Investors have bought the logic, which Thermo Fisher CEO Marijn Dekkers describes as the laboratory equivalent of joining the leading computer-printer maker with the top cartridge company. The combined company is a third larger than its closest lab-equipment rival, its stock price is up to $45 a share from the low $30s in the months before the announcement, and most securities analysts have raised their estimates on the company. Moreover, the new entity didn't take on any new debt, replacing existing borrowing with a new $1 billion credit facility, and in the process raised Fisher's rating to investment grade, from one notch below.
Little Fish, Then Big Fish
Far from the laboratory side of life
sciences, the world of drug dispensation
was shaken by the proposed CVS-Caremark
deal. But there, too, the road to the
acquisition was paved by years of development
by one of the parties — as Woonsocket, Rhode Island–based CVS
expanded its pharmacy franchise out of
the low-growth Northeast and into the
Sunbelt. Starting in 2004, it acquired
1,268 Eckerd and 701 Savon and Osco
stores, extending the chain into 43 states
with a total of 6,200 outlets.
CVS began 2006, however, with a relatively tiny acquisition: it bought retail drugstore diagnostic center MinuteClinic for an estimated $170 million. More than just giving CVS a new business line, the MinuteClinic acquisition let the drugstore chain be seen more as a healthcare provider. The deal prompted rival chains to consider similar strategies. Even some people at CVS figured it was time for a rest. "With MinuteClinic in hand, we thought we were in for a nice little time when we'd be expanding internally in various ways," says CFO David Rickard.
The strategic thinking behind the MinuteClinic deal, though, led CEO Tom Ryan to ponder more ways that CVS could be part of the evolving delivery of medical services. Ryan and Caremark Rx CEO Mac Crawford "had dinner one night, just checking in with each other," as executives in related industries often do, says Rickard. Nashville-based Caremark is among the largest providers of pharmacy benefit management (PBM) services, administering drug distribution through 2,000 health plans. During their conversation, "the two CEOs realized they shared a vision of the way U.S. health care will evolve in the next several years," says the CFO.
What they saw was a need to repair a rift in the system: consumers being penalized by higher copayments and reduced service in company-sponsored plans, while companies sought to deliver more value to employees. As Crawford and Ryan discussed the dilemma, "their conclusion was that this whole market is going to become more consumer-centric," and the combination of PBMs and pharmacies is aimed at facilitating that. A $21.8 billion merger proposal resulted.
Such a reorientation could change drugstores' relationships with PBMs, which tend to dictate terms to drugstores, forcing them to raise prescription rates. The combined PBM-and-pharmacy clout of CVS-Caremark, in theory, might allow the company to help create better deals for consumers, while it gives itself new revenue opportunities. Other drugstore chains and PBMs would also have to join forces, according to this scenario.
Fundamentally, a CVS-Caremark combination would change the structure of the drug-distribution business by putting company administration and drug delivery in the same hands. It would also have phenomenal reach: Caremark works with a national network of 60,000 pharmacies, seven mail-service pharmacies, and nine call centers. And CVS predicts that the "merger of equals" would generate $400 million in synergies from purchasing, operational efficiencies, and overhead reductions, with savings being passed on to consumers.
"We have a growth engine here that is phenomenal," Rickard says of the current CVS operation. "But in combination with Caremark, and with the cash-flow-generating capacity of the drugstores, we'll just gush cash."
Investors bid both CVS and Caremark lower after the deal was announced, though. Rickard thinks the hit to their shares reflected a lack of clarity about the vision for a combined company. "The two businesses — PBM and the drug business — are very different. They've been somewhat at war until now, and investors have been on both sides of it," he concedes.
At press time, a competing $26 billion bid for Caremark had been received from St. Louis–based Express Scripts Inc. — a classic PBM "scale-building" proposal that set the stage for a bidding war. While CVS's rival was not a PE player, Rickard had prepared for a private bid when he did his premerger valuation. "As a so-called strategic buyer, we base our values on improved growth, improved margins, and such, while the private-equity guys are looking at a set of cash transactions only. They buy it, squeeze it for a few years, and sell it," says Rickard. "We ran the numbers both ways."
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