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March 22, 2007 (9:10a) - Transaction
Completed
The companies have announced the formal
completion of this transaction.
Transaction length: 142
days.
March 16, 2007 (12:30p) - CMX Shareholder
Approval
CMX shareholders have approved this
transaction.
The companies intend to complete the transaction next week,
after certifying the vote count.
March 16, 2007 (10:25a) - CMX Shareholder
Meeting Status
Reports are beginning to surface indicating that
CMX shareholders have voted to approve the merger with CVS.
At the time of this update, CMX shareholder approval has
not been confirmed.
March 15, 2007 (11:35a) - CVS Shareholder
Approval
CVS shareholders have approved the
merger.
The next 24 hours will almost certainly be filled with
rhetoric from both sides, effectively cancelling out the respective arguments
for and against the CMX-CVS transaction.
While this promises to be one of the more fascinating
shareholder decisions in recent memory, this publication continues to
anticipate CMX shareholder approval tomorrow.
March 14, 2007 (2:15p) - Status Report (Proxy
Firms)
Two secondary proxy service firms (Glass Lewis
and PROXY Governance) have reiterated their recommendations against the CMX-CVS
merger transaction. As a result, CMX, CVS, and ESRX have been compelled to
continue their respective publicity campaigns in order to sway CMX shareholders
for or against the CMX-CVS deal.
This publication continues to perceive the chances of CMX
shareholder rejection as fairly small, with the uncertainty of the FTC review
being the deciding factor.
Barring some type of highly unusual development between now
and this Friday's CMX shareholder meeting, CMX shareholders continue to be
expected to approve the current merger agreement.
March 13, 2007 (8:35a) - ISS
Recommendation
Institutional Shareholder Services has reversed
its previous recommendation, and now recommends CMX shareholders support the
current merger agreement with CVS.
This development is not perceived as the proverbial 'nail in
the coffin,' but it certainly signals that the hammer is coming down on ESRX.
There is now a much smaller chance of CMS shareholder rejection this Friday,
and therefore very little chance ESRX will be able to prevent this deal from
closing.
It will be noted that CVS played this situation almost
flawlessly and will be rewarded by finally consummating this merger. Chances of
CMX shareholder approval are now perceived to be higher than 90%.
March 12, 2007 (11:35a) - Status Report
ESRX has announced that it will not increase its
offer again for CMX before the CMX shareholder meeting on March 16. The tone of
ESRX's press release indicates the company is essentially conceding the failure
of its attempt to derail the CMX-CVS transaction, although the company
continues to recommend CMX shareholder rejection of the current merger
agreement.
As noted previously, lacking an increased offer from ESRX,
the odds of CMX shareholder rejection are believe to be less than 20%.
There are currently no obstacles to completing the
transaction on March 16, other than CMX shareholder consent.
March 8, 2007 (9:25a) - CVS Offer
Increased
Late yesterday (3/8), CVS "enhanced the
terms in the merger agreement by increasing the special dividend to $7.50 and
by offering a:
"...cash tender offer for 150 million (or
approximately 10%) of the outstanding CVS/Caremark shares at a price of $35 per
share promptly following closing of the merger."
Obviously, this is not a shocking development given the
current circumstances. However, this publication is hesitant to now proclaim
this a done deal for two reasons. First, the quick increase leaves plenty of
time before the CMX shareholder meeting for ESRX to once again boost its offer
and allow CMX shareholders to consider rejecting the CVS merger in hopes of
obtaining the higher premium. Granted, this is a highly risky option, but it is
one that it must be assumed a large portion of CMX shareholders are
contemplating.
Second, so far the response of proxy advisor services
remains unchanged. CtW continues to oppose the CVS deal, claiming the offer
remains inadequate. As of this entry, ISS has not issued its updated
recommendation and will very likely offer a similar negative recommendation for
the CVS offer. However, this is by no means assured.
CVS claims that the "enhancement" is the final
offer it will make for CMX. This was an unnecessary statement and one which can
not be taken seriously -- especially if CMX shareholders vote against the
merger next week. CVS has simply come too far and gone through too much turmoil
to walk away from CMX if it comes down to a matter of another small
increase.
That being said, yesterday's increase does lower the chances
of CMX shareholder rejection considerably -- assuming ESRX does not announce
another counter offer within the next few days. If both offers remain unchanged
going into the CMX shareholder meeting on March 16, chances of rejection are
now perceived to be less than 20%.
