Rite Aid to buy Lilly's PCS unit $1.5 billion deal grows chain as pharmacy benefit manager


November 18, 1998|By Kristine Henry | Kristine Henry,SUN STAFF

The pharmacy benefits manager group at Eli Lilly & Co. dwarfs that of Rite Aid Corp., but yesterday the Camp Hill, Pa.-based drugstore chain announced that it will swallow the managed care giant in a deal worth more than $1.5 billion.

Lilly's PCS Health Systems Inc. covers more than 50 million people and fills 300 million prescriptions each year, while Rite Aid's Eagle Managed Care covers only 4 million people with 14 million prescriptions annually.

Pharmacy benefit managers (PBMs) negotiate prices from drug companies, then sell the drugs in bulk to health insurance plans.

Rite Aid, the country's third-largest drugstore operator with approximately 3,900 stores -- including 139 in the Baltimore area -- will pay $1.5 billion in cash for PCS, pending Federal Trade Commission approval. Lilly will keep $100 million in cash from PCS assets. The deal is expected to close in the first three months of 1999.

"The impetus on our part was that we saw Eagle Managed Care with only 4 million members and we wanted to get bigger," said Martin Grass, Rite Aid's chairman and chief executive. "This is the biggest PBM in the country."

Indianapolis-based Lilly, perhaps best known as the maker of Prozac, purchased PCS in 1994 from McKesson Corp. for $4 billion, and last year took a $2.4 billion charge to write down its value. A spokesman for Lilly said PCS' sales for 1998 are projected to be $835 million, up 50 percent over last year, with operating income of between $90 million and $100 million.

In January, the Food and Drug Administration proposed regulating PBMs that are owned by drug manufacturers to make sure they provide accurate information about their products and do not pressure physicians into prescribing their companies' brands.

Laurie Burke, director of the FDA's regulatory research office, said yesterday that the proposal is still under review.

The FDA's actions "had no role in the decision to sell," said Lilly spokesman Jeff Kappel. "We were very comfortable with our ownership of PCS and its growth into a successful and profitable business. We found Rite Aid's offer attractive and an opportunity for further success."

Grass said PCS and Rite Aid will have separate computer systems and will not share proprietary information.

Philip J. Muldoon, an analyst at McDonald & Co. in Cleveland, said the acquisition "has considerable favorable potential."

Rite Aid's retail outlets and PCS's large customer base mean the combined entity will have opportunities neither would have had alone. "Scale is important," Muldoon said.

Lilly, which reported a net loss of $385 million in 1997, said that with the sale it will gain between $165 million and $185 million over PCS's current carrying value.

PCS's president and chief executive, Jean-Pierre Millon, and other managers will continue to lead the subsidiary at its headquarters in Scottsdale, Ariz. PCS's name will not change, and Grass said the acquisition would not lead to layoffs.

Rite Aid plans to sell stock and other convertible equities in early 1999 to fund the purchase, Green said, although the company has secured a $1.5 billion loan from J. P. Morgan & Co. as a back-up financing option.

Shares of Lilly closed at $82.8125 yesterday, down $1.

Rite Aid, with a net income for fiscal 1998 of $316 million, saw its shares fall 81.25 cents, to $43.625, in trading yesterday.

Grass said Rite Aid was such a minor player in the PBM market that he does not expect any problem obtaining FTC approval. However, if the deal is approved, he said, that position will change.

"We have 4 million members and other drugstore chains have between 2 million and 5 million members," he said. "We have not ever become top-tier players -- now we are."

Pub Date: 11/18/98

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