Many investors are scratching their heads after the announcement of a blockbuster deal that would, if approved, combine CVS (CVS) and Caremark Rx (CMX) into a pharmacy goliath with a $40 billion market value and $90 billion in sales. Caremark has been very active in the M&A game in the past but this deal in particular surprised a lot of people. There are obvious synergies between a PBM and an actual pharmacy and it will be interesting to see exactly how the deal turns out, both for customers and for shareholders.
What exactly was the motivation for such a deal? Several ideas come to mind. First, Wal-Mart’s recent decision to price a 30-day supply of generic drugs for as little as $4 is a real threat to the likes of CVS, Walgreen’s (WAG), and Rite Aid (RAD). By merging with Caremark, CVS opens up new, stronger avenues to compete with Wal-Mart (WMT). For one, they can enhance their mail order prescription business (mail order script fills have stronger margins than retail fills). Second, now when Caremark works with corporations and customers on benefit program management, they can steer clients toward CVS retail stores or one of their own mail order pharmacies.
Cost synergies seem inevitable with this deal as well. Computer systems can be made far more efficient with the company adjudicating the claims and the pharmacy filling the scripts on the same team. Cash collections will also likely be improved since the pharmacies and the PBM will not be trying to squeeze each other for their own cash flow gains.
All in all, the combination of bricks and mortar pharmacy, mail order pharmacy, and pharmacy benefits manager makes logical sense. The size and scope of the deal, along with its associated integration, might have made some leery in the past to make it happen. However, Caremark has shown a willingness to make game-changing deals (they acquired AdvancePCS, a large competing PBM several years ago and it proved a very successful transaction).
It will be interesting to see what, if any, response Express Scripts (ESRX) and Medco Health (MHS) decide on. I could also imagine that many Caremark shareholders will be upset with this deal and might even vote against it. Will they be able to halt the deal entirely? Perhaps, but it’s too early to tell. Caremark and CVS will definitely have to sell the deal to naysayers though, and do so convincingly.