March 8, 2007 (9:20a) - ESRX Offer Increased /
HSR, DE Status
In response to the combination of an imminent
second request from the FTC and another rejected injunction from the Delaware
Chancer Court, ESRX has "improved" its offer for CMX. The new
proposed terms are as follows:
"The Express Scripts offer is to acquire
all outstanding shares of Caremark for $29.25 in cash and 0.426 shares of
Express Scripts stock for each share of Caremark stock. The Company will now
pay additional cash consideration of approximately 6 percent per annum on the
$29.25 cash portion of Express Scripts' offer."
The ball is now squarely in CVS' court. In order to
absolutely assure CMX shareholder approval next Friday (3/16), CVS will need to
increase its offer -- even if it's only a slight increase. Lacking any
adjustment to the current merger agreement the CMX shareholder vote outcome
must be considered tenuous. This, of course, would be changed if the various
institutional proxy advisors reverse their recommendations in favor of the
CMX-CVS deal. There is currently no indication that this will happen in the
next week.
If CVS intends to risk CVX shareholder rejection under the
current terms, the company can certainly adjust the terms upwards after the
fact and hope for CMX shareholder approval at some point in the spring. But
this seems to be a terribly risky, if not negligent, course of action.
This has developed into one of the more fascinating
scenarios in recent memory, and it is now somewhat difficult to confidently
predict events for the next several days. It is the opinion of this publication
that CVS will slightly increase the current terms if, and only if, substantial
indications of CMX shareholder rejection emerge over the next week. This
includes, but is not limited to, the proxy service reactions to yesterday's
events.
If CVS chances obtaining CMX shareholder approval without an
adjustment, the chances of this backfiring would seem to be relatively high:
+/- 30%.
It continues to remain the expectation of this publication
that the CMX-CVS deal will ultimately be completed well before ESRX is able to
obtain HSR clearance.
March 7, 2007 (11:35a) - HSR Second Request
(Unconfirmed)
Reports are surfacing that the FTC has issued,
or will issue, a second request in the propose CMX-ESRX combination. There has
been no confirmation of this development from the companies or the FTC as of
this entry.
March 7, 2007 (9:00a) - DE Chancery Court
Status (Appeal)
According to published reports, the CMX
shareholder groups involved in the initial Delaware Chancery Court lawsuit will
not join ESRX in its current attempt to enjoin the merger. Instead, the
shareholders will instead request a further delay to the CMX shareholder
meeting beyond March 16.
This publication continues to expect the Chancery Court to
reject the current attempts to enjoin the merger and is not likely to delay the
shareholder meeting a third time. The Court has already displayed reluctance to
question CMX's (execs/management) business decision, and will probably view the
disclosures provided last week in the same light. Perhaps in some other
jurisdiction (California?) ESRX might have a chance to derail the transaction,
but the Delaware Chancery Court simply does not inject itself into these
situations without sufficient cause. That cause does not exist in this
case.
As discussed from the entrance of ESRX into this situation,
a second request under HSR is anticipated for the unsolicited ESRX offer. If
this does indeed occur tomorrow, the pendulum will swiftly swing in favor of
the CMX-CVS deal as even small shareholders will have little interest in
waiting several more months for a still-uncertain outcome.
March 1, 2007 (3:35p) - ESRX Appeals DE
Chancery Court Ruling
ESRX has appealed Judge Chandler's of last
Friday (2/23), claiming CMX has failed to sufficiently provide disclosure to
shareholders as ordered by the Delaware Chancery Court. ESRX has also again
requested that the CMX-CVS transaction be enjoined on the basis of CMX
misconduct.
This attempt by ESRX smacks of desperation and will very
likely be viewed that way at the appeal hearing. The chance of additional
disclosures being required, along with another CMX shareholder postponement are
very small. The chances of the merger agreement being killed by the courts:
virtually nil.
February 26, 2007 (8:15a) - CMX Disclosure /
Shareholder Meeting Details
As anticipated, CMX has fulfilled its disclosure
obligations as dictated by the Delaware Chancery Court and sent the information
to shareholders. As a result of the disclosures, CMX has again re-scheduled its
shareholder meeting date to March 16, 2007 -- the current expiration
date for the ESRX offer.
With this task accomplished, this transaction now boils down
the the HSR review in the potential CMX-ESRX combination. If the FTC does not
issue a second request next week (3/8), CVS will essentially be forced to raise
its offer for CMX to at least match the ESRX offer, in order to obtain CMX
shareholder approval on March 16.
If a second request is issued on March 8, the complexion of
CMX shareholder vote should shift significantly in favor of the CMX-CVS deal,
although by no means will a positive outcome (for CVS) be guaranteed by a
second request. As stated several times, CVS needs to make at least one more
gesture towards CMX shareholders to secure approval of the merger transaction,
even if the FTC does issue a second request in the CMX-ESRX review.
