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Rite Aid to Buy Lilly Drug Supply Unit

November 18, 1998|From Bloomberg News

CAMP HILL, Pa. — Rite Aid Corp., the U.S.' No. 3 drugstore operator, said Tuesday that it agreed to buy Eli Lilly & Co.'s PCS Health Systems unit for $1.6 billion, moving to become a leading supplier of drugs to health insurance plans.

Rite Aid will pay $1.5 billion in cash, and Lilly will keep $100 million in cash from PCS, the largest U.S. pharmacy benefit manager. Such companies negotiate low prices with drug companies, then sell the drugs in bulk to health insurers.

Lilly is getting out of a business whose performance fell short of expectations. For Rite Aid, adding PCS' 1,200 health insurer customers gives Rite Aid an edge over rivals Walgreen Co., CVS Corp. and J.C. Penney Co.'s Eckerd unit, which have smaller pharmacy benefits subsidiaries.

After adding 1,300 stores in the last two years with its purchase of Thrifty Payless Holdings Inc., Harco Inc. and K & B Inc., Rite Aid's purchase of PCS moves it into a portion of the drug retailing business where there is no clear No. 1.

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. PCS has 1,500 employees, Eagle has 50. The purchase is expected to close in the first quarter. PCS oversees about 300 million prescriptions each year for about 1,200 health plans and has annual revenue of about $1 billion.

For Indianapolis-based Lilly, whose successes include the antidepressant Prozac, the transaction means it can concentrate on its pharmaceuticals business.

Lilly, which bought PCS from McKesson Corp. in 1994 for $4 billion to match similar purchases by rivals Merck & Co. and SmithKline Beecham, had the least success of the three, analysts said.

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.

Shares of Camp Hill, Pa.-based Rite Aid fell 81 cents to close at $43.63, while Lilly fell $1 to $82.81. Both trade on the New York Stock Exchange.

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