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No. 2 U.S. drugstore chain CVS Caremark (CVS-N) agreed to buy Universal American's Medicare prescription drug business for about $1.25 billion US in order to expand its presence in a growing segment of pharmacy benefits management.
The deal will more than double the size of CVS Caremark's business providing prescription drug coverage under the Medicare Part D program. Medicare is the U.S. government's healthcare program for the elderly.
Universal American shareholders are expected to receive about $12.80 per share to $13.00 per share in cash for the business, which accounted for less than half of the company's total revenue in the first nine months of 2010.
The acquisition will make CVS a formidable competitor to health insurers such as UnitedHealth Group Inc. (UNH-N) and Humana Inc. (HUM-N)—both major participants in the Medicare business. CVS said on Friday it expects the deal to add to its earnings in its first full year.
"It's a good move for them (CVS)," Kemp Dolliver, an analyst with Avondale Partners, said by phone. "They become a larger competitor in Medicare Part D in a short period of time."
The deal comes just as the first of the post war "Baby Boom" population becomes eligible for Medicare coverage.
Per Lofberg, president of Caremark Pharmacy Services, also cited the anticipated shift of retirees from employer-based coverage to Medicare under the new U.S. healthcare law.
Dolliver said the expanded healthcare coverage could also benefit CVS's retail store operations.
"This is a population (those eligible for Medicare) that generates a lot of foot traffic, so you start moving them around into your stores from other people that makes a nice difference," Dolliver said.
CVS's move to expand its PBM operations comes as its chief rival, Walgreen Co. (WAG-N) is looking to get out of the business. Walgreen hired Bank of America (BAC-N) in October to sell its pharmacy benefits management unit.
DOUBLING MEDICARE ENROLLMENT OVERNIGHT
CVS will buy all of Universal American's shares outstanding and then distribute stock in a newly formed public company to Universal American shareholders. The newly formed company will own all other operations of Universal American, including its Medicare Advantage and traditional insurance businesses.
Universal American serves about 1.9 million Medicare prescription drug plan members, while CVS Caremark serves about 1.2 million Medicare drug plan members.
CVS has had a rocky history with its pharmacy benefits management business after buying Caremark for $27 billion in 2007. Caremark administers prescription drug benefits for employers and health plans and operates a large mail-order pharmacy operation.
Late in 2009, the PBM lost $4.8 billion in contracts heading into the new year, and the president of the unit departed. At the same time, CVS disclosed that the U.S. Federal Trade Commission was investigating some business practices of the combined company, leading many to question whether the merger made sense.
Since then, CVS has sought to fix the business, bringing in veteran PBM executive Lofberg and changing the way it pitches to clients.
CVS said the Universal American deal won't affect its previously announced plans for dividends and share buybacks. It will shed more light on the deal when it gives its 2011 outlook on Feb. 3.
Goldman Sachs (GS-N) is acting as financial adviser to Universal American, and Paul, Weiss, Rifkind, Wharton & Garrison LLP is acting as its legal counsel.