This publication continues to expect a second request for
ESRX next week, despite ESRX's claims that it is working to clear the HSR
review without further delays. There is simply too much evidence to suggest an
extended FTC review, including the DOJ established difficulty in understanding
the PBM industry (see December 19th entry), the fact
that an ESRX-CMX combination will create the top PBM entity by quite a large
margin, and the involvement of several state Attornies General who have openly
expressed their concerns for the potential merger to federal regulators. In
short, HSR clearance of CMX-ESRX would be a small miracle.
This publication also continues to foresee a successful
completion of the CMX-CVS deal. This should occur on March 16 asssuming CVS,
again, takes the necessary steps to secure CMX shareholder approval.
February 23, 2007 (5:10p) - DE Chancery Court
Ruling
Delaware Chancery Court Judge William B.
Chandler III has denied ESRX's and certain CMX shareholder's request to
invalidate the $675 termination fee in the CMX-CVS merger agreement.
Furthermore, Judge Chandler has rejected the plaintiff's injunction based on
alleged CMX director misconduct.
Judge Chandler offered the following explanation for his
decision:
"Although plaintiffs allege facts
concerning the process by which the deal was negotiated that trouble the court,
very few of their arguments suggest that I am in a better position than
Caremark's shareholders to make the ultimate decision."
Chandler further ruled that the CMX shareholder meeting
again be postponed for at least 20 days from disclosures regarding appraisal
rights associated with the special dividend and certain fees paid to banks
involved with merger transaction.
CMX is expected to provide the required disclosers very
quickly -- probably before the end of next week -- allowing the special
shareholder meeting to be re-scheduled in about the third week of March
2007.
February 22, 2007 (9:05a) - Status
Report
Two secondary matters worth mentioning from
yesterday: CMX released a very positive earnings report for Q4 2006 and Medco
stated that it has no interest in entering this situation as a bidder for
CMX.
The latter is not a shock, yet interesting in that it
highlights Medco's perception that the offers for CMX are already well above
the company's actual value. And perhaps it also indicates Medco's awareness of
probably competition concerns in any potential CMX-Medco transaction.
The first item, also not terribly surprising, will hopefully
solidify CVS's resolve to complete the deal by increasing its offer to the
point of at least matching the current ESRX offer. Although there is currently
no indication that CVS intends to do this, CMX's earnings report coupled with
the current Delawar legal proceedings should motivate the company into taking
positive, definitive steps to successfully end this transaction.
February 20, 2007 (9:00a) - DE Chancery Court
Status
Delaware Chancery Court Judge William B.
Chandler III withheld a decision in this case until at least this Friday,
February 23.
Reports out of Delaware indicate the plaintiffs (ESRX and
certain CMX investors) argued that the breakup fee of $675 million is excessive
and that the CMX Board failed in its duties to negotiate for the best possible
deal with CVS or other parties. None of this is in any way a revelation.
On the other hand, CMX argued that ESRX's unsolicited offer
is primarily an attempt to ruin the CMX-CVS agreement, with the goal being to
weaken its competitor in the process. Again, no revelation here.
It is the opinion of this publication that the breakup fee
argument is completely frivolous, if not outright silly. Judge Chandler should
reject this aspect of the case without much consideration.
The complaint regarding the CMX Board failure to secure a
better deal is more legitimate, but ultimately it is expected that Judge
Chandler will decide that shareholders are responsible for determining this at
the company shareholder meeting.
In short, the lawsuit against CMX raises no new issues in
this case, or in the broader perspective of any other similar case involving
disgruntled shareholder and/or a shunned third party. Simply put, there appears
to be absolutely no reason for Judge Chandler to intervene beyond his decision
to delay the CMX shareholder meeting to March 9.
This publication continues to believe the CMX-CVS
transaction will be successfully completed, although there would be a great
deal more certainty if CVS would simply increase its offer a small amount with
cash (not a special dividend) or stock.
February 16, 2007 (8:45a) - DE Chancery Court
Status
Delaware Chancery Court Judge William B.
Chandler III will hold a hearing today to decide allegations of misconduct by
CMX executive and the Board of Directors. The lawsuits originate from ESRX and
certain CMX shareholders.
This publication anticipates a dismissal of both lawsuits,
as the Judge's decision to enjoin the CMX shareholder meeting should be
sufficient action at this time. Judge Chandler has not shown much inclination
towards granting injunctions in the favor of disgruntled shareholders in the
past, and there is little reason to expect him to do so in this case.
