Benefits company to join with CVS

No. 2 drug chain buying Caremark for $21 billion in `merger of equals'

November 02, 2006|By Bruce Japsen | Bruce Japsen,Chicago Tribune

In a move that could influence how and where millions of Americans get their prescriptions filled, CVS Corp., the nation's second-biggest drugstore chain, said yesterday that it would buy Caremark Rx Inc., the United States' largest manager of prescription benefits.

The $21 billion stock deal, which the companies described as a "merger of equals," will marry historical adversaries.

Pharmacy benefit managers like Caremark, middlemen who buy from drugmakers and provide prescription coverage to employers, have been known to encourage consumers to bypass retail pharmacies and purchase their drugs through the mail, typically in three-month supplies. In buying Nashville, Tenn.-based Caremark, retailer CVS would be eliminating a fierce competitor.

"The proposed merger of CVS and Caremark Rx signals a further shift in who controls the prescription drug market in the U.S.," said Sean Brandle of The Segal Company, an employee benefits consulting firm in New York.

If the merger comes to fruition, the combined entity expects to fill a billion prescriptions a year, giving it substantial power to negotiate better prices with drugmakers. It could also put substantial pressure on Deerfield, Ill.-based pharmacy giant Walgreen Co., which saw its stock drop nearly 4 percent yesterday, to take a similar path.

Observers say CVS would likely encourage Caremark's extensive list of large employers and consumers to use CVS stores to pick up their prescriptions, which could drive up in-store sales of other merchandise.

Currently, mail service accounts for nearly 15 percent of the $251 billion U.S. prescription market and retail chains account for 35 percent, but mail order is positioned to continue its rapid growth, according to 2005 figures from health information firm IMS Health.

As aging baby boomers require more routine maintenance medications such as daily cholesterol and high blood pressure drugs, the mail order business offered by large pharmacy benefit companies will take on a greater role in their lives. In fact, CVS and Walgreens have already built their own pharmacy benefit businesses, but they are much smaller than Caremark's.

"CVS remains poised to benefit from continued favorable demographics and trends shaping growth in prescription drug spending," Morningstar pharmacy analyst Mitchell Corwin said.

CVS is smaller than Walgreens in terms of sales revenue, but CVS leads in store count with about 6,200 stores across the United States. Walgreens, by comparison, has 5,475 U.S. stores, generating $47.4 billion in sales last year. CVS racked up $37 billion last year.

The combined CVS-Caremark, however, would have $75 billion in combined annual sales.

"Combining Caremark's expertise in serving employers and health plans with CVS' expertise in serving consumers will create a powerful force for change in pharmacy services," said Caremark's Chairman and Chief Executive Officer Edwin M. Crawford, who is to be chairman of the combined company.

In stressing the "merger of equals" idea, the companies said CVS Chief Executive Officer Thomas M. Ryan would become CEO of the new company and each company is to have equal representation on the new board of directors.

The name of the new company will be CVS/Caremark Corp. It will have its headquarters in CVS' current home of Woonsocket, R.I., and the proposed new firm will trade on the New York Stock Exchange under the symbol "CVS."

Wall Street was unenthused, with some analysts raising concerns about integration issues. CVS shares fell $2.32 to close at $29.06 on the New York Stock Exchange, while Caremark lost $1.06 to finish at $48.17.

But Walgreens took the announcement in stride, saying the deal actually would be a positive for it and other retail pharmacy chains.

"Anything that increases retail pharmacy's influence on prescription management is a good thing," said Walgreens spokesman Michael Polzin.

"In particular, if this merger helps lower patient co-pays and increases 90-day refills at retail pharmacies, I think those are good things for the industry," he said.

In response to pressure from pharmacy benefit companies that encourage mail order, Walgreens introduced a program two years ago that allowed its customers to pick up 90-day supplies of their prescriptions.

Walgreens also said it has contracts with Caremark and other pharmacy-benefit managers but would not disclose the specifics of those deals or discuss potential impact after the merger happens.

Because pharmacy-benefit managers work as a middleman between employers and drug manufacturers, employers have demanded more transparency in deals they cut.

Employers have been frustrated because their drug costs have risen while the stock prices and profits of pharmacy-benefit managers have soared.

Under the terms of the agreement, Caremark shareholders will receive 1.67 shares of CVS stock for each Caremark share. CVS stockholders will own 54.5 percent of the combined firm while Caremark shareholders will own 45.5 percent. The deal is subject to regulatory approvals and is expected to close in six to 12 months, the companies said.

Bruce Japsen writes for the Chicago Tribune.

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