CVS, Caremark to merge, create drug giant

CVS Corp. of Woonsocket, R.I., the nation's largest drugstore chain, said it plans to buy pharmacy-benefit manager Caremark Rx. Inc. of Nashville in a $21 billion all-stock deal, creating a drug distribution powerhouse.

But analysts wonder whether the merged entity will use its purchasing clout to benefit consumers.

"Caremark and CVS combined have the power to negotiate better prices from the drug manufacturers. The question is: Will they pass those savings on to consumers?" said Hussain Mooraj , life sciences research director at AMR Research in Boston.

"If you're a payer for healthcare, you've got to wonder if you're going to be getting as good a deal with CVS" as with other stores, said Richard Frank , professor of healthcare policy at Harvard Medical School. "I'd think twice about doing business with them."

Caremark shareholders will receive 1.67 shares of CVS stock for each Caremark share they own. Thomas Ryan , chairman and chief executive of CVS, will become chief executive of the combined organization, and Edwin Crawford, chairman and chief executive of Caremark, will be chairman. The firm will be called CVS/Caremark Corp., headquartered in Woonsocket.

"This merger is a logical evolution for CVS, Caremark, and the entire pharmacy industry," Ryan said in a statement. In an interview, he added that the merger would benefit consumers.

"This is a very competitive marketplace," Ryan said. "We will be the low-cost competitor."

The companies said the merger would benefit employers and health plans through lower costs, while consumers would benefit from "expanded choice, unparalleled access, and more personalized services."

Pharmacy-benefit managers are drug industry middlemen who negotiate prices and supply drugs to large group of beneficiaries such as health plans, employers, and unions. Traditionally, they have worked to cut the cost of drugs supplied by chains like CVS.

Some industry observers said the merger is a response to the recent move by Wal-Mart Stores Inc. to supply low-cost generic drugs. While generics are less expensive than name brands -- Wal-Mart will fill many generic prescriptions for $4 -- they often have higher profit margins for the retailer than name brands.

"This gives them the ability to drive health-plan membership to their stores and combat the Wal-Mart $4 generic," said Sean Brandle , national pharmacy practice leader for Segal Co. of New York, a consultant on employee benefits. "CVS doesn't want to lose that walk-in traffic."

In addition, Caremark gives CVS a large mail-order pharmacy business. Health insurers have sought to push members to use mail-order pharmacies as part of their larger push to control spending on prescription drugs. As an incentive, many health plans give members three months' drug supply for the price of two months.

"As mail-order pharmacy grows, it eats into growth of retail pharmacy," said Brandle.

Shareholders were not impressed by the deal. Caremark lost $1.06, or 2.2 percent, to close at $48.17. CVS dropped $2.32, or 7.4 percent, to close at $29.06. Both firms have seen their share prices slump since Wal-Mart's move into low-cost generics. The companies said the deal will add to earnings in the first full year after the deal closes. The combined company is expected to have annual revenues of $75 billion.

CVS has grown rapidly through acquisitions . In 2004, it acquired about 1,200 Eckerd drugstores from that chain's parent, JC Penney Co. This year, it bought more than 700 stores from the Albertson's grocery chain. It has 6,200 stores in 43 states.

CVS has a small pharmacy-benefits business that will be combined with Caremark. That business will be run out of Nashville.

Jeffrey Krasner can be reached at krasner@globe.com.