CVS-Caremark Deal Would Create Pharmacy Powerhouse

Many investors are scratching their heads after the announcement of a blockbuster deal that would, if approved, combine CVS (CVS) and Caremark Rx (CMX) into a pharmacy Goliath with a $40 billion market value and $90 billion in sales. Caremark has been very active in the M&A game in the past but this deal in particular surprised a lot of people. There are obvious synergies between a PBM and an actual pharmacy and it will be interesting to see exactly how the deal turns out, both for customers and for shareholders.

What exactly was the motivation for such a deal? Several ideas come to mind. First, Wal-Mart's recent decision to price a 30-day supply of generic drugs for as little as $4 is a real threat to the likes of CVS, Walgreen's (WAG), and Rite Aid (RAD). By merging with Caremark, CVS opens up new, stronger avenues to compete with Wal-Mart (WMT). For one, they can enhance their mail order prescription business (mail order script fills have stronger margins than retail fills). Second, now when Caremark works with corporations and customers on benefit program management, they can steer clients toward CVS retail stores or one of their own mail order pharmacies.

Cost synergies seem inevitable with this deal as well. Computer systems can be made far more efficient with the company adjudicating the claims and the pharmacy filling the scripts on the same team. Cash collections will also likely be improved since the pharmacies and the PBM will not be trying to squeeze each other for their own cash flow gains.

All in all, the combination of bricks and mortar pharmacy, mail order pharmacy, and pharmacy benefits manager makes logical sense. The size and scope of the deal, along with its associated integration, might have made some leery in the past to make it happen. However, Caremark has shown a willingness to make game-changing deals (they acquired AdvancePCS, a large competing PBM several years ago and it proved a very successful transaction).

It will be interesting to see what, if any, response Express Scripts (ESRX) and Medco Health (MHS) decide on. I could also imagine that many Caremark shareholders will be upset with this deal and might even vote against it. Will they be able to halt the deal entirely? Perhaps, but it's too early to tell. Caremark and CVS will definitely have to sell the deal to naysayers though, and do so convincingly.

Comments

[Adam Fein:]

My $0.02: Wal-mart is not really a factor in this deal. This move is about power in the pharmacy supply chain, a development that I predicted in June.

Check out my blog post here: Consolidation of the US Pharmaceutical Infrastructure

My June prediction is discussed in Wednesday's post: CVS + Caremark: I called it!

Adam
drugchannels.blogspot....

2006 Nov 03 10:06 AM

[Mark Nemhauser:]

I am a small investor, own CMX, and am a pharmacist. The merger with CVS is horrible and I certainly do not understand how it passed regulatory muster. Remember all of the past combinations of big-pharma and PBM's? How did that work out? And how in the world did that pass muster? The Merck-Medco combo comes to mind. Medco is still trying to get away from that stink. Letters to doctors and patients to switch to "less expensive" Merck meds (I guess that when you own the meds, they are indeed less expensive ... to Medco, but not to pharmacies and patients. Now we have a situation whereby if CVS buys CMX, it will certainly lure patients to CVS ... I cannot understand how that would be any more legal than a doctor steering patients to a particular pharmacy, which is illegal in most states.

It would make far more sense for Caremark shareholders to take the EXRX bid, although the board and the officers would make far more money, for themselves, with CVS. Imagine, CVS buys the company, the officers and board of Caremark are given their golden parachutes, and then they stay on with CVS. That adds value to stockholders? I think not!

As for Medicare D, most pharmacies and PBM's are making a LOT of money, but especially the mail order pharmacies. Even if the government does do something to control costs, the event will remain the same, albeit at a smaller margin. WalMart's $4 Rx plan for generics means nothing. Try going to a WM with a generic Rx ... and then try to figure out how it is saving people money. Only 180 meds out of 20,000 generics; only a 30 day supply at what WM figures the correct dose (their calculations are strange, indeed). As almost 95% of prescriptions are covered by some third party, this stupidity will not affect pharmacies, be they large chains or successful independent stores. Thus, no harm to other pharmacies. Costco doesn't buy into it, RAD doesn't, CVS doesn't ... it seems that only Target, and perhaps Walgreens are doing, or thinking of doing, the same stupid thing. Good luck to them.

Back to Caremark. They made a great move by acquiring Advance PCS. They have stolen contracts from Medco. Adding ESRX to the mix is a great move, and an excellent advantage to shareholders, while not giving away tons of money to the Board, and the officers, but keeping it as shareholder value. That's how I'm voting my proxy ... against the "white" and for the "gold" ... Would you believe that I've received 5 "cold calls" from Caremark's advisors trying to tell me what a great deal the merger with CVS would be? From my point of view, Caremark's Board is getting a bit scared!

2007 Mar 08 09:35 AM