In 2006, the drugstore chain, CVS, and the pharmacy benefits manager, Caremark, merged into the CVS Caremark Corporation (CVS). Since the merger’s completion, the combined business has faced an onslaught of criticism. The most concerning arguments against the company, now valued just shy of $50 billion, stem from apprehension over conflicts of interest that could be anticompetitive for the market, thereby hurting consumers and competing drugstores.
The Federal Trade Commission has already announced that it is investigating whether CVS has engaged in anticompetitive practices, as have about half the state attorneys general. The general concern is that CVS’s control of Caremark gives the company too much control over the distribution network that exists between pharmaceutical companies, pharmacies and individuals with prescription benefits. One key issue is whether Caremark’s database containing patient’s personal and confidential medical information will entice the compoany to use that information to coax patients to use CVS pharmacies over alternatives.
A prime example of the type of control CVS may be able to exert on the industry occurred last year. In June of 2010, Walgreen Co. (WAG) announced that it was going to stop participating in prescription drug reimbursement plans through Caremark, complaining that Caremark favored CVS stores and prevented patients from choosing where to get their medicine.
WAG, the nation's largest drugstore chain, also complained that Caremark’s Maintenance Choice program requires patients to fill prescriptions for long-term illnesses at a CVS store or through Caremark's mail-order pharmacy. Nonetheless, about two weeks later, and after CVS stated it will remove several thousand WAG pharmacies from its network, WAG and CVS re-forged their relationship.
In the face of all of this scrutiny, CVS continues to broaden its reach. On December 30, 2010, CVS agreed to purchase the Medicare Part D unit of Universal American Corporation (UAM). On April 27, 2011, UAM will have a special meeting to vote on the sale, valued at $1.25 billion.
Recently, some investors concerned with these complaints and also interested in greater performance have advocated that CVS divest itself of the Caremark business through a tax-free spin-off. Such a spin-off could still allow CVS and Caremark to continue their relationship through a joint venture purchasing agreement.
Alternatively, CVS could put Caremark up for sale. Companies such as Express Scripts (ESRX) or MedcoHealth Solutions (MHS) may be interested in essentially doubling their businesses through acquiring Caremark. Additionally, these companies could simultaneously develop joint ventures with the remaining CVS drugstore segment.
Given all the negative sentiment and concerns over anticompetitive control over the industry, one must wonder if CVS Caremark’s days are numbered, one way or another.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.