February 13, 2007 (3:55p) - CMX Shareholder
Meeting Enjoined
According to published reports, the Delaware
Chancery Court has issued a temporary restraining order effectively stopping
the CMX shareholder meeting scheduled for February 20th.
The order will apparently postpone the CMX shareholder until
March 9 -- an interesting date given that the HSR waiting period for
ESRX's offer expires on March 8.
Chancery Court Judge William B. Chandler III has been quoted
with the following statements:
"A reasonable shareholder may consider the
revelation that Caremark has considered, on at least three separate occasions,
potential transactions with Express Scripts to be highly relevant.
"This is particularly true in the face of Caremark's
present protestations that antitrust difficulties loom so large as to prevent
the board of directors from even discussing an offer with an admittedly higher
dollar value."
As this publication continues to anticipate a second request
for the DOJ - despite ESRX's efforts -- the delay in the CMX shareholder vote
will only serve to postpone the inevitable, assuming CVS continues to maintain
an acceptable offer level. If a second request is issued on March 8, there will
be virtually no chance of ESRX successfully derailing the current CMX-CVS
agreement.
February 13, 2007 (9:00a) - CVS Offer
Increased
CVS has increased the terms of this deal by
tripling the "special dividend" created several weeks ago. CMX
shareholders will now receive $6 per share condition upon completion of the
merger.
The expected move by CVS will probably receive a mixed
reception from CMX shareholders and analyst, but ultimately should be enough to
secure this transaction. Even if the dividend increase is deemed insufficient
by enough CMX shareholders to threaten approval, it is now very clear the CVS
intends to guide this deal through to completion.
In other words, if ESRX counters with its own increased
hostile offer, CVS will almost certainly bump its offer up again in order to
maintain the support of CMX and its shareholders as the CMX shareholder meeting
approaches.
February 12, 2007 (4:35p) - ISS Recommends
Rejection of CMX-CVS Deal
Institutional Shareholder Services has just
issued its recommendation for CMX shareholders to vote against the transaction
with CVS.
The ball is now squarely in CVS' court -- there is no reason
for the company to delay increasing the terms of the offer if it wants to
successfully complete this deal. CVS should be more than aware at this point
that CMX will slip away if it does not act quickly.
This publication expects a revised merger agreement within
the next 48 hours.
February 12, 2007 (10:30a) - Status
Report
As widely reported late last week, proxy firm
Glass Lewis & Company announced its opposition to the CMX-CVS transaction,
while not openly supporting ESRX's unsolicited offer. The responses from CMX
and ESRX were predictable: CMX "disagreed" with the assessment, while
ESRX essentially pleaded with CMX to enter negotiations based on the
expectation the the Glass Lewis recommendation would resonate with CMX
shareholders.
First, there does not appear to be any indication that CMX
intends to entertain ESRX's offer as it stands. CMX's resolve to maintain its
agreement with CVS has been impressive over the last few weeks and the Glass
Lewis recommendation certainly won't have much of an impact on that under the
current circumstances. As long as ESRX's offer remains stagnant ($29.25 in cash
and 0.426 ESRX shares), it is extremely unlikely CVS will agree to meet with
ESRX in good faith negotiations.
Second, the Glass Lewis recommendation seems highly suspect
in that it is probably geared toward inciting a higher offer from CVS and/or
ESRX, rather than looking out for the long-term interests of CVS
shareholders. With that being said, it would not be at all surprising to see
CVS increase the offer marginally within the next few days in order to seal
this deal. The only factor keeping the current merger agreement in doubt is the
current exchange rate, and this can be easily repaired by a small increase in
either CVS shares or a cash component, such as the dividend gesture made a few
weeks ago.
Absent a small increase, the CMX shareholder vote on
February 20 will remain somewhat in doubt, especially if Institutional
Shareholder Services seconds the Glass Lewis opinion with its own negative
recommendation.
February 8, 2007 (10:10a) - Status
Report
Today's revelations involve a very upbeat
earnings report from ESRX, coupled with new reports of questionable options
activity involving ESRX executives. How these two developments will affect the
current battle for CMX is unknown, and it would be blind speculation on the
part of this publication to attempt to offer a prediction.
Nonetheless, it will be repeated that the CMX-CVS deal, as
currently structured and with all aspects (short and long) considered, remains
perceived as the best and most probable outcome here.
Although it is conceivable that ESRX's earnings report will
translate into a significantly increase offer (which seems to be the popular
concept at this point), it is equally conceivable that CVS will amend its offer
to counter any proposition from ESRX -- without necessarily having to match or
exceed an ESRX offer.
