Replies to post #36859 on Biotech Values

[DewDiligence]

ESRX Planning Hostile Bid for CMX—NY Times

http://www.nytimes.com/2006/12/18/business/18deal.html

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December 18, 2006
By ANDREW ROSS SORKIN

In an audacious takeover bid that could lead to lower drug prices for consumers, a company that manages employee drug plans will make a $26 billion hostile bid for a much larger rival, according to people briefed on the offer.

The bid by benefits manager Express Scripts for rival Caremark Rx tops a competing offer by the CVS drugstore chain in a bold move that evokes memories of the big buyout deals of the 1980s.

Pharmacy benefit managers act as the middleman between drug companies and employers that offer drug subsidies to their workers as part of health-care coverage. By acquiring Caremark Rx, which is double its size, Express Scripts would by far become the largest pharmacy benefits manager in the nation.

Together they would have even more clout when negotiating prices with drug makers for clients, typically big corporations and their employees. The deal would also save the combined company as much as $500 million a year by reducing overlapping costs.

Both pharmacy benefit managers and drug makers are under increasing pressure to keep drug prices low from all sides. Prices offered at the pharmacy counter have also come under threat in recent months by Wal-Mart, which said it would offer certain generic drugs for $4.

The takeover bid seeks to scuttle Caremark Rx’s agreement last month to merge with CVS, the second-biggest drugstore chain in the country. That deal was expected to transform the drug industry.

Spokesmen for Express Scripts, Caremark and CVS could not be reached for comment.

The four largest prescription benefit mangers — Caremark, Medco Health Solutions, Wellpoint and Express Scripts — handle about 75 percent of the $235 billion spent on prescription medicines every year.

The takeover bid comes amid a record-setting year for mergers. As of the beginning of this month, there have been $3.3 trillion worth of deals in more than 32,000 transactions, according to Thomson Financial. Not since the days of the corporate raiders of the 1980’s, as captured in films like “Wall Street” and books like “Barbarians at the Gate,” have deal makers been so central in reshaping corporate America.

The bid will pit Express Scripts, with a market value of $9.3 billion, against the much-larger CVS, worth some $25 billion, in a battle over Caremark Rx. It is possible that a bidding war could ensue, with both suitors ratcheting up their offers. Any deal could face scrutiny from regulators in Washington.

The offer by Express Scripts is a throwback to the 1980’s in two ways: it is a rare hostile bid that could spark a fierce bidding war, and it relies heavily on debt, some $14 billion.

Buyers do not like to get into bidding wars: they can get expensive quickly and they can drive away important employees and customers, eroding the value of the business they want. Even as merger activity has accelerated, the number of deals in the United States that had two or more bidders has fallen sharply this year, according to Thomson.

But companies are increasingly willing to use debt in deals. The $26 billion offer is a vivid illustration of the role that cheap credit is playing in fueling the explosion in takeovers. Historically, low interest rates and a flood of available cash have enabled private equity firms to buy out bigger and bigger companies.

In those cases, the firms typically put up a quarter or so of the value of the company and borrow the rest, planning to use the companies’ revenues to pay off the loans. And even as the amount of debt used in these deals has risen to record levels, investors have stayed sanguine that the risks of default are low.

Now, Express Scripts is using the same weapon employed by private equity and leveraging itself or borrowing against the combined company to try to win Caremark. Other companies have also drunken deeply from the debt pool: the mining giant Freeport-McMoran Copper and Gold is essentially borrowing $15 billion to pursue its $25.9 billion takeover of Phelps Dodge.

The takeover bid by Express Scripts is being orchestrated by its chief executive, George Paz, who joined the company in 1998, as senior vice president and chief financial officer before becoming president in 2003 and then chief executive in 2005. Before Express Scripts, he was a partner at the accounting firm Coopers & Lybrand and then executive vice president and finance chief for Life Partners Group.

It is unclear how investors will react to Express Scripts’ offer. Express Scripts had widely been considered a takeover target, not an acquirer, because of its small size. Indeed, its bid for Caremark could also put it into play. Kemp Dolliver, an analyst at Cowen & Company, wrote in a research note after the CVS-Caremark announcement that Express Scripts could be bought by Walgreen, Wal-Mart or Aetna.

The proposed merger between CVS and Caremark received a mixed reception by investors. When it was first announced, shares in both companies tumbled, but they have returned to close to where they started after the deal. In that deal, Caremark received no premium for its shares. Shares of Caremark closed Friday at $50.30.

Under the proposed offer by Express Scripts, Caremark shareholders would receive just shy of $58.50 a share in Express Scripts stock and cash, people briefed on the offer said, representing a 22 percent premium. Exact terms of the breakdown between stock and cash could not be learned.

Under Mr. Paz, Express Scripts has made several acquisitions, most recently acquiring Priority Healthcare Corporation for $1.3 billion in cash in July 2005.

Express Scripts, with some 13,000 employees, was formed in 1986 and went public in 1992. The company is based in Maryland Heights, Mo.

In 2003, New York’s attorney general, Eliot Spitzer, began an investigation into claims that Express Scripts had over billed the state’s health care plans. In 2004, Mr. Spitzer sued the company in state court in Albany for breach of contract.
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[DewDiligence]

Medicaid Payments to Pharmacies Are Heading Down

[This is not something out of the blue, but rather the planned implementation of a bill already signed into law. Compared to the noise surrounding what the new Congress will do with Medicare, these changes to Medicaid are relatively non-controversial.]

http://www.nytimes.com/2006/12/18/washington/18medicaid.html

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By ROBERT PEAR
December 18, 2006

WASHINGTON — The Bush administration on Monday will propose sweeping reductions in payments to pharmacies as a way to save money for Medicaid, the health program for more than 50 million low-income people.

