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In a deal that will bolster CVS Corp.’s status as a leader in the pharmacy industry, the Woonsocket-based company last week said it will acquire Caremark Rx Inc., a Nashville-based pharmacy benefits manager, for $21.2 billion in what it described as a “merger of equals.”
Under the terms of the agreement, Caremark shareholders will receive 1.67 shares of CVS for each share of Caremark. When the deal is completed, the company will be renamed CVS/Caremark Corp.
Thomas Ryan, CEO of CVS, will remain as chief executive, while Caremark chief Mac Crawford will become chairman of the corporation.
“This merger is a logical evolution for CVS, Caremark and the entire pharmacy industry,” Ryan said in a news release. “Together, CVS and Caremark will help manage the costs and complexities of the U.S. health care system, offering unparalleled access and driving superior health care outcomes, enhancing value for employers, health plans and consumers.”
CVS operates the nation’s largest retail pharmacy chain, with 6,157 stores across 43 states and the District of Columbia as of Sept. 30, as well as a $3 billion wholly owned pharmacy benefits management (PBM) and specialty pharmacy subsidiary, PharmaCare.
In addition, CVS is involved, through a PharmaCare partnership, in a major Medicare Part D prescription drug plan, and it recently bought the MinuteClinic retail health clinic chain.
Caremark, meanwhile, provides PBM services to more than 2,000 health plans, including major corporations such as AT&T, HMOs, insurance companies, unions and government entities. It also has a subsidiary that provides Medicare Part D coverage, and it operates a national retail pharmacy network with more than 60,000 participating pharmacies, seven automated mail service pharmacies and 21 smaller regional mail service pharmacies.
As part of the merger, PharmaCare will be brought under Caremark’s operation, creating a $33 million PBM business, said David Rickard, chief financial officer and chief administrative officer of CVS and future CFO of the combined company, in an e-mail interview. Industry leader Medco Health Solutions Inc. reported nearly $38 million in revenue in 2005.
Asked whether CVS, which has focused on retail acquisitions in recent years, now sees less growth potential in retail than in PBM services, he replied:
“Oh no. This is entirely because of the size and nature of the opportunity that the merger represents. … This is an upside opportunity – not walking away from the retail stores.”
The companies said the PBM business would be based in Nashville, but asked how that would affect the staff of PharmaCare, which is based in Lincoln, Rickard replied: “We will determine over the next few months how the integration will go. … It’s not clear or necessarily the case that a lot of people will be asked to move.”
Altogether, the two companies said, they will employ more than 180,000 people, including more than 21,000 pharmacists and nurse practitioners.
In the companies’ joint announcement, Caremark’s Crawford said the merger would create “a significant platform to address the needs of both payors and consumers by providing high-quality, cost-effective services in a manner that is convenient, flexible and easy for the consumer to navigate and understand.”
At least some analysts agree this could be a powerful combination.
“It makes CVS both a competitor and a supplier to the other chain drugstores,” said Matthew Kaufler, who helps manage $2.5 billion in assets, including CVS shares, at Clover Capital Management in Rochester, N.Y. “This could truly be a transformative event.”
The announcement of the merger came on the same day as the release of CVS’ quarterly earnings report, which showed a 12.5-percent increase from the same period last year, to $284.2 million. The combined 2006 revenue for CVS and Caremark is projected to be about $75 billion.
The initial response in Rhode Island was positive.
Gov. Donald L. Carcieri issued a statement saying he was “pleased” that CVS would keep its headquarters in Rhode Island, and adding that he would be “working closely” with CVS executives to determine how the deal would affect the company’s Rhode Island employees.
“My hope is that today’s announcement will mean a bigger presence in Woonsocket and Rhode Island for CVS,” he said.
With Bloomberg News reports.
