How Will CVS Health Benefit From its Acquisition of Omnicare?

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The healthcare industry has seen consolidation on a wide scale this year, with market leaders making multi-billion dollar deals. First it was Rite Aid (NYSE:RAD) in February, which acquired EnvisionRx (for about $2 billion) to enter the pharmacy benefit management (PBM) market. [1] This was followed by the acquisition of Catamaran Corporation (NASDAQ:CTRX) by UnitedHealth Group (NYSEUNH), [2] also in the PBM market. Now, it is CVS Health (NYSE:CVS), which announced last week that it would acquire pharmacy services provider Omnicare for about $10 billion. The company expects to achieve significant purchasing and revenue synergies as well as operating efficiencies from this acquisition.

What’s Causing The Consolidation?

Cost squeeze from the government is what we believe is primarily causing this consolidation in the healthcare industry. Government spending on healthcare forms about 18% of the country’s GDP currently. As this share is expected to only go up with time, the government is taking several steps to control expenditure, such as the step down in Medicare Part D rates earlier this year. While the market size for healthcare firms continues to expand, margins have been declining due to several reasons, including the government’s cost squeeze.

Looking at the increased frequency of M&A in this industry, it is pretty clear that firms are betting on scale to protect their profits. Even CVS Health falls in the same category of firms, as its acquisition of Omnicare will help the company strengthen its position in the markets where it already has a presence. Below we dig deeper into how CVS will benefit from this deal.

View our detailed analysis for CVS Health

Enhanced Specialty Pharmacy Capabilities

Specialty drugs treat complex diseases such as multiple sclerosis, rheumatoid arthritis, hepatitis C and cancer, among others. As these drugs are characterized by high cost and high complexity, this holds a lot of growth potential for retailers with the necessary delivery and support systems. Examples of these therapies include Sovaldi and Harvoni, which were launched in 2014. Sovaldi costs $84,000 for a 12-week course of treatment and the more recently launched Harvoni is even more expensive, listing for $94,500 for 12 weeks of treatment. [3]

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Source [4]

Omnicare’s complementary specialty pharmacy platform and clinical expertise will augment CVS Health’s capabilities. In addition to dispensing specialized pharmaceuticals, Omnicare also provides brand support services, supply chain solutions, and support services to manufacturers, physicians, nurses, caregivers and patients. In 2014 alone, Omnicare’s Specialty Care Group revenues increased by more than 20% to about $1.7 billion. [5] With the specialty pharmacy platform adding to CVS’ current specialty pharmacy capabilities, the company will be strongly placed to tap the rapidly growing specialty pharmacy market.

Exposure to the Growing Senior Patient Segment

Omnicare’s Long Term Care division provides a variety of services and products to long-term care facilities, residents, and senior populations living independently. With this acquisition, CVS Health will significantly expand its ability to dispense prescriptions in facilities serving the senior patient population, which is expected to grow significantly in the near future. The U.S. population aged 65 and over has increased from 36 million in 2003 to 45 million in 2013 (a 24.7% increase) and is projected to increase to more than 56 million by 2020 [6]. As people age and spend more on health care, pharmacies will benefit from a higher number of prescriptions filled. CVS’ share of the total prescriptions filled in the United States has increased over the past few years and has been a key driver of its top line growth.

Not only does this add to the prescription revenues, but firms like CVS (with a PBM business) will also benefit from greater bargaining power with drug makers. As the company’s cost of acquiring prescription drugs decreases, it will be able to pass on more benefits to consumers, which will likely translate into a higher volume of contracts from groups that pay for drugs (usually insurance companies or corporations) and hence a higher share in incremental market revenues.

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Notes:
  1. Rite Aid Enters The Pharmacy Benefit Management Market With EnvisionRx Acquisition []
  2. UnitedHealth Expands PBM Footprint With Catamaran Acquisition []
  3. Abbvie Expects $3B In Hepatitis C Drug Sales And 40% Of Insured Customers, Forbes, January 30, 2015 []
  4. Annual Analyst Day 2014,CVS Health Events,December 16, 2014 []
  5. Omnicare Investor Relations []
  6. Profile of Older Americans: 2014 []