CVS to buy top manager of drug plans

By Lisa Girion

Nov. 2, 2006 12 AM PT

Times Staff Writer

The proposed $21-billion merger announced Wednesday between drugstore giant CVS Corp. and pharmacy-benefits manager Caremark Rx Inc. would give the new company immense power to influence prescription drug prices, but that might not translate into more affordable medications for consumers, analysts said.

The combined company would dominate much of the market and reduce competition, becoming both a supplier and a rival to other drugstore chains, analysts said.

“Caremark was constantly pushing retailers for lower prices,” said Sean Brandle, national pharmacy practice leader for Segal Co., a benefits consulting firm. “That’s gone away.... We’ve lost one of the checks and balances that was inherent in the system.”

The merger was seen as the latest effort by CVS to keep up with a fast-changing prescription drug market increasingly shifting to companies like Caremark that specialize in selling 90-day supplies of generic maintenance drugs by mail order.

The combined company would control more than a fourth of the nation’s pharmacy market, dispensing about 1 billion prescriptions a year.

Many of those prescriptions would be filled for people in California, where CVS has become a major player with its acquisition of 700 Osco and Sav-On stores from Albertsons Inc.

CVS and Caremark cited competitive strength as one of the benefits of the deal. They did not mention pricing, but said customers would benefit from “expanded choice, unparalleled access, and more personalized services.”

The combined company would be a more formidable competitor to Wal-Mart Stores Inc., which recently slashed the price of generics, prompting other big retailers to do the same and triggering what some view as a new drug war.

“They are all battling for the traffic in their stores,” Brandle said.

Because of the two companies’ overlapping footprints, the merger must be approved by the Federal Trade Commission in a process that could take months. If the FTC finds antitrust problems, portions of one or both companies may have to be divested before the deal could go forward.

The deal reflects the pressure drugstores have been under in recent years as they have lost prescription business to mail-order companies. These highly automated fulfillment shops can beat retailers’ prices on prescription medications because they have lower overhead and labor costs.

They also gain a pricing advantage by focusing on maintenance drugs, such as cholesterol-lowering medications and birth control pills, that can be sold in 90-day supplies rather than shorter-term medications such as antibiotics needed on an urgent basis.

Much of the shift to mail-order prescriptions has been driven by employers seeking to hold down the soaring cost of providing health benefits. Prescription medication spending was up 5.4% in 2005, to more than $250 billion.

Caremark and other companies that manage prescription drug benefits for employers hold down costs by buying in bulk and seeking out the lowest prices on medications from pharmacies and other distributors.

They also encourage employers to steer their workers toward newly available generic drugs that are much cheaper than the branded medications they mimic.

“Drugs are becoming commodities,” said John Cronin, a lawyer and pharmacy consultant who owns two independent drugstores in San Diego County.

Indeed, drugstores rely on pharmacy customers to make other purchases when they come to pick up their prescription medications.

They have tried to staunch the loss of business by beefing up services, such as offering flu shots and opening medical clinics.

Retailers also have expanded through acquisition, enabling them to fill customers’ prescriptions even when they are not at home. In addition to its Osco and Sav-On acquisitions, CVS in 2004 bought 1,260 Eckerd drugstores and its mail-order pharmacy business from J.C. Penney Co.

The deals have not been good for consumers, said Jerry Flanagan, a patient advocate with the Santa Monica-based Foundation for Taxpayer and Consumer Rights.

“Mega-mergers are transforming the healthcare marketplace and reducing consumer choice,” Flanagan said.

Investors took a dim view of the deal. Shares of CVS closed down $2.32, or 7.4%, to $29.06. Caremark fell $1.06, or 2.2%, at $48.17.

Also Wednesday, CVS said its third-quarter net income rose 12% to $284.2 million, or 33 cents a share, on higher sales of generic drugs. Revenue was up 25% to $11.2 billion.

Caremark reported net income of $288.6 million, or 67 cents a share, up 25% from a year earlier. Revenue rose 13% to $9.1 billion.

lisa.girion@latimes.com

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Back story

CVS

Headquarters: Woonsocket, R.I.

Founded: 1963

Chief Executive: Thomas M. Ryan

Business: Operates 6,200 retail drugstores

Prescriptions filled (2005): 434 million

Sales (2005): $37 billion

Net income (2005): $1.2 billion