Coverage: CVS buys Omnicare for $12 Billion

CVS is shelling out major cash to get into the long-term care business. It’s a bold move in an industry that’s already fairly consolidated.

Chitra Somayaii had these details about the deal in story for Bloomberg:

CVS Health Corp. agreed to acquire nursing-home pharmacy Omnicare Inc. in a deal valued at $12.7 billion, adding services for the elderly to bolster its position as the biggest U.S. retailer of prescription drugs.

CVS will pay $98 per share in cash, the companies said in a statement on Thursday. Omnicare, with a market value of about $9.2 billion, hired advisers to explore a sale earlier this year. The deal includes about $2.3 billion in debt.

Omnicare delivers drugs and helps senior-living facilities manage residents’ medications. CVS is the nation’s second-largest pharmacy benefits manager, handling drug plans for health insurers and employers. In its most recent quarter, growth in sales from that business far outpaced the company’s retail division.

The acquisition puts CVS in position to sell to a growing market as the U.S. population ages, the company said. The number of people 65 or older is expected to grow more than 80 percent to 72.1 million from 2009 to 2030, according to the U.S. Department of Health and Human Services.

Shares of CVS, based in Woonsocket, Rhode Island, rose 2.4 percent to $103.69 at the close in New York. Covington, Kentucky-based Omnicare climbed 1.7 percent to $96.26.

While investors may like the terms, Robert Cryan wrote for The New York Times that this could be a sign of mergers in the space slowing down:

CVS Health’s $12.7 billion deal for Omnicare portends lower merger activity in the pharmacy sector. The drugstore company’s purchase gives it entrance to nursing homes and expands specialty medicine distribution. But the increasingly concentrated industry is bumping up against antitrust concerns and may have to live with fewer transactions.

CVS acts as a drug middleman as well as a retailer. Its Caremark division negotiates pharmaceutical discounts for companies and health plans, and shares the savings. The more patients that Caremark and other pharmacy benefits managers, known as P.B.M.s, represent, the greater their leverage and profit.

Hence the urge to merge. In March, UnitedHealth Group agreed to pay $12.8 billion for pharmacy benefits manager Catamaran Corporation, which did a lot of deals of its own. And Rite Aid paid $2 billion for EnvisionRx, also a P.B.M., in February.

The result is a concentrated industry. The three largest pharmacy benefits managers — CVS, Express Scripts and UnitedHealth — control between two-thirds and three-quarters of the market, depending on the measurement used. That’s a troubling development for trustbusters and consumers.

The Wall Street Journal story by Charley Grant pointed out that the deal is a good one since it won’t likely run afoul of anti-trust regulations:

And Omnicare’s position as a market leader is indisputable: It filled about 111 million prescriptions in 2014, while PharMerica, its second largest competitor, filled 35 million. And because the deal won’t increase the size of Omnicare’s long-term care business, analysts at J.P. Morgan reckoned it won’t be held up by regulators.

CVS chief Larry Merlo also indicated on Thursday that there will opportunities for smaller, bolt-on acquisitions over the long term. This means Omnicare could signify a beachhead for CVS in this area.

Granted, CVS isn’t exactly scooping up a distressed asset. The purchase price of $98 per share comes out to 19 times expected 2016 earnings. But that is a lower multiple than the 21 times UnitedHealth paid for Catamaran in a $12.8 billion cash deal announced in March.

The Associated Press story by Tom Murphy highlighted the ability of the combined company to sell specialty drugs, which will become even more critical as the U.S. population ages:

The deal also will bring in more business doling out specialty drugs. These complex and expensive medications for cancer, hepatitis C and other conditions can represent treatment breakthroughs but are raising growing concerns over cost. Insurers and other bill payers want help containing that expense.

Specialty drug revenue soared 46 percent for CVS Health in the first quarter, helping the company trump analyst expectations and make up for a sales hit from its decision to stop selling tobacco products last year in its drugstores. CVS Health also runs the nation’s second largest drugstore chain, trailing only Wagreens Boots Alliance Inc.

Cincinnati-based Omnicare’s core business involves distributing drugs and providing pharmacy services to long-term care providers, a market CVS Health doesn’t currently serve.

CVS Health CEO Larry Merlo told analysts that represents a “substantial growth opportunity” for his company, with the U.S. population aging.

U.S. Census Bureau researchers have predicted that the population age 65 and older will approach 84 million people by 2050, nearly double its total in 2012, due largely to the aging baby-boom generation.

Merlo noted that older people are more likely to take several medications and can have trouble making sure their prescriptions follow them as they move from their own home to long-term care or other settings. He believes his company can help ease these transitions.

The deal seems to be a smart move for CVS, adding critical pieces of the healthcare sector without violating regulations. The industry consolidation helps as well and as the New York Times piece pointed out, this could be the beginning of the end for pharmacy mergers. Either way, the key will be integrating the two businesses and finding cost savings, something that grows harder the bigger the companies involved.