Lilly Will Pay $4 Billion Cash for Drug Plan Manager PCS : Acquisitions: It’s the third recent deal where a major drug maker has snatched up a firm involved in the spending end.

In another attempt by a giant drug maker to regain control of its market, Eli Lilly & Co. said it will pay $4 billion in cash to acquire PCS Health Systems Inc., the nation’s largest company that manages prescription drug plans for employers and other groups.

Lilly’s move is the third recent deal in which a major drug manufacturer has attempted to gain control of the firms that increasingly determine how much money will be spent on prescription drugs and which manufacturers’ products will be prescribed.

PCS, a unit of San Francisco-based McKesson Corp., controlled roughly $6.4 billion in drug spending for some 50 million people in its fiscal year ended in March. Its major customers include the three big U.S. auto makers and some federal agencies.

Employers contract with companies such as PCS to process prescription claims, negotiate discounts with drug makers and monitor doctors’ drug-prescribing activities. Such companies, for example, will encourage doctors to prescribe less costly generic versions of brand-name drugs when they are available.

Lilly’s acquisition price--about 23 times PCS’ annual sales of $180 million, as estimated by analysts--reflects the critical importance the drug maker places on gaining a foothold in the drug benefit management field. Lilly was one of several big drug makers scrambling to respond to earlier moves by rival firms--and PCS was the last of the big drug benefits firms available.

Merck & Co., the world’s largest drug maker, in November signaled the changes to come when it paid more than $6 billion for Medco Containment Services, a prescription benefits manager and mail-order drug firm. And British-owned drug maker SmithKline Beecham in May said it would pay $2.3 billion for Diversified Pharmaceutical Services of Bloomington, Minn.

Both those deals would have inhibited Lilly’s access to patients in the Medco and Diversified Pharmaceutical benefits programs, analysts said.

For its $4 billion, Lilly would gain access to PCS’ 50 million members and more control over ensuring that PCS members use Lilly drugs whenever possible.

Analysts noted that Lilly is paying a far heftier price--some 75 times operating earnings--than Merck or SmithKline paid to gain entry into the managed-care field. Merck paid roughly 30 times earnings for Medco, while SmithKline paid 55 times earnings for Diversified Pharmaceuticals, according to Lawrence Marsh, analyst at Wheat First Butcher & Singer in Richmond, Va.

But analysts also said Lilly’s higher price is justified, in part because PCS has more members than either Medco or Diversified and is considered by analysts to be the most profitable and fastest-growing of the firms.

“I think Lilly is paying what they need to pay to get the business,” said Jack Lamberton, an analyst with County NatWest USA in New York.

However, many Lilly investors apparently weren’t happy with the $4-billion price tag, which the drug maker plans to finance mostly through borrowing. Lilly shares dropped $7.375 to $50 on the New York Stock Exchange, as the company lost about $2 billion in market value.

But McKesson shares soared on the news, gaining $24.75 to close at $98 on the Big Board. For McKesson, a giant drug wholesaler whose relatively tiny PCS unit was considered the company’s crown jewel, the Lilly deal reflects an offer that was evidently too good to refuse. McKesson was reportedly approached by other drug makers interested in buying PCS, including British-based Glaxo Holdings.

“There’s a real sense of concern among the drug companies of missing the boat, and McKesson was willing to use its position as the last unaffiliated drug benefit firm to strike an impressive deal for shareholders,” Marsh said.

Alan Seelenfreund, McKesson’s chairman and chief executive, suggested that recent moves by “companies with substantially greater” clinical resources, physician relationships and research and development budgets were making it tougher for PCS to compete.

“In light of this changed environment and the offer from Lilly . . . this transaction represents the best opportunity to maximize shareholder value,” he said.

Under terms of the deal, Lilly would pay McKesson stockholders $76 in cash for each outstanding share.