As Managing Editor Eric Wicklund reports in this issue, pharmacy benefit management firm Express Scripts is acquiring Wellpoint’s NetRx subsidiary businesses in a $4.75 billion cash and equity deal.
The leadership of Express Scripts thinks it’s making out pretty well, but is this a good deal for Wellpoint and its investors? The Manhattan-based ratings firm Moody’s Investors Service is cautious, but hopeful.
Soon after the deal was announced, Moody's affirmed the ratings of WellPoint, Inc. and its subsidiaries (at a senior unsecured debt rating of Baa1). The ratings firm said the outlook on WellPoint and its subsidiaries remains negative.
The reasoning behind such a rating?
Moody's analysts believe that, while the transaction has the potential to place positive pressure on WellPoint's ratings, the ultimate impact will depend on the use of proceeds and the amount of savings and operational efficiencies WellPoint can achieve from its new multi-year service agreement with Express Scripts.
Moody’s noted that future rating actions would reflect its concerns with respect to Wellpoint’s investment portfolio volatility, membership losses stemming from current economic conditions, and issues that could arise from the CMS audit findings and the current Medicare Advantage enrollment suspension.
Steve Zaharuk, Moody's vice president & senior credit officer, thinks the sale of Wellpoint’s PBM business will provide an opportunity for the company to improve its financial profile by reducing debt, improving liquidity, and strengthening its risk-based capital.
Zaharuk said WellPoint has indicated that – from the after tax proceeds of the sale – approximately $500 million would be used to reduce debt, $400 million would be used for general corporate purposes, and $2 billion would be used for share repurchase.
Pharmacy benefit management operations account for less than 10 percent of WellPoint's earnings before interest, taxes, depreciation and amortization, Zaharuk says, but WellPoint anticipates that it will be able to offset a large portion of the loss from savings it achieves from its 10 year PBM service agreement with Express Scripts.