CVS/Caremark
Anyone have an intelligent idea as to why Caremark would agree to be acquired for less than what the shares were most recently trading at? Craziest thing I have ever seen.
posted by Odoacer at
2:45 PM
Wednesday, November 01, 2006
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10 Comments:
Yo, I am puzzled too. But, over at the Health Care blog, someone had some insight on Caremark actually having a somewhat unsustainable business model.
http://www.thehealthcareblog.com/the_health_care_blog/2006/11/pbms_caremark_s.html
Toppe, Do I sell PFE here on the bad news for Torcetrapib? That was pretty much my main reason for holding the shares. My gut is saying sell.
The big emphasis on the call today was that CMX wants to get closer to consumers and CVS wants to get closer to payers. The companies hope to be leaders in healthcare by offering payers a consumer driven solution in contrast to one where payers force members to bear a larger portion of drug cost. So the idea is that the combined company can offer unique products to the market that will save cost and provide better service. They said they've been in talks for a long time (maybe 6 months or more) and that the deal was in no way driven by AWP or WMT. They emphasized that they're playing offense here, not defense.
Yeah, I listened in on the conference call yesterday. Almost puked from all the BS they were shoving down our throats. Funny little story, before I jumped in on the call, one of our senior analysts was saying anytime you hear someone talk about revenue synergies you should run as fast you can. What was the second thing out of their mouth? Revenue synergies...
I actually mispoke yesterday. Based on the terms, CMX got roughly a 5% premium or so, which is basically nothing. We own CVS, and I cover drug retailers as part of staples, so needless to say I am not happy about the stock's reaction to the deal particularly since two weeks ago I actually recommended we increase our weight in the stock.
Matt,
I am not covering PFE these days so I really dont have anything to offer on the stock. I hold it in my PA but have been negligent in paying attention. Too many bigger issues to pay attention to...
Also, this transaction is interesting from the perspective of thinking across the pharmacy value chain. I had contemplated that the PBMs would have been taken out by the large national managed care providers when multiples were rising in that group in the recent past while PBM multiples had begun to decline. From a cost of care perspective, those pairings would be better for cutting costs to employers across the health care continuum -- and by that, I mean bringing down the total cost of care, vs. playing a game to reduce some drug costs and not others, but with little regard for the efficacy of therapies. The managed care companies would encourage utilization where it would keep hospital costs down, even if a pharmaceutical therapy might cost more than an alternative with less efficacy. In short, they understand the cost/benefit analysis to drug therapy and would use it to deliver more cost efficient medicine. They also had the ability to take some share in this business over time and use their overall cost control ability to win some customers as they tried to achieve some scale.
By contrast, the PBMs run by pharmacies always seemed a dubious effort. In fact, WAG's CEO told Anil and I that he never thought it would be a really big business for them, but that they got useful information by having one. It never seemed to be much of a possibility that any of the drug retailers could develop truly competitive PBMs on their own, as there already existed too much volume inside the big three PBMs, and there was really a very limited value propsition they could offer to potential clients. So if a retailer wanted control of their own destiny, they did need to buy in.
While some may see this as a sign of weakness for CVS, I see it as equally so for CMX. The battle over value capture is clearly here, and I believe that physical location is very important here. The drug store will not go away, but they are likely to encounter fierce competition in mail as the PBMs get aggressive on pushing newly generic medicines to mail that they had formerly not pursued as brands (which aren't very profitable in mail). On the flip side, the retail point of distribution has now more substantially consolidated, giving the retailers more leverage in dealing with the PBMs. In short, PBMs are in a position to drive volumes away from drug retailers and retailers are in a position to squeeze margins back on the PBMs for drugs delivered through retail. In addition, while mail is a great cost reducer, as this generic wave comes to an end in 2007, profit growth for the PBMs and drug retailers, in my opinion, was to be limited (except through store growth and aging population) and possibly eroded from 2007-2010, when the next wave begins.
This deal combines the strength of both channels. Likewise, this achieves a goal in addressing the WMT competitive threat. That is, that the real way to drive down costs was for drug retailers to build/buy packaging facilities. This is the best way to drive down retail distribution costs. The pharmacist is too expensive, and there is a shortage of them, and many Rx filled at retail are common pills and dosages. Why not package those drugs in a facility and just have the pharmacist hand them out with instructions at the counter vs. having the pharmacist actually "fill" the script? There is certainly a set of non-chronic meds that could be more cost-efficiently delievered this way, driving down fill cost. OCR has made a living doing this in the institutional setting (current issues aside), and I think it was only a matter of time before the drug retailers would go this way.
So why not combine the PBM, with the efficient packaging faclilities and the drug retailer with the convenient locations? Consolidating in this way, there is no incentive to tie drug therapy to outcomes. It is purely profit promotional through aggregating buying and distribution power. Not that there is anything wrong with that economically, but employers costs will not be competed down as quickly in this scenario. But for the protection of both the PBMs and drug retailers, it makes a lot of sense. In the short term, the player making the first deal should be able to leverage the combined platform very effectively. This should really pressure WAG and RAD to act as well. And for WMT, boom, a big shot back across the bow. WMT will not be the low cost provider in this space unless they buy there own PBM. This is a real - "take that" - move from CVS.
The question is, who steps up next? Will it be WAG or AET? (I doubt WMT.) And if the pairings bifurcate between industries, how will that change competition? If I was thinking of buying a PBM as a CEO at a managed care company, I had better act fast. But the managed care companies have plenty of capital and strike me as more efficient decision-makers than mgmt. at WAG. With WAG under pressure to follow suit, AET sitting on a pile of capital, we could be off to the races with deals here, and the outcome of pairings could be pivotal in determining winners in this arena over the next 10 years.
A small portion of my report to the PM's on the deal
"I was really disappointed by the conference call discussing the merger. Both CEO’s were on the call and had equal opportunity to discuss the deal. Frankly, they offered no truly compelling reason for the deal. They offered a lot of platitudes and generalizations but really nothing to buy into. The image of how this deal came to pass in my mind is as follows: Each CEO privately has a “grass is greener” view of the other. The CMX CEO wants to retire and doesn’t have a successor in place. They play golf a few times and share Cuban cigars at a nice restaurant, at shareholder expense, while talking about the industry. Lacking anything else to do, they decide to merge – CMX needs an exit strategy and CVS needs a deal, any deal. I was skeptical of the deal before the conference call and left it fairly disappointed and even more skeptical."
You should probably copy my comments, cut out your comments, and then paste my comments on your report. Your PMs would be more interested in hearing analysis than silliness.
Ben,
Some day you will have the intellectual credibility with your PM's that will be able to inject some humor into your analysis. Until then, enjoy regurgitating other people's analysis and passing it off as your own.
Greg
I had the credibility within the first month son as I got three different guys to sell off 10% of a company in one week. Also, I am not regurgitating any else's analysis...I have always followed CVS/WAG as I have always loved the companies. But i do like your humor.
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