Pharma will see tougher price negotiation from its trading partners
Concluding an unusually contentious battle for control, Caremark, the No. 2 pharmacy benefit manager (PBM) based in Nashville, TN, announced on March 17 that its shareholders had approved the acquisition by CVS, the No. 1 drugstore chain (by number of pharmacy outlets). The “integrated pharmaceutical services provider” will have projected revenues of $75 billion, with 161,000 employees, 6,200 stores in 43 states, and managing over 2,000 corporate, insurance, managed care, government and union health plans. The companies plan to wring out $500 million in efficiencies, and to increase revenue by $1 billion in the coming year.
The losing bidder was Express Scripts (Maryland Heights, MO), whose unsolicited bid ended at an offer price of around $27.2 billion—higher than CVS’, but less attractive to Caremark shareholders, partly because of fears of anti-trust attention. Wall Street, raising numerous questions about the structure of the CVS-Caremark deal initially, bid up the price of Express Scripts during the contest and following the deal conclusion. At least one financial analyst (at Credit Suisse) also gave CVS an “outperform” rating after the successful vote. Chatter among stock pickers is that Express Scripts might bid for another PBM, or that the big chains might want to match CVS/Caremark with a PBM merger.
What does all this mean for the pharma industry? There is no little irony that at a time when pharma stocks are under continuing pressure, PBMs and chains are seeing rising valuations because of strong profit growth. Overall, bigger retailers (including Wal-Mart, whose “$4 per month” prescription plan is cited as a factor driving the merger) and bigger PBMs mean a stronger price-negotiation position for these pharma customers. CVS/Caremark is counting on better performance because it will now have bricks-and-mortar stores to serve customers in addition to its mail-order services. CVS/Caremark “will transform the way pharmacy services are delivered, enabling consumers to benefit from enhanced healthcare services and improved outcomes, and for payers to benefit from more effective cost management tools," said Tom Ryan, chairman of CVS after the acquisition vote. But in a recent interview with Healthcare Week in Review, David Snow, CEO of Medco Health Solutions, said that retailers that Medco works with see CVS/Caremark as “a threat to their business,” and might prefer a “neutral” business partner like Medco.
“I expect more consolidation within the U.S. pharmaceutical infrastructure - the network of companies that facilitate dispensing and payment of pharmaceuticals -- PBMs, GPOs, wholesalers, retailers, providers, et al. These formerly distinct sectors now find themselves competing for similar profit streams due to cross-industry consolidation,” says Adam Fein, president of Philadelphia-based Pembroke Consulting (and a Pharmaceutical Commerce Editorial Board member). “In 2007, I'd expect even more creative combinations as profit models continue to converge. I would not be surprised to see a Big 3 drug wholesaler acquire an acute care GPO or a chain pharmacy to combine with a provider (a la CVS and MinuteClinic).”
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