BANGALORE | Wed Mar 9, 2011 2:20pm EST  - Catalyst Health Solutions Inc said it will buy Walgreen Co's pharmacy benefits management unit for about $525 million in cash, a deal that might spur more consolidation before big generic drug launches that could boost the business.

Catalyst shares rose 16 percent to $51.86 on Wednesday on Nasdaq. Walgreen shares were almost flat at $42.49 on the New York Stock Exchange.

Walgreen is the largest U.S. drugstore operator, but is a small player in the pharmacy benefit management business. Rival drugstore operator CVS Caremark Corp  struck a much bigger deal when CVS bought Caremark in 2007.

Pharmacy benefit managers, or PBMs, administer drug benefits for employers and health plans. They are in a position to gain as the patents of several top-selling drugs, such as Pfizer's Lipitor, expire this year.

Generic drugs are copies of brand-name medicines that have lost patent protection. They are highly profitable for PBMs, especially those delivered through their extensive mail-order pharmacies.

"I think we are heading into a significant generic opportunity in 2012 and these companies are scaling up ahead of that," said ThinkEquity LLC analyst Glenn Garmont.

For Catalyst, the deal will double the volume of prescriptions it manages to 165 million annually, while membership will jump to 18 million from about 7 million.

Aside from the nearly 7,700 drugstores it operates, Walgreen has direct relationships with employers, such as Caterpillar Inc., to provide prescription drugs. It also provides specialty at-home medical treatments such as intravenous infusions.

Analysts say the deal is good for Walgreen because it lets the largest U.S. drug store operator focus on its primary business. The deal also raised questions about whether CVS would dump its pharmacy benefits management unit.

"While Walgreen's PBM sale is small, it should fuel the debate on a possible break-up at CVS. Walgreen is clearly telling investors that it doesn't make sense to own a PBM," said Credit Suisse analyst Edward Kelly.

The industry is dominated by the likes of CVS, Medco Health Solutions and Express Scripts Inc., which now could extract deeper discounts from drug manufacturers and retailers, leaving smaller companies to consolidate, Garmont said.

SXC Health Solutions Corp. is one company with enough cash that could get involved, possibly with a $1 billion deal, he said.

"I think Wall Street was expecting SXC to acquire Walgreen's business, but the reality is Walgreen is not the only asset out there," he said. "There are quite a few private players that have some good scale."

It is expected to double the volume of prescriptions Catalyst manages to 165 million annually, while membership jumps to 18 million from about 7 million now.

Buying Walgreen's PBM business will help Catalyst gain an additional 4 percent of the market, said JPMorgan analyst Michael Minchak.

The deal, which is expected to close by the end of June, will not affect or will modestly add to Catalyst's 2011 adjusted profit. The company also expects a tax benefit of about $90 million-$110 million on completion of the deal.

Catalyst said it secured $700 million in financing to fund the deal, including a $500 million term loan and a $200 million revolving credit facility. BofA Merrill Lynch advised Walgreen, while Citi, Goldman Sachs and Jefferies & Co advised Catalyst.

(Reporting by Krishnakali Sengupta, Rajarshi Basu and Brad Dorfman; Editing by Dave Zimmerman, Anthony Kurian and Saumyadeb Chakrabarty)

© 2010 Thomson Reuters. Click for Restrictions.

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