(FROM THE WALL STREET JOURNAL 5/22/15)
By Joseph Walker
In a bid to strengthen its foothold as a dispenser of expensive
prescription drugs, CVS Health Corp. agreed Thursday to pay $10.4
billion to acquire Omnicare Inc.
Omnicare is a growing player in the fulfillment of prescriptions
for diseases like cancer and multiple sclerosis, where the
per-patient cost of medications can range from $50,000 to $100,000
annually.
CVS offered $98 a share in cash, a 3.6% premium to Omnicare's
closing price Wednesday and a 24% premium to the pharmacy company's
average share price over the previous 100 days. The total deal is
valued at $12.7 billion, including $2.3 billion in debt held by
Cincinnati, Ohio-based Omnicare.
Omnicare has two main businesses. Its smaller but faster growing
specialty-pharmacy unit ships expensive therapies directly to
patients on behalf of pharmaceutical companies.
Such drugs typically aren't sold in brick-and-mortar retail
pharmacies, and drug makers often limit the number of pharmacies
allowed to sell them. In recent months, Omnicare had signed
agreements to dispense cancer drugs made by Bayer AG, Novartis AG
and Pfizer Inc.
Omnicare is also the largest U.S. provider of prescription drugs
to nursing homes and other housing facilities for elderly and
disabled people. Pharmacy services to such long-term-care
facilities represented nearly three-quarters of Omnicare's $6.42
billion in revenue last year. But the unit has experienced sluggish
growth amid competition from smaller, regional providers, analysts
said.
The deal could give CVS even greater purchasing power to
negotiate discounts from drug manufacturers and wholesalers,
analysts said. It will also give CVS leverage to capitalize on two
of the biggest trends in health care: a rapidly aging population
and the growth of expensive drugs for relatively rare ailments.
CVS Chief Executive Larry Merlo, during a conference call with
analysts on Thursday, said the acquisition would expand "our
customer reach to a broader population of chronic-care patients and
seniors at an important time as our population ages." Mr. Merlo
added that Omnicare's specialty pharmacy unit would strengthen
CVS's "presence in this growing space."
CVS operates nearly 8,000 retail pharmacies in the U.S., but in
recent years it has expanded its operations to other areas of the
pharmaceutical supply chain. Through its 2007 acquisition of
Caremark, CVS is now the second largest pharmacy-benefits manager,
or PBM, in the U.S. after Express Scripts Holding Co.
PBMs manage the logistics of prescription-drug plans for
insurance companies and large employers, using their purchasing
power to negotiate discounts and rebates from drug makers.
In 2014, CVS was the leading provider of specialty drugs in
North America, with $20.5 billion in revenue, representing 26% of
the total market, according to an analysis by Adam J. Fein, a
pharmaceutical-supply-chain consultant. Omnicare was the
eighth-largest specialty drug provider, according to Mr. Fein.
"The specialty business is the crown jewel of Omnicare," Dr.
Fein said in an interview. "Long-term care is growing very slowly,"
but it dispenses high volumes of prescription drugs, which should
help CVS negotiate better discounts, Dr. Fein said.
The pharmaceutical industry has undergone a transformation in
recent years as drugs for common ailments like high cholesterol
have gone generic. The industry has in turn focused its research
and development efforts on less common conditions affecting
relatively small numbers of patients.
To compensate for the smaller market sizes, companies charge
significantly more for the so-called specialty drugs. Recently,
that has led to a national debate on the sustainability of
high-price medications.
In the first quarter of 2015, revenue from Omnicare's
long-term-care unit was $1.19 billion, flat compared with the prior
year. By contrast, revenue from the company's specialty pharmacy
and services unit grew to $465.3 million, up 23% from $379.7
million in 2014.
Omnicare's specialty unit provides other services on behalf of
drug makers as well, including the management of so-called
reimbursement hubs, which help patients get expensive drugs paid
for by insurance companies.
CVS's PBM unit administers prescription-drug benefits for
Medicare beneficiaries, who also make up a large percentage of the
nursing-home patients serviced by Omnicare. But CVS's Mr. Merlo
said the company doesn't "see any challenges" in clearing antitrust
hurdles because regulators have said that retail pharmacies and
long-term care don't compete directly with one another.
Omnicare and other specialty pharmacies, which charge markups on
the prices of prescription drugs, have benefited from price
increases on older specialty medications. In its most recent
regulatory filing, Omnicare said growth in its specialty unit was
driven in part by "drug-price inflation."
PBMs like CVS also keep a percentage of the rebates they
negotiate from pharmaceutical companies. In recent years,
competitive pressures have caused PBMs to share a greater portion
of the rebates with their clients, CVS said in a recent regulatory
filing.
Shares of CVS rose 2.4% to $103.69 through the close of regular
trading on Thursday; shares of Omnicare rose 1.7% to $96.26.
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