Rite Aid to Buy Lilly's Benefits Unit for $1.6 Bln (Update2)
Bloomberg News
November 17, 1998, 9:49 a.m. ET
Rite Aid to Buy Lilly's Benefits Unit for $1.6 Bln (Update2)
(Adds analyst's comments in 4th and 9th paragraphs, share
prices.)
Camp Hill, Pennsylvania, Nov. 17 (Bloomberg) -- Rite Aid
Corp., the No. 3 U.S. drugstore operator, said it will buy Eli
Lilly & Co.'s PCS Health Systems unit for $1.6 billion, moving to
become a leading supplier of pharmaceuticals to health plans.
Rite Aid will pay $1.5 billion in cash, and Lilly will
retain $100 million of cash from PCS.
The acquisition will allow Rite Aid to expand in a high-
growth industry where it now has a small presence, gaining an
edge on rivals Walgreen Co., CVS Corp. and J.C. Penney's Eckerd
unit, which have their own pharmacy benefits subsidiaries.
''This is a good way for them to boost their volume on the
pharmacy side,'' said Robert Izmirlian, an S&P Equity Group
analyst with an ''accumulate'' rating on Rite Aid. ''It increases
the number of prescriptions, and gets more people into their
stores, which will help their other sales.''
The purchase is expected to close in the first quarter of
1999, the companies said.
While Rite Aid has been aggressively buying other drugstore
chains, the purchase of PCS moves it into a portion of the
drug retailing business where there is no clear No. 1.
''No one in the drug store industry has a major leadership
position,'' in offering prescription benefits plans, said Martin
Grass, chairman and chief executive of Camp Hill, Pennsylvania-
based Rite Aid. ''PCS now provides to more people than any other
pharmacy benefit manager.''
Pharmacy benefits managers such as PCS negotiate low prices
with drug companies, then sell the drugs in bulk to health
insurance plans.
Better Prices
''They are going to have so many more customers, they are
going to be able to give better prices to the HMOs,'' Izmirlian
said.
Rite Aid shares rose 3/16 to 44 5/8 in early trading. Lilly
rose 1 1/16 to 84 7/8.
For Indianapolis-based Lilly, whose successes include the
antidepressant Prozac, the transaction means it can concentrate
on its pharmaceuticals business and exit a business that didn't
perform as the company expected. Lilly bought PCS from McKesson
Corp. in 1994 for $4 billion to match similar purchases by rivals
Merck & Co. and SmithKline Beecham Plc. Lilly had the least
success of the three, analysts said.
''Lilly was the last in line and arguably paid a big premium
for what was the last major pharmacy benefits manager,'' said
Nigel Barnes, an analyst with Merrill Lynch & Co. in London.
''SmithKline and Merck have been better able to maximize the
benefits of their PBM.''
Lilly took a $2.4 billion charge against earnings last year
to write off the value of PCS. Lilly said it will post a one-time
gain of about $165 million to $185 million over the current
carrying value of PCS, including costs of the transaction.
300 Million Prescriptions
PCS oversees about 300 million prescriptions each year for
about 1,200 health plans, which makes it larger than Merck's
Merck-Medco Managed Care LLC, the next largest competitor.
Rite Aid, which operates about 3,900 pharmacies in the U.S.,
will fold its own pharmacy benefits manager unit, Eagle Managed
Care, into PCS. Grass said he expected the combined unit to find
$75 million in savings during the next year.
Grass said PCS will continue to operate as an independent
unit, with Jean-Pierre Millon, its current president and chief
executive, staying on. PCS is based in Scottsdale, Arizona, and
has operations in Fort Worth, Texas. Rite Aid expects the
purchase to add between 1 cent and 3 cents to its earnings in the
first year.
Rite Aid and Lilly have negotiated over PCS since the summer,
when Rite Aid approached Lilly, which was operating PCS as an
independent unit.
Rite Aid said it expects to finance the purchase with shares
or other securities.
Failed Health Reforms
Lilly, Merck and SmithKline bought their pharmacy benefit
businesses in the hopes they could guarantee a market for their
drugs to health plans. However, the U.S. Federal Trade Commission
barred the companies from favoring their own drugs at the expense
of rivals.
When Lilly purchased PCS in 1994, drugmakers were concerned
that President Clinton's proposed reform of the U.S. health care
system would cause their profits to fall as managed care
companies looked to lower prescription costs. In the end, the
Clinton health plan died in Congress.
''Managed care has been mainly benign to the pharmaceutical
industry,'' said Sidney Taurel, Lilly's president and chief
executive. ''There are less restrictions than what we were
expecting at the time.''
After Lilly purchased PCS, the FTC imposed restrictions on
how much information the two companies could share. Grass said
PCS and Rite Aid would have a similar arrangement, with each
having a separate computer system.
J.P. Morgan is arranging the $1.5 billion interim bank loan
to finance the transaction before the stock issue. Goldman, Sachs
& Co. advised Rite Aid, while Merrill Lynch advised Lilly.
--Christopher Elser in the Princeton newsroom (609) 279-4107 and |