This publication simply does not foresee CVS allowing CMX to
slip away this close to completing the transaction.
February 6, 2007 (1:20p) - Status Report
Over the last week there have been no
significant developments in this situation -- only continued publicity stunts
on both sides to sway CMX shareholders to either the CVS deal or an ESRX
combination.
Quite a few "objective" analytical reports have
strongly suggested that ESRX will ultimately win the battle for CMX, based on
the assumption that ESRX will again increase its offer before the February 20
CMX shareholder meeting. These reports are purely speculative (obviously) and
the vast majority completely discount the probability that CVS would counter
any future ESRX increase with another increase of its own. With CVS' strong Q4
results in hand, the company could legitimately increase the stock portion of
the deal in order to secure an adequate level of CMX shareholder support for
the merger.
In short, this publication does not agree with the
mainstream reports favoring ESRX in this particular situation. The rationale
for a CMX-CVS combination remains perfectly sound, and a CMX-ESRX will very
likely receive a second request, followed by a fairly lengthy review process,
regardless of ESRX's "efforts" in working with the FTC to avoid this
scenario.
January 31, 2007 (9:25a) - ESRX to Re-file HSR
Notification
ESRX has announced that it will withdraw and
re-file the HSR notification in its unsolicited bid for CMX on February 2,
2007.
While not at all surprising, this action by ESRX is
essentially futile, as a second request from the FTC is a virtual certainty --
re-filing or not. ESRX's stated intention to "clear the transaction
without the need for a second request" is wishful thinking from this
publication's perspective and is intended to give CMX shareholders the false
impression that the FTC review in a CMX-ESRX deal will not be lengthy. All
evidence suggests otherwise.
The new HSR expiration date will be March 8, 2007. By
that time, the CMX-CVS deal should already be completed unless ESRX raises its
offer significantly.
January 29, 2007 (9:10a) - Political Concern
Reported (CMX-ESRX)
According to reports published late Friday
(1/26), legislators from at least four states have contacted the FTC to voice
their concerns about a potential CMX-ESRX combination. The states identified to
this point are Arizona, California, Colorado, and Texas.
It will again be noted (see December
15 analysis) that the AdvancePCS (ADVP) - Caremark
(CMX) drew similar concerns from Texas and Florida, although those issues
ultimately amounted to very little in terms of the companies completing the
transaction.
The state concerns in this deal are not all surprising and
serve as yet another glaring weakness in the ESRX's attempts to break up the
CMX-CVS deal. It is abundantly clear that a CMX-ESRX transaction will receive a
long and thorough FTC review if it moves forward. Despite the fact that the
current deal obtained FTC clearance without a second request, the CMX-ESRX
combination would generate an HSR review of at least four months, and more
likely six, which is a factor that CVS and CMX must make clear to shareholders
leading up to the CMX shareholder meeting.
If the companies fail to drive this point home over the next
few weeks, the outcome of the CMX shareholder meeting will remain somewhat
tenuous.
January 23, 2007 (8:45a) - CMX Sends Support
Letter to Shareholders
CMX has sent a letter of support for the formal
merger agreement with CVS, and rejection of the unsolicited offer from ESRX, to
its shareholders. The letter is accessible by following
this
link.
Not surprisingly, the letter emphasizes the certainty of
completing the CVS transaction next month, while warning that the ESRX offer is
highly conditional and subject to lengthy delays. This publication, as stated
repeatedly, generally agrees with this general assessment, especially where the
HSR review is concerned for a CMX-ESRX combination.
This will obviously not be the last publicity effort on
either side of this situation. ESRX can be relied upon to refute most of the
claims made in CMX's letter (although it would be best to avoid denying
potential regulatory delays) and CMX will need to continue to attempt to
convince shareholders that the CVS deal is the more desirable transaction.
This publication continues to believe that the CMX-CVS deal
will ultimately prevail.
January 22, 2007 (10:10a) - Status
Report
As expected, the proxy statement was declared
effective on Friday (1/19) , and will be send to shareholders beginning early
next week.
Also, several reports have surfaced over the last few days
suggesting the deal may be threatened by the perceived inappropriate perks
being offered to CMX executives as incentives for continued support of the
merger. This seems to far-fetched and perhaps wishful speculation from sources
hoping to inject additional controversy into an already volatile situation.
There is obviously nothing new or unethical about executives
from a target company receiving substantial, even absurd, rewards for agreeing
to a formal merger agreement. It is part and parcel of the process and should
not be viewed as anything but standard procedure in this transaction.
ESRX's chances of disrupting the current transaction will
only succeed if the company raises its offer significantly and can convince CMX
shareholders that the HSR review will not drag on into the summer of this year.
