CVS to buy Caremark in vertical expansion
The US's drug store chain announced it would buy the US's #2 pharmacy benefits manager in a $21 billion move. The move is a dramatic vertical acquisition that will stir up the already shaking drug industry.
A pharmacy benefits manager (PBM) is a company that negotiates and coordinates and purchases for insurance companies, hospitals, government agencies, and other large institutions. They use their purchasing power to hold down drug costs, and exert major power in the industry by establishing so-called "formularies," lists of approved drugs for specific illnesses. Drugs not on an insurance company's formulary, for example, may require end consumers paying in full out of there own pocket. Drug chains work through the PBMs to get paid for the drugs they sell and must negotiate margins.
In recent years, the big PBMs (Medco, Caremark, ExpressScripts) have been in direct competition with the ever-concentrating drug chains, by establishing extensive mail-order refill programs. Mail-order plans are highly automated and have low overhead costs, so they can charge less. Some big companies, including IBM and GM, have made mail-order ordering mandatory for employees. The big drug chains (Walgreen, CVS, Rite-Aid) have been desperately trying to catch up, but they are of mixed minds, since a trip to the pharmacy often also means buying shampoo, candy, or aspirin at their superstores. CVS, for example, now currently has its own, much smaller, PBM/mail-order operation, called PharmaCare.
The announcement comes as the drug store chains are see the competition matrix shift on them, as companies like Wal-Mart, Target, and others become serious competitors. That was capped off by the recent announcement by Wal-Mart that it would begin to sell many generic drugs at extremely low prices in its stores, a move that Target and K-Mart soon announced they would follow.
The new company will, according to sources, be able to fill over a billion prescriptions a year, giving them the ability to negotiate better deals from the Pfizers and Mercks of the world. Analysts see it as a good move for CVS. But will the other PBMs refuse to allow patients to fill their prescriptions at CVS stores when it becomes a direct competitor?
And for the consumer? According to Sidney Wolf, the director of the health research group at Public Citizen, a Washington nonprofit group, not so much. "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…There is no evidence this kind of thing passes money onto patients." ("CVS, Caremark Unite to Create Drug-Sale Giant", Wall Street Journal, 11/2/06)
The drug industry, already a tight oligopoly on many levels, looks like it will concentrate even further. As one industry analyst is quotes as saying, "Whenever you have a merger of this size, it can force other players in the industry to say, 'Do we need to buy someone? Do we need to be bought?'… I'm sure management teams across the industry are talking this morning."
He also said "Historically, the PBMs and drugstores are on opposites sides of the fence; it's a bit surprising to see them get together." (""CVS-Caremark Merger May Spark Similar Deals", Wall Street Journal, 11/1/06)
You have it all - shift in the matrix, feeding frenzy, friendly enemies. All leading to more concentration. ExpressScripts may be in play and Walgreen and/or Wal-Mart may be interested.
The next question, assume stockholders approve, is how antitrust regulators will react,
6:16:37 PM 
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