CVS to Acquire Caremark Rx for $21 Billion

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CVS in Talks to Buy Drug Middleman [New York Times]

Summary: Drugstore chain CVS Corp. is in late-stage talks to purchase pharmacy benefits manager [PBM] Caremark Rx for $21 billion. The combined company should enjoy annual revenue of $75 billion, well beyond that of any of its competitors. PBMs, which function as middlemen between drug companies and people with drug benefits coverage, handle about 75% of the $235 billion spent on prescriptions every year in the U.S. The merger is taking place during a period of serious challenges to the business of drug retailing, including the recent announcement by Wal-Mart that it will sell generic prescriptions for $4. The addition of Caremark Rx to CVS's own PBM, PharmaCare, will place CVS far ahead of rivals Medco Health Solutions, Express Scripts and Wellpoint. PBMs administer drug benefits to the employees of their customers, which are generally large corporations. They purchase drugs from their manufacturers and then distribute them through drugstores or mail order. Caremark, which handles drug benefits services for 4.5 million federal employees, retirees, and dependents as well as the employees, retirees and dependents of Chrysler, processed more than 530 million prescriptions last year through its network of 6,000 walk-in and seven mail order drugstores. Because they buy in such bulk, PBMs are able to buy drugs at discounted prices -- but that advantage is now threatened by Wal-Mart's $4 generic drug program. Caremark's stock price has reflected the threat, falling 17% since Sept. 12 to a $49.23 close yesterday. The merger, which is not yet official, will be reviewed by the Federal Trade Commission to ensure that there are no antitrust violations.
Related links: How the CVS-Caremark Merger Might Work (Or Not) • Why Wal-Mart's Drug Program Shouldn't Worry Walgreen and CVS Investors • Wal-Mart's Cheap Drugs Not as Threatening as they Appear • CVS Trumps Walgreen on Stock Valuation • Wal-Mart's $4 Generic Drugs Could Shake Up Entire Pharma Sector • Wal-Mart's Prescription Drug Plan Could Impact Entire U.S. Health Care System • CVS, Caremark Unite to Create Drug-Sale Giant [Wall Street Journal]
Potentially impacted stocks and ETFs: CVS Corp. (CVS), Caremark Rx (CMX), Medco Health Solutions (MHS), Express Scripts Inc. (ESRX), Wellpoint, Inc. (WLP) • Retail HOLDRs (RTH), SPDR Retail (XRT), PowerShares Dynamic Pharmaceuticals (PJP), iShares Dow Jones US Pharmaceuticals (IHE), SPDR Pharmaceuticals ETF (XPH)

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