Express Scripts tops CVS in hostile bid for Caremark Rx
A surprise $26-billion hostile bid Monday for one of the largest managers of employee drug benefits by a smaller rival could lead to lower drug prices for employers and their workers, analysts said.
The offer by Express Scripts Inc. to acquire Caremark Rx Inc. came nearly two months after drugstore giant CVS Corp. offered about $5 billion less for Caremark. Express’ move puts pressure on CVS to sweeten its bid.
Consolidation among pharmacy benefit companies such as Maryland Heights, Mo.-based Express Scripts and Nashville-based Caremark, rather than acquisitions from outside players like CVS, could give the combined company greater power to negotiate lower drug prices and pass along more of the savings, analysts said.
Pharmacy benefit companies are middlemen hired by employers and insurers to negotiate better prices from drug manufacturers and retailers. They also encourage workers to use lower-priced generic drugs and less expensive mail-order pharmacies, taking millions of customers away from drugstores.
As the cost of prescriptions have increased at double-digit rates for much of the last decade, pharmacy benefit managers have been under growing pressure from employers and insurers to hold prices down.
Prescription medication costs were up a lower-than-expected 5.4% in 2005 but were still rising almost twice as fast as inflation.
Caremark is supposed to negotiate the lowest price possible for its clients, but some analysts say it might not do so if it was owned by CVS.
“Being bigger means [Express Scripts] could get better deals from big pharma, and they wouldn’t have a conflict of interest in their business model,” said Richard Frank, a Harvard University health economist.
Christopher McFadden, a Goldman, Sachs & Co. healthcare analyst, agreed that consumers could see lower drug prices under the proposed deal, but said the effect might be muted.
Pharmacy benefit managers’ services “are sold to employers, so any benefits they get would have to filter through an employer first,” he said.
Pharmacy benefit managers have expanded rapidly over the last decade as a slew of high-priced drugs have hit the market and the overall number of medications Americans take has increased. Today, four main players -- Caremark, Medco Health Solutions Inc., Express Scripts and WellPoint Inc. -- play a powerful, behind-the-scenes role in the $250-billion-a-year pharmaceutical market.
But a recent wave of consolidation in the healthcare industry means that bigger may indeed be better for many healthcare players, including pharmacy benefit managers.
Larger pharmacy benefit managers would have more negotiating power with drug makers, which also are merging. After years of lukewarm results from their research pipelines, many drug manufacturers may soon have no other choice but to partner with competitors if they hope to keep robust profits, many analysts say.
And now that major retailers such as Wal-Mart Stores Inc. and Target Corp. have begun selling generic drugs for $4 each, there’s pressure on everyone to lower prices as much as possible.
Under its proposed deal, Express Scripts is offering $29.25 in cash and 0.426 of a share of its stock for each share of Caremark stock. The combined company would have about 30% of the total pharmacy benefit management market, with $49 billion a year in revenue compared with its next biggest rival, Medco, with revenue of $38 billion a year.
Express Scripts Chief Executive George Paz said it made sense to join with Caremark because the companies had similar business models and cultures. Express Scripts expects a marriage to generate $500 million in annual cost savings, although the company didn’t lay out a detailed plan on how it would achieve that.
As a combined company, “we can take inefficiencies out of the supply chain and negotiate the best deal for our customers,” Paz said.
Not everyone is confident that more consolidation is good.
Sean Brandle, national pharmacy practice leader for Segal Co., a benefit consulting firm, agreed that bigger pharmacy benefit managers would have more bargaining clout. But there’s no guarantee, he said, that the companies would pass along any savings to employers and thus workers.
Brandle also said that larger pharmacy benefit managers might seek larger rebates and other incentives from drug manufactures in exchange for their business, a common but controversial practice that could result in consumers’ getting higher-priced medications.
In 2004, Medco paid $29 million to settle allegations by 20 states, including California, that it pressured doctors to switch patients’ medications to benefit its bottom line.
Although any deal is likely to draw scrutiny from regulators in Washington, analysts say they wouldn’t expect one to be rejected because there would still be several other competitors in the market and because recent political winds favor such deals.
CVS issued a statement saying the company hadn’t had an opportunity to review the Express Scripts offer but that it had a definitive agreement with Caremark.
Shares of Caremark rose $5.28 to $55.58. Express Scripts shares rose $1.31 to $69.97.
