The proposed merger of CVS Corp. and pharmacy benefits manager Caremark Rx Inc. has received the go-ahead from Caremark’s board, which turned town a hostile $26 billion bid from Express Scripts Inc., citing “insurmountable antitrust risks.”
The CVS/Caremark deal would pair mail-order prescription filling with a top drugstore chain, while Express Scripts’ proposal aimed to combine two pharmacy benefits managers — businesses based largely on prescription benefit management and home delivery.
U.S. drugstore chains have been pressured by Wal-Mart Stores Inc., which announced last year it would lower its prices for a 30-day supply of selected generic prescriptions to $4. One upside of the CVS/Caremark deal would be “increased generic substitution rates,” Caremark said in a statement.
“Caremark believes that its future success does not lie in simply creating a larger pharmacy benefits manager, but becoming an end-to-end provider of diversified pharmaceutical services,” Mac Crawford, the firm’s chairman, president and chief executive officer, said in the statement.
“The Express Scripts proposal does not constitute, and is not reasonably likely to lead, to a superior proposal,” according to Caremark. The company said Express Scripts’ offer would face “significant, if not insurmountable, antitrust risks and associated timing delays.”
Caremark, which characterized Express Scripts’ attempt to break up its merger with CVS as a “defensive move,” added that the combination of the companies would also constitute a “risk of significant consumer attrition. Simply creating a larger pharmacy benefits manager does not address evolving market dynamics.”
Express Scripts maintained Monday that its offer — which it noted represents a 13 percent premium to the proposed CVS acquisition price, based on recent closing share prices — is “superior” and said antitrust concerns were a “red herring.” The company said it would file a proxy to take the issue directly to Caremark stockholders, arguing that Express Scripts’ said its bid would produce cost-saving synergies in excess of $500 million.
Express Scripts said in a statement Monday afternoon it intended to nominate four candidates for election to Caremark’s board. Caremark, which noted board members must be nominated in accordance with its bylaws, viewed the move as a “another attempt by Express Scripts to interfere” with its merger with CVS. The drugstore chain dismissed the plan to nominate directors as a “publicity stunt.”
“Caremark stockholders and the marketplace as a whole have demonstrated their strong support for our offer, which clearly provides Caremark stockholders with superior value,” Express Scripts said in a statement. “We believe that Caremark is attempting to use antitrust as a red herring to distract stockholders from the real value differential at issue.”
CVS and Caremark announced in November that they would merge to create CVS/Caremark, an estimated $22 billion deal. Express Scripts last month offered about $26 billion for Caremark.
Caremark estimated Monday that merging with CVS would yield cost savings of about $500 million. “The merger with CVS presents limited integration risk,” Caremark added.
An equities analyst at HSBC Securities said it appears CVS’ main challenge is the value of the CVS/Caremark merger, an estimated $4 billion less than the Express Scripts acquisition offer.
“The best defense is a good offense,” said Mark Husson managing director at HSBC. But “if [shareholders] like the idea of a combined [CVS/Caremark], CVS might not have to offer a premium.”
CVS said Monday it was “pleased” with Caremark’s decision to turn down Express Scripts’ bid.
“With the [U.S. Federal Trade Commission] antitrust waiting period already expired and our joint proxy statement on file at the [U.S. Securities and Exchange Commission], we remain firmly committed to completing our combination,” Tom Ryan, chairman, president and ceo of CVS, said in a statement.
Caremark affirmed its “strong commitment” to the CVS merger, noting that a combined CVS/Caremark would have 21,000 pharmacists and nurse practitioners, along with Caremark’s 2,000 health plan sponsors and their participants.
Express Scripts said it provides services to more than 16.7 percent of the U.S. population.
CVS shares were up 0.58 percent to close at $31.35. Caremark shares increased by 0.51 percent to $56.64. Shares of Express Scripts Inc. were down 0.12 percent, closing at $68.78.