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Drugstore cowboys

21 May 2015 By Robert Cyran

CVS Health’s $10 billion deal for Omnicare portends lower doses of pharmacy M&A. The drugstore’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 operating stores. Its Caremark division negotiates pharmaceutical discounts for companies and health plans and shares the savings. The more patients it and other pharmacy benefits managers, known as PBMs, 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, which did a lot of deals of its own. And Rite Aid paid $2 billion for EnvisionRX, also a PBM, in February.

The result is a concentrated industry. The three largest PBMs – 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.

CVS’ latest acquisition may skirt regulatory concerns. Omnicare’s biggest business is distributing and dispensing drugs in nursing homes and other institutions, a new market for CVS. But the combination offers consumers potential savings from less expensive medications.

Whether the entire deal makes strategic sense is another issue. One of Omnicare’s main moneymakers is expensive niche medicines, which it helps manufacturers distribute and get reimbursed for by insurers and the U.S. government. Those drugs account for about a quarter of company sales, and those sales are growing at an annual rate of more than 20 percent. But the lucrative business may end up conflicting with Caremark’s focus on extracting discounts from pharmaceutical firms.

CVS investors warmly greeted the deal, boosting company shares 3 percent after it was announced. They seem smitten with the prospect of CVS expanding into a new area and adding bulk to its pharmacy arm.

It might have made more sense to craft a merger with, say, Express Scripts or another rival, given the potential synergies. That CVS settled for Omnicare shows its options were limited – and that the era of frantic pharmacy mergers is nearing an end.


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