Pharmacy Chain CVS To Purchase Pharmacy Benefit Manager Caremark Rx for $21.3B in Stock

Rhode Island-based pharmacy chain CVS on Wednesday announced plans to acquire Tennessee-based pharmacy benefit manager Caremark Rx for about $21.3 billion in stock, the Philadelphia Inquirer reports. Under the acquisition, Caremark shareholders would receive 1.67 shares of CVS stock for each Caremark share. CVS shareholders would own 54.5% of the combined company -- CVS/Caremark -- and Caremark shareholders would own 45.5% (Philadelphia Inquirer, 11/2). According to the Wall Street Journal, the acquisition would "create a behemoth controlling the dispensing of one billion prescriptions a year -- more than a quarter of the U.S. total" (Armstrong/Martinez, Wall Street Journal, 11/2). CVS and Caremark will have combined revenue of about $75 billion in 2006, the companies said (Johnson, AP/Memphis Commercial Appeal, 11/2). CVS and Caremark said that the acquisition would provide $400 million in "operating synergies" through increased purchasing power and other cost savings (Wall Street Journal, 11/2). CVS Chair and CEO Thomas Ryan would become CEO of CVS/Caremark, and Caremark Chair and CEO Edwin Crawford would become chair of the combined company (Krasner, Boston Globe, 11/2). CVS/Caremark would have headquarters in Rhode Island, but the PBM business of the combined company would remain in Tennessee (AP/Memphis Commercial-Appeal, 11/2). The acquisition requires approval from shareholders, as well as state and federal regulators (Fineman/Lauerman, Bloomberg/St. Louis Post-Dispatch, 11/2). The acquisition likely will receive a "tough review" by the Federal Trade Commission and might "face forced changes or divestitures if the agency finds antitrust problems," the Journal reports. CVS and Caremark expect the acquisition to close in six months to one year (Wall Street Journal, 11/2).

Ryan, Crawford Comments
Ryan in a statement said, "This merger is a logical evolution for CVS, Caremark and the entire pharmacy industry." In addition, Ryan said, "This is a very competitive marketplace," adding, "We will be the low-cost competitor" (Boston Globe, 11/2). Ryan and Crawford said that CVS/Caremark would offer lower prices and would allow consumers to use mail, telephone, the Internet or visits to retail stores to fill prescriptions. "We'll be agnostic (about) where the consumer fills their prescription," Ryan said (Day, Washington Post, 11/2). Crawford said, "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" (AP/Memphis Commercial-Appeal 11/2). According to the Globe, some "industry observers said the merger is a response to the recent move by Wal-Mart Stores to supply low-cost generic drugs" (Boston Globe, 11/2). However, Ryan and Crawford "dismissed Wal-Mart's generic discounts as a 'pricing promotion' and said their combined companies would bring more fundamental changes to the pharmaceutical marketplace," the Post reports (Washington Post, 11/2).

Reaction
Hussain Mooraj, life sciences research director at AMR Research, said, "Caremark and CVS combined have the power to negotiate better prices from the drug manufacturers. The question is: Will they pass those savings on to consumers?" Richard Frank, a professor of health care policy at Harvard Medical School, said, "If you're a payer for health care, you've got to wonder if you're going to be getting as good a deal with CVS" as with other pharmacy chains. Frank added, "I'd think twice about doing business with them" (Boston Globe, 11/2). Keith Bruhnsen, assistant director of the benefits office at the University of Michigan, said that employers who contract with Caremark "should be nervous and need to ask some questions." He added, "They're going to have to examine whether this is going to create some conflicts of interest." Sidney Wolfe, director of the Health Research Group at Public Citizen, said, "If CVS is getting into this because they think they can increase their profits by acquiring and controlling the PBM, it might be very good for CVS, but it's hard to imagine how it is good for the public." Wolfe added, "There is no evidence this kind of thing passes money onto patients" (Wall Street Journal, 11/2). Sean Brandle, national pharmacy practice leader for the benefits consulting company Segal, said, "Caremark was constantly pushing retailers for lower prices. That's gone away. ... We've lost one of the checks and balances that was inherent in the system" (Girion, Los Angeles Times, 11/2). Michael Polzin, a spokesperson for the pharmacy chain Walgreen, said, "I think it can be a positive for the retail pharmacy industry," adding, "Anything that increases retail pharmacies' influence on prescription management is a good thing" (Washington Post, 11/2).

Broadcast Coverage
Several broadcast programs reported on the acquisition:

• APM's "Marketplace": The segment includes comments from Mark Husson, a pharmaceutical industry analyst for HSBC, and Stuart Schweitzer, associate director of the Research Program in Pharmaceutical Economics and Policy (Scott, "Marketplace," APM, 11/1).
  The complete transcript and audio of the segment are available online.
  
  
• NPR's "Morning Edition": The segment includes comments from Meredith Rosenthal, an assistant professor at the Harvard School of Public Health, and Ryan (Horsley, "Morning Edition," NPR, 11/2).
  Audio of the segment is available online.
  
  
• PBS' "Nightly Business Report": The segment includes comments from Husson (Gharib, "Nightly Business Report," PBS, 11/1). The complete transcript of the segment is available online.