CVS, Drug Benefit Manager To Merge

Caremark, which is based in Nashville and has more than 13,000 employees, is one of the two largest managers of employer drug-benefit plans, the larger being Medco Health Solutions Inc. CVS has had a small benefit management unit, but analysts said it was not growing as fast as the company wanted.

"It's another example of consolidation in the health-care industry, in this is case pharmaceuticals," Darling said. "It should bring more bargaining power."

The deal, which the companies hope will be completed within a year, calls for CVS to swap 1.67 of its shares for each share of Caremark. Based on the closing price the day before the deal was announced, the deal is worth $22.5 billion. The new company would be headquartered in Woonsocket, R.I.

Some Wall Street analysts questioned whether the two companies would fit together as well as executives claimed. Shares of CVS fell $2.32, to $29.06. Caremark fell $1.06, to $48.17.

Also yesterday, CVS announced that third-quarter earnings rose 12 percent, to $284.2 million, on higher sales of generic drugs. Revenue rose 25 percent, to $11.21 billion.

The aging U.S. population increasingly relies on prescription drugs to prevent or treat illness. That has led to consumers paying higher out-of-pocket costs for drugs as wages have remained flat.

Health-related costs rose an average of 9.6 percent a year from 2000 to 2004, while inflation averaged 2.6 percent. Drug prices, which rose an average of 11.4 percent a year over that time, are a significant factor in rising health expenses.

In 2005, prescription drug expenditures totaled $251.8 billion, according to industry figures, up 5.4 percent from the preceding year. But how individual prescription drugs are priced has for decades been difficult to determine because drug companies have not shared that information.

News of the planned merger of CVS and Caremark was greeted optimistically by a competitor, the nation's largest drugstore chain, Walgreen Co.

"I think it can be a positive for the retail pharmacy industry as whole" because it gives it more control over distribution channels, said Michael Polzin, a Walgreen spokesman. "Anything that increases retail pharmacies' influence on prescription management is a good thing."

Mail-order business has been growing faster than sales in stores for several years, largely under the direction of pharmacy benefit managers like Caremark encouraging consumers to use the service for 90-day supplies of their regular medications.

But last year, Polzin said, that trend broke. The number of retail pharmacy prescriptions rose 8.5 percent, while mail-order prescriptions rose 7.4 percent. That is partly due to pharmacy benefit managers moving away from requiring people to fill their prescriptions by mail.

Some retailers -- including Target Corp. and Wegmans Food Markets Inc. -- have followed Wal-Mart's lead in lowering some generic-drug prices. Walgreen and other pharmacy chains have not.

Staff writer Ylan Q. Mui contributed to this report.