In the November 2006
issue:
Booming Biotech Market - Fifteen Deals Worth $7.8 Billion Announced in
October
During October witnessed a total of 15 mergers and acquisitions in the
biotech sector. The combined price for this activity was $7.8 billion.
...
CVS and Caremark Rx To Combine - Is This $21.0 Billion Merger A
Prescription for Success?
As we were going to press, retail drugstore giant CVS announced a merger
with lead pharmacy benefits manager Caremark Rx. Read inside to see what is
behind this $21.0 billion deal and how it may shape the future of PBM
mergers and acquisitions.
...
In The Departments
October’s M&A Market
Services
-
Health Care Services
-
Deal Summaries
-
Additional Transactions
-
Transaction Updates
Technology
-
Health Care Technology
-
Deal Summaries
Additional Transactions
-
Transaction Updates
Sign up for a trial subscription and get
the current issue!
Read more about
The Health Care M&A Monthly.
Articles Archive
Companies Mentioned in this issue:
November 2006
A
AdvancePCS p2
Albertson’s, Inc. p2
Alnylam Pharmaceuticals p9
Alternative Behavioral Services p3
Alvarado Hospital Medical Center p4
Amedisys p4
AnorMED p10
Aspen Educational Group p4
Axia Health p8
B
Bain Capital Partners p4
Banc of America Securities, LLC p16
Bank of America p16
Baxter International p15
Beckman Coulter p16
Behavioral and Medical Research p8
Biomet p16
Blackstone Real Estate Partners p8
Boehringer Ingelheim p16
Borealis Infrastructure Management p8
Brean Murray, Carret & Co. p10
Bristal Assisted Living p8
Bristol-Myers Squibb p15
C
California Clinical Trials Medical Group p8
Capella Healthcare p4
Caremark Rx p1
Carraway Methodist Medical Center p4
Charles River Laboratories p8
Chartwell Seniors Housing REIT p8
Chattem p16
Chemed Corp. p1
CIBC World Markets p8
CNS p16
Community Health Systems p4
Connetics Corp. p16
Corus Pharma p9
CRC Health Group p4
Credit Suisse p8
CVS Corporation p1
Cytyc p16
D
Danaher Corp. p16
Deutsche Bank Securities p16
Doctors Community Healthcare p4
E
Eckerd p2
Eli Lilly & Co. p9
Emeritus Assisted Living p8
Encysive Pharmaceuticals p9
Evercore Group, LLC p3
F
FHC p3
Fresenius p16
FTI Cambio p4
G
GE Healthcare Financial p8
Genzyme Corp. p10
Gilead Sciences p1
GlaxoSmithKline p9
GP Medical Ventures p7
H
HAPC p16
Harborside Healthcare p8
Healthways p8
Hollywood Medical Center p4
Horizon Health Corp. p4
I
I-Flow Corporation p16
Icos Corporation p9
ImClone Systems p10
Impact Dental Laboratory Limited p8
InfuSystem p16
Investcorp p8
J
J.C. Penney p2
J.P. Morgan Securities p3
Jefferson County Patient Care Services p4
Johnson & Johnson p16
L
Lehman Brothers, Inc. p3
LifeMasters Supported SelfCare p8
Lumigen p16
M
Maverick Capital, Ltd. p15
MDS, Inc. p7
MedAvant Healthcare Solutions p15
Medical Resource, LLC p15
Merck & Co. p9
Merrill Lynch & Co. p9, p16
Millennium Pharmaceuticals p10
Muskogee Regional Medical Center p4
Myogen p1
N
Nabi Pharmaceuticals p16
National Dentex p8
National Provider Network, Inc. p15
Northwest Kinetics p8
Novartis p10
NuScribe p15
P
PAREXEL International p8
Parkway Regional Medical Center p4
Pfizer p16
Plexxikon p10
Plymouth Health p4
Psychiatric Solutions p3
R
RBC Capital Markets p8
Regency Care p8
Roche Holding p10
Rosetta Inpharmatics p9
Roto-Rooter p1
S
Sirna Therapeutics p9
Smith & Nephew plc p16
South Broward Hospital District p4
Stiefel Laboratories p16
Stryker Corp. p16
Sun Healthcare Group p8
T
Tenet Healthcare Corp. p4
Texas Pacific Group p15
The Keller Group p8
The Public Health Trust of Miami-Dade County p4
U
UBS Securities LLC p3
V
Vemics p15
Ventana Medical Systems p16
Vision Systems Ltd. p16
Vitas Healthcare p1
W
Wal-Mart p3
Z
Zimmer Holdings p16 |
CVS and Caremark Rx To Combine - Is This
$21.0 Billion Merger A Prescription for Success?
Email Editor
Business partners can make
strange
bedfellows, and not the least in the
health care M&A market. Consider the whimsical (and admittedly successful)
2003 pairing of hospice services provider Vitas Healthcare with
drain cleaning services provider Roto-Rooter to form Chemed
Corp. (NYSE: CHE). But even a deal between two companies with more in
common can leave us scratching our heads, wondering what makes it tick?