ESRX is expected to renew its publicity campaign during the course of this
week. It is highly likely that it will increase its offer within the same time
frame, although there has been no solid indication of this over the last
several days.
January 18, 2007 (9:15a) - Proxy Mailing Date
Details / Status Report
CVS filed the
third amended proxy
statementwith the SEC on yesterday (1/17).
The proxy mailing date is stated as January 19, 2006.
Therefore, the proxy will most likely be declared effective later today.
As of this update, CMX shareholder response to the special
dividend added to the deal has been lukewarm, at best. However, this lack of
enthusiasm seems to be tempered by the continued rejection of shareholder suits
filed against the current merger agreement. Although the lawsuits had very
little chance of succeeding, the fact that CMX shareholders are being turned
away by the courts weighs heavily in favor of momentum continuing for the
current transaction.
January 17, 2007 (1:20p) - Shareholder Meeting
Details
CVS filed the
second amended
proxy statement with the SEC on yesterday (1/16).
The CMX shareholder meeting has been scheduled on
February 20, 2007. The CVS shareholder meeting will be held on
February 23, 2007, assuming CMX shareholders approve the
transaction.
The proxy is not expected to go effective within the next
five business days and will be mailed to shareholders before the end of this
month.
January 17, 2007 (9:20a) - Special Dividend
Announced
As expected, the companies announced a cash
component in the form of a special dividend of $2.00 to be paid to CMX
shareholders after the completion of the transaction. The original terms of the
transaction will remain unchanged at this time.
In response, ESRX continues to claims that its offer remains
superior despite the new cash component.
This step should demonstrate to CMX shareholders that CMX
and CVS fully intend to complete the transaction regardless of ESRX's
intrusion. It is unclear at this stage if the special dividend will be enough
to appease the existing CMX shareholder concern, but it certainly will help
slow any momentum in ESRX's favor. It also opens the possibility of an
additional increase the terms, although it is not expected that CVS will be
willing to add significantly to the current terms.
January 16, 2007 (8:50a) - ESRX Commences
Exchange Offer
ESRX has announced the commencement of an
exchange offer for all outstanding shares of CMX for $29.25 in cash and
0.426 shares of ESRXstock.
The current exchange offer expiration is Tuesday,
February 13, 2007.
As of this update, neither CMX or CVS has responded to the
exchange offer, but both are expected to reaffirm their committment to the
current merger agreement at some point today.
This action by ESRX will effectively continue to agitate CMX
shareholders against the CMX-CVS transaction and, presumably, will prompt some
sort of proactive move by CVS to ensure that the merger moves forward. It will
again be speculated that CVS will make an adjustment to the current terms of
the transaction, either in the form of a cash component or an increase in the
share exchange. Adding a cash component at this juncture would have the most
positive affect in motivation CMX shareholders to vote for the merger.
Additionally, CVS stated late last week that it expects the
CMX shareholder meeting to be held at some point in February. Naturally, this
assumes that SEC consent will be granted within the next two weeks and that no
shareholder meeting adjournments are necessary. The SEC obstacle is fully
expected to be overcome in time for a late-February CMX shareholder meeting.
However, CMX will very likely need to take the necessary steps (i.e. increase
the offer) in order to go into the CMX shareholder meeting with the necessary
votes.
January 11, 2007 (8:50a) - Status Report
CVS filed an
amended proxy
statement with the SEC on January 9. The definitive proxy should be out
within the next two to three weeks.
Also, ESRX has filed a lawsuit challenging the breakup fee
for the formal merger agreement. This is currently percieved as a futile legal
effort, yet probably a valid means of obtaining additional publicity and CMX
shareholder support. It is extremely unlikely that any court will force the
companies to adjust the breakup fee for this transaction.
January 8, 2007 (9:05a) - Status Report
CMX's Board of Directors yesterday reaffirmed
the companies commitment to the current formal merger agreement with CVS.
Naturally, ESRX has responded by repeating its claim that its unsolicited offer
is superior. Interestingly, ESRX does not give much of a rebuttal to CMX's
detailed explanations of synergy and related financial benefits of the CMX-CVS
deal, but it does state the following regarding the expected HSR issue:
"We believe that Caremark is attempting to
use antitrust as a red herring to distract stockholders from the real value
differential at issue."
It remains the opinion of this publication that ESRX's
claims are hollow and ultimately fail to achieve the company's objective. The
only superior aspect of the ESRX offer is the current premium to the CVS
terms, which is now approximately 13%. CVS can correct this by adding a cash
component to the current formal agreement without actually having to meet or
exceed the premium.
