Walgreen Co. said Wednesday it is leaving the pharmacy benefits management business, selling that operation to Catalyst Health Solutions Inc. for $525 million in cash and freeing it to focus on its drugstore network, the largest in the United States.
The companies expect to complete the deal by the end of June assuming regulators approve. The pharmacy benefits management business, known as Walgreens Health Initiatives, has never approached the size of Caremark, the pharmacy benefits management business of CVS Caremark Corp., which is Walgreen's largest drugstore competitor. Caremark says it manages prescription benefits for about 60 million people.
Caremark is the third-largest pharmacy benefits manager in the U.S., behind Medco Health Solutions Inc. and Express Scripts Inc.
While Catalyst remains much smaller than those companies, the purchase more than doubles its size. After the deal is complete, Catalyst's total membership will rise to about 18 million from 7 million. The Rockville, Md., company said it will handle about 165 million prescriptions a year, compared to about 80 million previously.
Catalyst shares rocketed $7.12, or 16 percent, to $51.65 in midday trading.
Walgreen does not disclose financial results for the health initiatives business and did not say if it is profitable.
Pharmacy benefits managers handle prescription drug plans for health plan sponsors and members. They make money by reducing costs for sponsors and members. One of their chief methods involves encouraging members to fill prescriptions with low-cost generic drugs. PBMs also encourage patients with chronic illnesses to fill their prescriptions through the mail using 90-day orders instead of the traditional 30 days.
Some critics have said the drugstore-PBM combination creates a conflict of interest, as PBMs try to reduce costs and drugstores want to bring in more revenue. Walgreen's drugstores almost stopped doing business with Caremark last year over those issues: Walgreen was unhappy with the rates Caremark paid it to fill prescriptions, and with policies that were intended to encourage Caremark customers to fill their prescriptions at CVS stores.
Stifel Nicolaus analyst Steven Halper said Walgreens Health Initiatives was never a central part of Walgreen's business, since its highest priority is its retail stores.
"They don't believe that the PBM is central to what they want to do," Halper said in an interview. That's in contrast to Caremark, which is key to CVS's strategy: CVS Caremark uses its size to get discounts from pharmaceutical wholesalers, and designs its benefit plans to encourage clients to go to CVS drugstores.
Halper said Walgreen may use the proceeds from the sale to make another acquisition or buy back stock.
Walgreen, of Deerfield, Ill., said the sale of the Walgreen Health Initiatives unit will be neutral to its profit in its next fiscal year. In addition to its network of 7,689 drugstores, Walgreen still has specialty pharmacy and mail service businesses and runs worksite health centers.
BMO Capital Markets analyst Dave Shove said Walgreens Health Initiatives is different from other pharmacy benefits management companies. Other PBMs focus on health plans and employers, but Shove said about 45 percent of Walgreens Health Initiatives' business comes from seniors who get their drug coverage through Medicare Part D. About 30 percent of its business comes from health plans and employers, and the remaining 25 percent comes from customers who use Walgreen's discount cards.
As part of the deal, Catalyst will administer Walgreen's prescription savings club. It will also provide PBM services to Walgreen's 244,000 employees and retirees and dependents. Walgreen will provide some services to help patients transition to Catalyst. It expects those services to cost it around $40 million.
Shove said Catalyst has a different strategy from the larger PBMs: It tells clients what it pays for each drug and adds an administrative fee. The larger pharmacy benefits managers charge their clients on a per-person basis. Shove said Catalyst's method is popular with government programs.
Shares of SXC Health Solutions Corp., which both analysts said had been seen as a potential buyer for Walgreens Health Initiatives, fell 66 cents to $47.69. Walgreen shares gained 23 cents to $42.62.