CVS and Caremark Announce Merger

What was hinted at this morning became reality this afternoon when CVS, a major pharmacy chain which has a prescription benefit manager affiliate Pharmacare and a major PBM Caremark announced their merger. Caremark shareholders will receive 1.67 shares of CVS stock for each of their Caremark shares. The new company will be called CVS /Caremark and it will be headquartered in Woonsocket, Rhode Island (gateway to the Taunton). The stock swap deal is valued at $21 billion and the projected 2006 revenues for the combined company are $75 billion. The Wall Street Journal notes that CVS has been very acquisitive this year and that PBM stocks have been down since September when Walmart announced its $4 generic prescription price. The proposed settlement in the AWP price fixing litigation has added to the PBM stock woes as discussed in the blog last week.

The AP reports that

Glenn Garmont, an analyst with First Albany Corp., said before the announcement that the deal was likely spurred in part by the fear that Wal-Mart, "will emerge as a fierce new competitor following its introduction of selected $4 generic drugs."

Wal-Mart announced last week that it is extending its $4 for a one-month supply of 314 different generic prescriptions to make the program available at 1,008 stores in 27 states.

However, [CVS CEO Tom] Ryan and [Caremark CEO Tom] Crawford said Wal-Mart's action didn't affect their decision to merge.

"We've been working on all this for some time," Crawford said. "This didn't have anything to do with Wal-Mart."

Garmont said such a deal between Caremark and CVS "would spawn others, and we view all PBMs ... as potential take-out targets."

Still, some analysts said the deal might face antitrust concerns. Barry Barnett, a health care consultant for PricewaterhouseCoopers, said regulators might be concerned that Caremark might unfairly funnel business to CVS pharmacies at the expense of other drug stores.

Several years ago Caremark acquired Advance PCS, one of the original PBMs. Earlier in its history, PCS had been owned by a drug manufacturer Eli Lilly, a drug wholesaler McKesson, and a pharmacy chain Rite Aid. None of those arrangements were profitable, as I recall. Another major PBM Medco recently split away from its drug manufacturer parent Merck a few years ago following considerable antitrust scrutiny. So the experience of this new combination will be worth following.