If CMX shareholder discontent with the CMX-CVS deal
continues to grow -- which is highly likely -- CVS is expected to make a minor
revision to the terms of the deal before the CMX shareholder meeting.
January 4, 2007 (8:30a) - CMX Shareholder
Status
An unidentified group of CMX shareholders has
scheduled an informal meeting today to discuss strategies for terminating the
current CMX-CVS merger agreement. The time of this meeting is unknown, but the
location is believed to be Nashville, Tennessee.
This development is not at all surprising given the set of
circumstances involved, but is currently not perceived as a legitimate threat
to the formal merger agreement.
As discussed in previous updates, the rapid HSR clearance
for the CMX-CVS transaction should provide ample leverage for the companies to
fend off any shareholder discontent (current or future). However, it also would
not be at all surprising if the terms are adjusted upwards if only to end any
doubts going into the CMX shareholder meeting.
December 26, 2006 (10:25p) - Status
Report
On December 23, U.S. District Court Judge Aleta
Trauger denied a CMX shareholder motion for force the company to
"consider" ESRX's unsolicited offer. The Judge cited CMX's publicly
stated intentions to review the offer under the terms of the current merger
agreement.
This development is not expected to end CMX
shareholder efforts to seek a better deal with CVX or instigate a bidding war
involving ESRX. In fact, reports indicate that CMX shareholders will re-file
the motion later this week or early next week with revisions to the
complaint.
This publication currently anticipates that the CMX-CVS
merger will be successfully completed during the first quarter of next year.
However, the wide discrapancy between the current CVS terms and the ESRX offer
will in all likelihood force the companies to revise the terms upwards in order
to appease CMX shareholders. With the unexpected rapid FTC clearance, CVS
should have the necessary leverage to proceed with the transaction without
having to enter a protracted bidding war with ESRX.
Although
some reports are now suggesting that a potential CMX-ESRX deal
would also receive FTC approval without delay, this is a wholly unrealistic and
uninformed assessment. The FTC will probably issue a second request for
CMX-ESRX, as the impact of that combination would have a palpable impact on the
PBM industry, while CMX-CVS will have virtually no impact. It is this concept
that CVS can be expected to use as propaganda against ESRX in the coming weeks
in order to maintain adequate CMX shareholder support.
It is this factor that should allow CVS to complete the deal
without having to exceed ESRX's current offer price. Nevetheless, CVS will most
likely need to increase the terms -- perhaps adding a cash element -- in order
to assure CMX shareholder approval in February or March of next year.
December 20, 2006 (10:45p) - HSR
Expiration
Surprisingly -- to this publication and
apparently to the companies -- the FTC has cleared this transaction under HSR
without the issuance of a second request.
CVS has accordingly revised its closing projection to
"as early as the first quarter of 2007."
This projection naturally assumes that no state AG's will
intercede in the transaction, which is a distinct possibility given the rapid
HSR approval.
December 20, 2006 (2:30p) - Preliminary Proxy
Statement Filed
CVS filed the
preliminary
S-4 for this transaction with the SEC yesterday (12/19).
According to the S-4, the HSR notification was in fact filed
on November 20, 2006. Therefore, the anticipated second request should be
announced either tomorrow or Friday.
The document also notes the following regarding various
state reviews:
"CVS and Caremark have been informed that
Arizona, California, Florida, Illinois, Louisiana, Maine, Massachusetts,
Missouri, Nebraska, New York, Ohio, Pennsylvania, Rhode Island, Virginia and
the District of Columbia are reviewing the merger from an antitrust
perspective. CVS and Caremark have and will continue to cooperate with these
states in their review."
The involvement of these states is similar to those in the
AdvancePCS (ADVP) - Caremark (CMX) deal, where Attorneys
General in Florida, Texas, and particularly Connecticut intervened and somewhat
impact the HSR review (see December 15 report).
Thus, the only surprising aspect of this information is that Connecticut and
its highly visible AG have not intervened at this point. More than likely,
Connecticut will enter the picture eventually.
Nevertheless, it remains the belief of this publication any
antitrust delays for this deal will be caused by the unusual nature of the PBM
industry, rather than competition-related issues. The FTC and all state
regulators are expected to sufficiently acquaint themselves with the PBM market
complexities and this deal's impact on that market, and ultimately conclude
that is does not pose an antitrust threat at this time.
December 19, 2006 (8:20a) - Status Report /
Additional Research
CVS responded to ESRX' unsolicited offer with
the standard statement expressing confidence in its current agreement with CMX.
