CVS wagers billions on health care endeavor
A deal to buy Omnicare is one more step in pharmacy chain's bid to transform into a major health player.
CVS Health Corp. Chief Executive Officer Larry Merlo is betting billions that nursing-home pharmacy operator Omnicare Inc. can further his efforts to transform the drugstore chain into a dominant health care player.
Under Merlo, who took the helm in 2011, CVS stopped the sale of cigarettes, saying it was contrary to the mission of improving customers' health, and changed its name to CVS Health from CVS Caremark. He has aggressively expanded CVS's in-store health clinics, with plans to add about 600 locations by 2017, and in 2013 purchased an operator of drug-infusion centers.
The agreement announced Thursday to buy Omnicare, valued by CVS at $12.7 billion including debt, may be Merlo's most significant move yet for profits. CVS said it will add adjusted earnings of 20 cents a share next year.
The all-cash deal is the drug-retailing leader's biggest since 2007 when it paid $21.7 billion for pharmacy benefit manager Caremark Rx Inc., an acquisition made under Merlo's predecessor that began the company's diversification.
CVS is "moving away from being solely a pharmacy and PBM to becoming more of a vertical integrator of health care," said Jonathan Palmer, an analyst with Bloomberg Intelligence. It's a strategy tuned to an aging population with greater care needs, and broader consolidation in the industry, Palmer said.
Merlo, 59, comes from a health care background. He was trained as a pharmacist at the University of Pittsburgh and started at Woonsocket, R.I.-based CVS in 1990 when it acquired Peoples Drug. Before taking over as CEO he led the company's pharmacy retail division.
He's been lauded for banishing cigarettes, getting invited by First Lady Michelle Obama to her husband's State of the Union address this year and being named one of Fortune Magazine's business people of the year. CVS declined to make him available for an interview.
"We see ourselves at the forefront of the changing health care landscape," Merlo said this week at the UBS Global Health Care Conference.
Omnicare delivers drugs and helps senior-living facilities manage residents' medications. Under the deal, CVS will pay $98 per share in cash. CVS's $12.7 billion valuation for Omnicare includes $2.3 billion in debt.
Merlo said in a conference call with analysts that he hopes Omnicare will be a "great platform" as it looks to move deeper into the long-term care and assisted-living sectors.
CVS's pharmacy services unit, whose revenues expanded by 18.2 percent in the first quarter, is driving the company's growth. Retailing grew by only 2.9 percent in the period. Demand for pharmacy services has been on the rise as patients, insurers, and employers look to manage their costs amid soaring drug prices. With more control over different aspects of the drug-supply chain, companies can get more leverage on price.
CVS is the biggest U.S. retailer of prescription drugs and the second-largest pharmacy benefits manager, handling plans for health insurers and employers. It operates 7,700 retail pharmacies, 900 walk-in clinics and managed pharmacy benefits for 65 million people.