Smaller drug-benefits rival outbids CVS for Caremark

December 19, 2006|By Bloomberg News

ST. LOUIS -- Express Scripts Inc. made an unsolicited $26 billion hostile bid for Caremark Rx Inc. to become the biggest U.S. manager of drug benefits, topping a bid by drugstore chain CVS Corp.

Caremark investors would receive $58.50 in cash and stock for each share, 15 percent more than the Dec. 15 closing price, Express Scripts said yesterday. CVS proposed on Nov. 1 to buy Caremark for $48.53 a share, offering no premium.

"The perception before was that Caremark was selling out cheaply," said Kemp Dolliver, an analyst with Cowen & Co. LLC in Boston.

Shares of Caremark rose $5.28, or nearly 11 percent, to close at $55.58 yesterday on the New York Stock Exchange.

By acquiring Caremark, Express Scripts would strengthen its hand in negotiating discounts with drugmakers such as Merck & Co. Its revenue would triple to $49 billion, surpassing the $37.9 billion of Medco Health Solutions Inc., the No.1 pharmacy benefit manager. Pharmacy benefit managers act as intermediaries between health insurers and drugmakers.

Express Scripts also would get a bigger share of the $35 billion annual market for specialty biotech drugs, which can generate higher profits because distributors can sell equipment and services that pill-takers don't need. The drugs are often fragile and need to be injected or given intravenously.

Caremark had specialty-drug revenue of $3 billion last year, according to Susan Bro, a company spokeswoman. Express Scripts has more than doubled its biotech prescription revenue to $1.6 billion.

Holders of Caremark would get half the purchase price in cash and half in Express Scripts stock. The acquiring company would borrow $13.4 billion, more than its market value of $9.1 billion, from Citigroup Corporate and Investment Banking and Credit Suisse.

Express Scripts reported long-term liabilities of $576.7 million in the third quarter and has no publicly traded debt, according to Trace, the bond reporting service of NASD, formerly known as the National Association of Securities Dealers.

Merging the companies' operations would generate $500 million in annual cost savings, Express Scripts said. The acquisition wouldn't affect earnings in the first year and would boost them afterward, Express Scripts said.

Shares of Express Scripts rose $1.31, or 1.9 percent, to close at $69.97 on the Nasdaq stock market. The stock has lost 20 percent in the past 12 months, despite a 4.7 percent gain in the 55-member Standard & Poor's health care index.

Shares of CVS fell 51 cents to close at $30.01 on the New York Stock Exchange. The stock lost 7.4 percent on Nov. 1 when the agreement to acquire Caremark was announced.

CVS offered to exchange 1.67 of its shares for each Caremark share. That bid values Caremark at $50.92 a share based on Friday's closing price.

CVS said it hasn't had a chance to review the Express Scripts offer carefully. Even so, the prospects "are excellent" for CVS to prevail, it said.

Caremark said it would review the Express Scripts offer. The company said it "continues to be bound" by the terms of its CVS agreement, "and the parties anticipate filing a joint proxy statement with the Securities and Exchange Commission shortly."

George Paz, chairman and chief executive officer of Express Scripts, said in a letter to Caremark CEO Edwin M. "Mac" Crawford that Express "would unquestionably prefer to work cooperatively."

"Alternatively, we are prepared to take our transaction directly to your stockholders," Paz wrote. "You should also know that we are prepared to solicit proxies against approval of your proposed merger with CVS."

CVS, the second-largest U.S. chain of retail drugstores with 6,200 outlets in 43 states, wants Caremark to gain more leverage in negotiating prices with drugmakers and to support sales of razors, sodas and makeup that might be hurt by a loss of foot traffic to mail-order firms.

Drug-benefit managers like Caremark steer patients toward low-cost generic drugs sold by mail, taking millions of customers away from drugstores. Last year, Express Scripts reported filling 40.2 million mail-order prescriptions for a three-month supply, while Caremark said it filled 58.3 million by mail.

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