Global Insight Perspective | |
Significance | U.S. drug-store chain CVS has agreed to buy the leading pharmacy benefits manager Caremark, in a complex stock-for-stock deal that could take as long as a year to close. |
Implications | The new company will have estimated revenues of US$75 billion annually, and will fill or manage over one billion prescriptions each year. |
Outlook | The advantages that this new firm will bring to U.S. consumers are difficult to assess, although CVS and Caremark said that they would benefit from more joined-up services. They also claimed that costs would not escalate because the new company needed to remain competitive in a fiercely contested market. However, what is perhaps clearer is that this deal will bring a significant new challenge to drug-makers, with the new company gaining significant additional leverage over drug-makers to force them to lower drug costs. |
America’s largest pharmacy chain CVS, which has around 6,200 stores across the United States, announced yesterday that it has agreed to buy the pharmacy benefits management (PBM) company Caremark Rx. The deal was described as a merger of equals by the companies yesterday, creating a firm that will fill or manage over one billion prescriptions a year, or just over one quarter of total annual prescriptions written in the United States. Projected revenues for the new company, which will be called the CVS/Caremark Corporation, are estimated at around US$75 billion, after adjusting for inter-company transactions.
CVS and Caremark believe that by combining their businesses they will be able to create significant benefits for the employers and health plans which currently use their services, and provide synergies that will give them a considerable competitive advantage over pharmacy industry rivals. The companies estimated that the deal would bring substantial operating synergies of approximately US$400 million through increased purchasing scale and operating efficiencies, and that it will also be accretive to earnings in the first full year. CVS has been in an entrenched battle for market share in the drug-store sector. It has been faced by direct rivals such as Walgreen, a rapid rise in the use of mail-order pharmacies by U.S. customers and increased efforts from large retail firms such as Wal-Mart to muscle in on this lucrative sector.
Two of the key things that consumers look for when deciding where to buy their pharmacy products are cost and convenience. CVS believes that by integrating with Caremark it will be able to provide a service that brings benefits in both of these areas to its clients. Nevertheless the deal, which will see Caremark shareholders receiving 1.67 shares in CVS in a stock-for-stock transaction, is likely to cause a significant headache for the regulators. It is likely to encounter a difficult review from the U.S. Federal Trade Commission, with the companies facing forced divestitures or changes to the deal if anti-trust problems are found, reports the Wall Street Journal.
Outlook and Implications
This merger between CVS and Caremark could take between six months and a year to close. It will considerably change the dynamic in the drug-retail sector by creating a monster company that has control over both the management of pharmacy benefits for a huge number of clients and over the stores or mail-order services where the prescriptions are eventually filled. As a result, this mega-merger could raise some concerns for consumers, as the new company aims to maximise its profits across both its PBM and retail pharmacy arms. This, of course, is something that the two companies have denied at length, instead claiming that costs for consumers will not rise because the new entity will have to remain competitive in this challenging sector.
While it remains to be seen whether this deal brings costs for consumers down or not, it does appear to pose a direct risk to drug-makers, especially if, as many analysts are now predicting, it sparks off a significant drive towards further consolidation in pharmacy services. The new CVS/Caremark will have significantly enhanced buying power over pharmaceutical firms, compared to what the two companies had separately. This increased leverage will particularly impact manufacturers of generic drugs, and products from branded-manufacturers that sit in some of the more commodity-rich sectors of the drugs market.