And we just heard about a doozy that made us question on which side of the
trick-or-treat equation this deal fell.
The morning after Halloween
The New York Times reported on a rumored $21.0 billion merger
between the retail drugstore chain CVS Corporation (NYSE: CVS) and
the pharmacy benefits manager (PBM) Caremark Rx (NYSE: CMX). By
early afternoon, the fated press release appeared announcing a "merger of
equals."
Such
language, when it occurs in the context of M&A, needs decoding; here it
means something like "don’t expect any premium." And, indeed, the deal
does not dangle any premium in front of CMX shareholders. Further, the
announcement displeased investors, who sent the price of both stocks down,
dragging the entire PBM sector with it. So, if on the face of it, a deal
charms neither investors nor analysts, what reasons, we have to ask, do
management and the companies have for undertaking it?
First, a look
at the players. CVS is a national drugstore chain that also provides
other, related services, such as PBM and specialty pharmacy. The company
has expanded through organic growth and acquisitions. In 2004, it paid
$2.15 billion to acquire 1,260 Eckerd drugstores in the South and
Midwest from J.C. Penney (NYSE: JCP), along with its specialty
pharmacy, PBM and mail order businesses. Earlier this year it acquired
Albertson’s, Inc., and its 700 stand-alone drug stores, for $4.0
billion. As of July CVS operated approximately 6,200 stores in 44 states,
including 52 specialty pharmacies in 22 states. For the first six months
of the year, CVS’s PBM segment generated revenue of $1.74 billion,
representing 8% of the company’s revenue during that period. On a trailing
12-month basis, CVS generated company-wide revenue of $39.2 billion,
EBITDA of $2.9 billion and net income of $1.3 billion.
Caremark
provides pharmaceutical services, specializing in pharmacy benefit
management services for prescription drug use. Its CarePatterns and
Accordant disease management programs cover various conditions, including
asthma, coronary artery disease, congestive heart failure, diabetes,
hemophilia, rheumatoid arthritis and multiple sclerosis. It provides
prescription drugs through its own mail service pharmacies and a network
of third-party retail pharmacies. The company grew through a series of
acquisitions, peaking in late 2003 with its $6.0 billion purchase of
publicly traded PBM AdvancePCS. Since then expansion has relied on
organic growth from existing resources, not from acquisitions. But, as
seen below, CMX did not go on an M&A diet because it had lost its appetite
for dealmaking. As for its financials, on a trailing 12-month basis, CMX
generated revenue of $34.8 billion, EBITDA of $1.7 billion and net income
of $1.0 billion.
CMX may be
contemplating this deal as a response to a pesky regulatory limitation on
the company’s future growth. With so much consolidation in the late 1990s
and early 2000s, only a handful of PBMs are left, and they dominate the
market nationally, so that any sizable acquisition in this industry would
likely be deemed anticompetitive by the antitrust powers. This presumably
led CMX to step outside the PBM industry, and into the arms of CVS.
Under terms
of the agreement, CMX shareholders are to receive 1.67 shares of CVS
common stock for each share of CMX common stock they hold. After the deal
closes and on a pro forma basis, current CVS shareholders will own 54.5%
of the combined company, CMX shareholders 45.5%. The board of directors of
the new company will be split evenly between current CVS and CMX
management, with CMX’s Mac Crawford advancing to Chairman and CVS’s Tom
Ryan stepping into the CEO slot.
The basic
proposition behind this combination seems to be that CVS can use CMX’s
skills in lowering the cost of prescription drugs to attract more
customers, prescriptions and revenues to its stores while CMX sees in CVS’
national chain an expanded network to which it can apply its PBM products
and services. The combined organization would generate about $75.0 billion
in sales, but result in only $400.0 million of synergies, capable of
moving margins less than 1%. The company, to be called CVS/Caremark, will
be headquartered in Rhode Island, while all the PBM and specialized
pharmacy services will be concentrated in Nashville.
This merger
is not—the parties insist, and rather loudly—a defensive reaction to
competitor Wal-Mart’s (NYSE: WMT) recent plan to sell prescription
drugs at its retail stores for four bucks a pop. Still, this deal appears
to give the combined company an operational competitive edge, and that may
be the best that can be said about it. From an investment perspective,
shareholders may have to content themselves with not seeing company
earnings diluted in this transaction.
If this
transaction goes through and shows positive operational or financial
results, particularly in improving margins, we may yet see a subsequent
round of deals pairing up retail drug stores with PBMs down the road.
Based on what we currently know, however, this deal leaves us nonplussed.
CMX had financial
advice from J.P. Morgan Securities and UBS Securities LLC
while CVS got its investment banking advice from Evercore Group, LLC
and Lehman Brothers, Inc. |
|
FREE TRIAL
TO THE
HEALTH CARE M&A INFORMATION SERVICE!
If you like this article, there’s lots more
waiting for you in The Healthcare M&A Information Service. It’s the
bible of what's going on in health care M&A today.
Sign up for two free months right now! There’s no
obligation, no writing “cancel” on a bill. Happy reading!
|
|