The goal is to ensure that Medicaid can get drug discounts similar to those provided to large customers in the private market, including companies like Caremark Rx and Medco Health Solutions that manage drug benefits for people who have health insurance through an employer. Congressional investigators have found that Medicaid pays 35 percent more than the lowest price available in the private market for some commonly used brand-name drugs.

States, which share the cost of Medicaid with the federal government, make the final decision on what pharmacies are paid, subject to federal limits.

The proposed rule would provide new data for states to use in their calculations, redefining the “average manufacturer price” for brand-name and generic drugs. Consumers would not be directly affected by the proposed changes. But federal officials said they hoped consumers would press for lower drug prices after checking the price list, which will be posted on a Web site.

S. Lawrence Kocot, a senior adviser to the administrator at the Centers for Medicare and Medicaid Services, said the proposed rule would carry out provisions of a law, the Deficit Reduction Act, signed by President Bush on Feb. 8.

The law, and the proposed rule, would also limit payments to state Medicaid agencies for the aggregate costs of prescription drugs when a generic substitute is available.

Federal officials said the rule would save $8.4 billion over the next five years. That represents a 5.6 percent reduction in total projected Medicaid spending on prescription drugs in those years. The administration estimates that the federal government would save $4.9 billion, and the states would save $3.5 billion, if the proposed rule is adopted.

In a document analyzing the proposals, the Department of Health and Human Services estimates that more than 90 percent of the savings would come from pharmacies. The rest would come from drug companies, which would, for example, be required to give price concessions on certain drugs administered in doctors’ offices.

The administration said the rule could reduce revenues for many of the nation’s 18,000 small retail pharmacies. The administration also said it had no way to measure that impact precisely, though it acknowledged the reductions could fall particularly hard on “those in low-income areas where there are high concentrations of Medicaid beneficiaries.”

Officials said that pharmacies could “mitigate the effects” of the lost revenue by buying lower-cost drugs. This assumes that pharmacies can find another source of supply: generic drug companies willing to lower their prices below the new federal limits.

The public will have 60 days to comment on the proposals. The government will weigh the comments and then issue a final rule with the force of law.

Bruce T. Roberts, executive vice president of the National Community Pharmacists Association, a trade group, said, “The proposed rule would have the perverse effect of discouraging the use of generic drugs.”

“The new limits on Medicaid reimbursement will be way below what drugstores typically pay for those drugs,” Mr. Roberts said.

Under a 1990 law, drug manufacturers must give discounts to states that buy their drugs for poor people who receive Medicaid benefits. The discounts take the form of rebates, which are paid by drug companies every time their pills are dispensed to a Medicaid beneficiary.

For a generic drug, the rebate is 11 percent of the average price paid to the manufacturer — the average manufacturer price. For a brand-name drug, the basic rebate is at least 15.1 percent of the average price, and it may be more because Medicaid is supposed to have access to the “best price” paid by any other buyer, with some exceptions.

Each drug company calculates how much it owes Medicaid for each of its drugs.

The Government Accountability Office, an investigative arm of Congress, said that manufacturers calculated prices and rebates in very different ways because they had not received “clear guidance” from the federal government. Moreover, it said, federal Medicaid officials rarely check the accuracy of these calculations.

In the proposed rule, the Bush administration takes steps to ensure that Medicaid gets the best price available to any buyer. In determining the best price, it says, manufacturers must offer the government the benefit of any “rebates, discounts or other price concessions” given to the pharmacy benefit managers like Caremark Rx and Medco Health Solutions.

Drug makers routinely pay rebates to pharmacy benefit managers as a reward for increasing the use of their products.

The proposed definition of best price also includes prices for drugs sold to mail-order pharmacies. Purchases by mail-order houses and pharmacy benefit managers account for a large share of all sales, and “they reflect the realities of today’s marketplace for consumers of prescription drugs,” the rule says.
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[DewDiligence]

CVS, Caremark Complete Merger

[The merged company will have annual revenue of about $80B and a market cap of almost $60B. Whether the merger makes economic sense remains to be seen.]

http://yahoo.reuters.com/news/articlehybrid.aspx?storyID=urn:newsml:reuters.com:20070322:MTFH44794_2...

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Thu Mar 22, 2007 3:15 AM ET

NEW YORK, March 22 (Reuters) - U.S. companies CVS Corp. and Caremark Rx Inc. said on Thursday they have completed their merger, which joins the nation's largest pharmacy chain with a leading pharmaceutical services company as CVS/Caremark Corp.

Effective from Thursday, trading in Caremark stock <CMX> has been discontinued with the combined company's shares trading on the New York Stock Exchange under the symbol <CVS>.
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[DewDiligence]

Nice call, rph_in_wi: This is what you posted in 2006 (#msg-14527959):

I have the same type of reservations about this [CVS-caremark] merger as I did when Merck bought Medco in the 90's… CVS maintains that there will be no exclusive contracts nor preferred reimbursement, and that they will strive to make the PBM industry more transparent. One pharmacy spokesman said that if CVS actually does make changes to the industry, then the merger could be good for everyone. I will believe that when I see it.

I think you nailed it! Please see the next post.