CVS Buying Caremark for About $21.2B
By LUCAS L. JOHNSON II
The Associated Press
Thursday, November 2, 2006; 1:11 AM
NASHVILLE, Tenn. -- Drugstore operator CVS Corp. announced Wednesday it is buying pharmacy benefits manager Caremark Rx Inc. for about $21.2 billion in stock, creating a company that will have formidable power in negotiating lower prices with drug companies.
The deal would create a $75 billion drug distribution powerhouse that could compete more effectively for customers as Wal-Mart Stores Inc. and other retailers introduce programs selling cheap generic drugs.
"This is all about giving the consumers unparalleled access and choice ... It will help providers deliver the right drugs at the right time," CVS CEO Tom Ryan said in a conference call.
But investors sent shares of both companies lower, and some analysts raised concerns about integrating the two businesses.
CVS shares tumbled $2.32, or 7.4 percent, to close at $29.06 on the New York Stock Exchange while Caremark lost $1.06, or 2.2 percent, to finish at $48.17. Caremark shareholders will be getting CVS stock in the deal.
SunTrust Robinson Humphrey analyst David Magee wrote in a note that the deal could be seen as too much risk for CVS which is still digesting acquisitions from the past couple of years, including purchasing the Sav-On drug store chain made earlier this year. He also wrote the deal could distract CVS from growing its existing business lines.
He said the he was optimistic about the long-term implications of the deal because of the size and buying power of the new company.
Company officials said the deal would create significant benefits for employers and health plans through more effective cost management and new programs, and for consumers through expanded choice and more personalized services.
"Combining Caremark's expertise in serving employers and health plans with CVS's expertise in serving consumers will create a powerful force for change in pharmacy services," said Edwin "Mac" Crawford, Chairman, CEO and President of Caremark, which is based in Nashville.
The merger brings together companies from two industries that have had a sometimes bitter rivalry. PBMs offer customers the option of purchasing their drugs through the mail for reduced prices. Drug stores have argued such policies cut into their revenue and compromise patient safety because it deprives them of access to a pharmacist.
The growing mail order business has been hurting drug stores' market share, said Morgan Stanley analyst Mark Wiltamuth. CVS has its own mail order subsidy and analysts said buying Caremark would bolster that portion of its business, analysts said.
The companies called the deal a "merger of equals" and under the terms, Caremark shareholders will receive 1.67 shares of Woonsocket, R.I.-based CVS for each share of Caremark. CVS shareholders will own 54.5 percent of the combined company and Caremark shareholders will own 45.5 percent.
The new company will be called CVS/Caremark Corp. and will be headquartered in Woonsocket.
The pharmacy services business will remain based in Nashville. Combined 2006 revenue for the companies are expected total about $75 billion, a joint statement said.
Caremark's Crawford will become the chairman of the combined company and Ryan will become president and chief executive of the combined company.
After the markets closed Wednesday, CVS reported its third-quarter profit rose 13 percent on higher same-store sales.
Net income grew to $280.7 million, or 33 cents per share, from $249.2 million, or 30 cents per share, a year ago.
Revenue rose 25 percent to $11.21 billion.
Analysts surveyed by Thomson Financial expected earnings per share of 32 cents on revenue of $11.24 billion.
Caremark reported a 25 percent increase in third-quarter profit on strong sales in the company's mail-order and retail businesses.
Net income grew to $288.6 million, or 67 cents per share, from $231.4 million, or 51 cents per share, a year ago.
Revenue rose 13 percent to $9.14 billion.
Analysts expected earnings per share of 63 cents on revenue of $9.23 billion.
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, Ryan and 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.
Caremark buys drugs from pharmaceutical companies directly and then distributes them through its national network of about 60,000 pharmacies and seven mail-order offices. It provides services for over 2,000 corporate, insurance, managed care, government, and union health plans.
Caremark posted 2005 net income of $932.4 million on sales of $32.99 billion.
CVS is the nation's largest pharmacy chain by prescriptions filled, and is second to Walgreen Co. in total sales. It operates more than 6,200 stores in 45 states and reported 2005 net income of $1.22 billion on sales of $37.01 billion.
The Securities and Exchange Commission has been investigating whether executive stock options were backdated at Caremark, company officials have acknowledged. In September, Caremark's Crawford said the company is in "good shape" regarding the investigation and doesn't expect to have to restate earnings.