Medco Shares Fall on Deal Questions (Update 1)

Updated to reflect closing share prices and earnings estimates.

NEW YORK (TheStreet) -- Medco Health Solutions' (MHS) $29 billion sale to Express Scripts (ESRX) announced in July 2011 is coming under increasing uncertainty, driving shares sharply lower.

The deal to combine two of the largest pharmacy benefits managers in the U.S. is facing increasing scrutiny, with Reuters reporting that the Federal Trade Commission may look to file an antitrust suit against the merger as soon as this month once the regulator has compiled the adequate evidence to win a court battle.

Already the merger was facing congressional inquiry with the CEOs of both companies having to testify in front of Senate and House of Representatives subcommittees about how the tie-up would impact prescription drug subscription pricing for consumers. The merger would create a benefits giant with more than 115 million customers and one out of every three prescriptions in the U.S.

The combined company would also have $110 billion in annual revenue, eclipsing the industry second CVS Caremark's(CVS) $96 billion in annual revenue.

On February 2, an industry group for the nation's largest grocery chains called the Food Marketing Institute sent a letter to the Federal Trade Commission saying the merged company would be able to cut prescription related payments to pharmacies, according to Reuters reports. In January, a coalition of consumer advocacy groups like the U.S. PIRG and the Consumer Federation of America said that the deal should be blocked by antitrust regulators.

Shares of Medco Health Solutions fell over 8% to $58.47 on news of the potential for a FTC antitrust suit, while Express Scripts shares fell nearly 5% to $49.67 on the report. Meanwhile, competitor Walgreen's (WAG) rose nearly 2% to $34.28.

For more on 2011 mega-deals facing antitrust review, see 5 big deals that may flop in 2012.

Prior to the reports of a possible FTC antitrust suit, Medco's stock had traded over 10% below the $71.36 a share purchase price, signaling investor uncertainty over the deal, or an easy stock return if it's completed.

Pharmacy benefits managers handle prescription drug plans via pharmacy chains and wholly owned outlets, in addition to mail order prescriptions.

In January, Deutsche Bank analyst Ross Muken wrote that he expected the merger to be approved, occurring in the vicinity of Mar. 31, slightly ahead of management's end of June deal closing estimate. Meanwhile, UBS analyst Steven Valiquette raised his 2013 price target for Express Scripts to $66 on increasing earnings per share a result of the deal, which he expects will be completed.

Nevertheless, the fear of an antitrust war remains, especially as the largest merger in 2011, AT&T's(T) $39 billion bid for T-Mobile USA was iced. In February, NYSE Euronext(NYX) walked away from a tie-up with Deutsche Boerse after a European Commission antitrust review.

Concentration battles have been waged in the benefits sector. In 2007, Express Scripts ended a $26 billion battle for Caremark Rx on antitrust concerns, paving the way for the company's merger with CVS. In January, CVS Caremark agreed to pay $5 million to settle charges by the FTC that after the merger, the company unfairly increased prescription drug costs. In the settlement, the FTC did not find that the merger led to anticompetitive pricing.

To be seen is whether that tie-up will have any impact on the Express Scripts and Medco Health Solutions merger or if a FTC review will even yield an antitrust suit. No formal antitrust decision has been announced on the Medco Health Solutions and Express Scripts merger.

On Monday, Express Scripts issed $500 million of bonds to finance its purchase of Medco Health Solutions. The company is looking to repay $14 billion in a bridge loan and issue up to $12 billion of debt to finance the acquisition, the company said in a statement.

Fitch Ratings, which gives Express Scripts bonds a BBB rating, the second lowest investment grade mark expects that the company's debt to earnings before interest, taxes, depreciation and amortization will increase to 3.1 times, if the deal were to go through.

Medco Health Solutions is expected to earn $1.17 a share when it reports fourth quarter earnings on Feb. 21, according to consensus estimates compiled by Zacks. Currently, analysts give Medco Health Solutions shares a $65.78 value, according to ratings compiled by Bloomberg.

For more on Express Scripts, see 8 big acquirers of 2011. See TheStreet's 3 healthcare buys for 2012 for more on the sector.

To learn more about Medco Health Solutions, see 5 short sighted stock spinoffs.

-- Written by Antoine Gara in New York