompetitive pricing.

To be seen is whether that tie-up will have any impact on the Express Scripts and Medco Health Solutions merger. A merger approval would be an immediate boost to Medco share prices, even as the stock posted strong end of year gains.

For more on Express Scripts, see 8 big acquirers of 2011. See TheStreet's 3 healthcare buys for 2012 for more on the sector.

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