CVS Buying Caremark for About $21.2B

Customers take advantage of the drive through pharmacy window outside a CVS drug store in a Bainbridge Twp., Ohio file photo from Aug. 3, 2006. Prescription benefits manager Caremark Rx Inc. and drugstore chain CVS Corp. said they are in talks about a combination of the companies. The companies said in a statement that they are discussing a possible "merger of equals" transaction. (AP Photo/Amy Sancetta, File) (Amy Sancetta - AP)

NASHVILLE, Tenn. -- Drugstore operator CVS Corp. announced Wednesday it is buying pharmacy benefits manager Caremark Rx Inc. for about $21.2 billion in stock, creating a company that will have formidable power in negotiating lower prices with drug companies.

The deal would create a $75 billion drug distribution powerhouse that could compete more effectively for customers as Wal-Mart Stores Inc. and other retailers introduce programs selling cheap generic drugs.

"This is all about giving the consumers unparalleled access and choice ... It will help providers deliver the right drugs at the right time," CVS CEO Tom Ryan said in a conference call.

But investors sent shares of both companies lower, and some analysts raised concerns about integrating the two businesses.

CVS shares tumbled $2.32, or 7.4 percent, to close at $29.06 on the New York Stock Exchange while Caremark lost $1.06, or 2.2 percent, to finish at $48.17. Caremark shareholders will be getting CVS stock in the deal.

SunTrust Robinson Humphrey analyst David Magee wrote in a note that the deal could be seen as too much risk for CVS which is still digesting acquisitions from the past couple of years, including purchasing the Sav-On drug store chain made earlier this year. He also wrote the deal could distract CVS from growing its existing business lines.

He said the he was optimistic about the long-term implications of the deal because of the size and buying power of the new company.

Company officials said the deal would create significant benefits for employers and health plans through more effective cost management and new programs, and for consumers through expanded choice and more personalized services.

"Combining Caremark's expertise in serving employers and health plans with CVS's expertise in serving consumers will create a powerful force for change in pharmacy services," said Edwin "Mac" Crawford, Chairman, CEO and President of Caremark, which is based in Nashville.

The merger brings together companies from two industries that have had a sometimes bitter rivalry. PBMs offer customers the option of purchasing their drugs through the mail for reduced prices. Drug stores have argued such policies cut into their revenue and compromise patient safety because it deprives them of access to a pharmacist.

The growing mail order business has been hurting drug stores' market share, said Morgan Stanley analyst Mark Wiltamuth. CVS has its own mail order subsidy and analysts said buying Caremark would bolster that portion of its business, analysts said.

The companies called the deal a "merger of equals" and under the terms, Caremark shareholders will receive 1.67 shares of Woonsocket, R.I.-based CVS for each share of Caremark. CVS shareholders will own 54.5 percent of the combined company and Caremark shareholders will own 45.5 percent.