CVS' Caremark buy seen as bold, positive move

December 11, 2006

The recent news that CVS and pharmacy benefit manager Caremark Rx are hooking up (Drug Topics, Nov. 20) didn't come as a surprise to pharmacy insiders. What does the industry think of the $21 billion agreement?

Perry Cohen, Pharm.D., principal of the Pharmacy Group LLC, Glastonbury, Conn., said the merger "shows a wave of consolidation in the PBM industry as a repercussion of the winners and losers in Medicare Part D. Some people thought that the only losers were going to be small independent pharmacies. Some PBMs will be losers, too." It's easier to pick up script volume by directing PBM claims than to go and build more pharmacies, he said. "It all ties together. Then you have Wal-Mart offering $4 generics. A lot of the big players are doing things to protect their franchise or guarantee revenue streams in this new world."

Agnese agreed with Cohen that the CVS-Caremark deal is logical. "It fits CVS' strategy well," he said. "The chain was looking to grow its PBM business and this merger does just that in a significant way. It definitely gives CVS the scale and boosts its capability to offer mail order."

How will the deal impact independents? Agnese speculated, "Having more and more share in fewer and fewer hands hurts individual pharmacists because it makes it more difficult for them to compete."

The National Community Pharmacists Association issued a statement that said the merger plans could have a significant negative impact on patients' access to the pharmacy of their choice. However, NCPA also called the planned merger an excellent opportunity for CVS to address the many problems that PBMs like Caremark have caused community pharmacies and their patients, and urged the company to take action to clean up PBM abuses.

Will CVS' walk down the aisle with Caremark entice other chains to court PBMs, namely Medco Health Solutions or Express Scripts?

Agnese said, "Walgreens has to be seriously taking a look now at how it's going to boost its mail order and not fall behind. CVS is going to have enormous scale now, especially with its ability to get better deals from manufacturers by buying in bulk. Lately Walgreens has started to look at making acquisitions. An example is Happy Harry's-it's a smaller chain, but at least Walgreens is in the game and getting some experience with integrating acquisitions, which can be difficult. CVS has a history of integrating acquisitions."

Walgreens spokesman Michael Polzin said the firm plans to grow its PBM business, but he wouldn't say whether it would make any acquisitions.

Predicting that in the next five years, more PBMs would fall, change, and merge if they don't change their business model, Cohen commented, "I think Express Scripts will be the next to go."

Whether or not the industry will see more hookups between drug chains and PBMs in 2007 remains to be seen. One thing is certain. The CVS-Caremark deal signals a new direction for the industry that may include more combinations and consolidation among companies in the prescription drug business. Even Medco Health Solutions reportedly tried to strike a deal with Caremark before the latter reached its $21 billion merger with CVS.