WellPoint Divests Smartly

Express Scripts, Inc. (ESRX - Snapshot Report) and WellPoint Inc. (WLP - Analyst Report) announced yesterday that they have signed a definitive agreement, under which Express Scripts will acquire WellPoint's NextRx subsidiaries for $4.675B.

WellPoint NextRx subsidiaries provide PBM services to approximately 25 million Americans and manage more than 265 million adjusted prescriptions annually. The transaction includes a 10-year contract for Express Scripts to provide services to WellPoint, following closing of the transaction.

ESRX along with CVS Caremark (CVS - Analyst Report) and Medco (MHS - Analyst Report) currently dominate the pharmacy benefits management (PBM) market, and given the respective sizes could potentially absorb any changes resulting from health care reform initiatives in Washington.

Nonetheless, we believe the recent entry of major retailer Wal-Mart (WMT - Snapshot Report) into the PBM arena will lead to increased pricing pressure over the medium term to longer term for the industry overall.

We view WLP’s divestment of NextRx, which had been flagged by the company earlier this year, is positive in terms of cash flow and streamlining of operations. We also believe the current downturn in the economy will limit medical inflation over the next 12 months, which bodes well for an improved health benefit ratio going forward, and maintain our Buy recommendation on the stock at current levels.