Another angle in the battle over Caremark

Pharmaceutical Benefits Manager (PBM), Caremark has been under heavy scrutiny for agreeing to a takeover by CVS that appeared to place a relatively low value on the company. Fellow PBM Express Scripts came in with a higher offer, which Caremark rejected, citing anti-trust concerns. Shareholder lawsuits were inevitable in such a situation and have been filed as expected.

Business Week’s website published an exclusive post, reporting that the lawsuits alleged that Caremark accepted the CVS offer:

…in large part because the deal protected them from charges of improper backdating of options…The suit charges that Caremark’s top executives and the board were willing to sell the company at no premium in part to get the broad indemnity that would cover any potential backdating transgressions. “Conversely,” Silk adds, “CVS was willing to give such broad indemnity because it believed it was purchasing the company at such a bargain price.”

It’s an intriguing theory, making neat use of the current frenzy over backdating to find a way in. Who knows, it could even be true.

The more likely explanation is a little less exciting:

  • CVS saw a threat to its business from mail order (a Caremark strong point) and decided to get into the market
  • Caremark worried that the PBM business was coming under pressure –thanks to the coming squeeze on generics margins– and decided not to overreach
  • Express Scripts sees the same trends as Caremark and has decided its best strategic option is consolidation. Caremark is the only logical candidate (assuming an acquisition of Medco is infeasible) and so Express Scripts has to offer more for being late to the party and to offset the risks to Caremark that the deal will be scuttled by anti-trust concerns. If Express Scripts actually can acquire Caremark, it’s likely to be able to reduce costs more dramatically than CVS, because it can eliminate duplicate infrastructure. That makes the deal more valuable

Stay tuned for the Caremark shareholder vote on February 20.

February 1, 2007

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