As Columbia/HCA Healthcare Corp. ties up the loose ends of its acquisition of Value Health, Eli Lilly & Co. has conceded its $4.1 billion purchase of PCS Health Systems, another pharmacy benefits manager, was a financial disappointment.
Last week, Indianapolis-based Lilly said it would take a $2.4 billion charge, or $4.40 per share, for the second quarter ending June 30, to reflect the fair value of its PCS unit, based in Scottsdale, Ariz.
Previously part of McKesson Corp., PCS was bought by Lilly in 1994 as a hedge against healthcare reform and to build drug market share among managed-care companies. Pharmacy benefits managers such as PCS process claims, develop drug formularies and run approved pharmacy networks-often including mail-order operations-for managed-care plans, insurers and employers. But the expected synergies between PCS and Lilly have not materialized.
Lilly said "the highly competitive and rapidly changing environment in which PCS operates has held its operating profits below levels anticipated prior to the acquisition."
In addition, Lilly said managed-care growth has been slower than expected, hindering PCS' expansion plans. As a pharmacy benefits company that also offers disease management services, PCS stood to prosper by helping HMOs aggressively manage costs.
Finally, an antitrust settlement with the Federal Trade Commission that let the deal go through has kept PCS from aggressively favoring Lilly drugs and has scared off other drug companies from investing in the company, upsetting Lilly's plan for defraying expenses.
Despite the recitation of disappointments related to PCS, Lilly affirmed its commitment to the unit.
"PCS remains a key part of Lilly's pharmaceutical strategies and holds significant potential for us," said Charles E. Golden, Lilly's chief financial officer.
And the write-down hardly seems the precursor to a sale of the unit.
"I don't think they're willing to question the viability of the strategy, but it constitutes an admission that they overpaid," said Elliot Wilbur, an analyst with Oppenheimer & Co. in Los Angeles.
Lilly had foreshadowed the expensive accounting move in its 10Q filed with the Securities and Exchange Commission last month.
At that time and again last week Lilly said that despite growing revenues and profits from PCS, it is necessary to carry PCS' current fair value on its books. Current accounting rules forced the expensive restatement when Lilly projected undiscounted cash flows from PCS had fallen below the unit's carrying value.
Lilly bought PCS for many of the same reasons Nashville-based Columbia is buying Value Health, a benefits management company based in Avon, Conn. That $1.1 billion sale is expected to close soon.