Naturally, CVS did not offer a course of action going forward or timing for a
review of the ESRX offer. It can generally be expected that CVS will provide
further guidance late this week or early next week. As noted yesterday, this
situation does look like one in which a brief bidding war will develop for CMX
and CVS will more than likely be forced to increase the exchange rate, perhaps
to include a cash element, in valuing CMX above the $60 per share level.
Separately, whichever company ultimately proceeds in
acquiring CMX, the DOJ is certain to give at least a cursory look into the
market implications of the combination. Within
this chapter of a recent DOJ report encompassing the broad
pharmaceuticals industry, it is clear that the regulator still does not fully
grasp the dynamics of the PBM market, which is not surprising given that
apparently no one can claim to possess this knowledge. In previous research,
the words "opaque" and "mystery" commonly surfaced in
trying to define this enigma of an industry. The DOJ prefers to use the terms
"transparency" in its overview -- an overview that views CMX and ESRX
as two of the three dominant players in the PBM field. This will be significant
if in fact ESRX wins the battle for CMX. It is expected that CVS will use the
potential antitrust factor as leverage to maintain its agreement over the
coming weeks.
Some interesting excerpts for the DOJ report are as
follows:
"It is estimated that there are 60 PBMs
operating in the United States today. There are three independent, full-service
PBMs with national scope: Medco Health Solutions, Inc. (Medco) (formerly
Merck-Medco), Express Scripts, Inc., and
Caremark, Inc.. Some PBMs are owned by significant
retail supermarket/pharmacy chains, e.g., CVS's
PharmaCare, Kroger's Prescription Plans, and Walgreen's Health
Initiatives. Many large insurers such as Aetna and Cigna offer in-house PBM
functions. In addition, there are many smaller, privately-held PBMs. The
relative size and ranking of these companies varies according to the measure
used, such as annual prescription expenditures, prescriptions per year, or
covered lives. Each measure has its own shortcomings. Overall, however, the
market share figures present an industry in which three national PBMs are major
players; a large share, anywhere from one-third to one-half, includes health
plans and retail pharmacy chains offering PBM services; and local and regional
PBMs have a significant presence.
"PBMs appear to compete on price and non-price
dimensions. One survey of plan sponsors using PBM services showed the financial
terms of the bid (such as the reimbursement rate and dispensing fee paid to
pharmacies, the rebates paid to plan sponsors based on formulary drugs
utilized, mail order pricing, and administrative fees) often were the key
determinants in the selection of the winning bid. This study also found that
plan sponsors were concerned about non-price dimensions of service, such as
plan design, the extent of the retail network, and mail order components. Each
term or feature is balanced against each other and is driven by the needs of
the plan sponsor. For example, some want to maximize generic substitution,
whereas others want to maximize rebates from manufacturers.
"Vigorous competition in the marketplace for PBMs is
more likely to arrive at an optimal level of transparency than regulation of
those terms. Vigorous competition is also more likely to help ensure that gains
from cost savings are passed on to consumers of health care services, either as
lower premiums for health insurance, lower out-of-pocket costs (for that
portion of health care expenditures borne directly by consumers through
deductibles and co-payments), or improved services. Negotiated limitations on
transparency are unlikely to be so severe that health plan sponsors cannot
assess the price and quality of the services they are receiving. Just as
competitive forces encourage PBMs to offer their best price and service
combination to health plan sponsors to gain access to subscribers, competition
also encourages disclosure of the information health plan sponsors require to
decide on the PBM with which to contract."
December 18, 2006 (8:30a) - ESRX Offer
Details
ESRX has announced an unsolicited, competing
offer for CMX of $29.25 in cash and 0.426 ESRX shares, valuing CMX at roughly
$26 billion. The ESRX offer represents a 15% premium over the current terms
offered in the CVS transaction.
ESRX' entrance into this transaction must be considered a
legitimate effort and promises to force CMX into reconsidering the formal
agreement with CVS. For its part, CVS does not appear likely to back down from
the ESRX threat without a fight, so a bidding war for CMX could very well occur
in this case. It would not be surprising given the parties involved to see CMX'
per share value increased to the $60 level or beyond.
As far as regulator matters are concerned for a potential
CMX-ESRX combination, the projected outcome for the CMX-ESRX deal can
essentially be directly applied. There is very little difference in terms of
competition matters and overall impact to the PBM industry if ESRX prevails.
However, further analysis of a CMX-ESRX transaction will be generated in the
near future.
December 15, 2006 (2:05p) - Regulatory
Status
According to CMX, the companies are not planning
to disclose the HSR filing date even though the companies openly anticipate a
second request. Although unconfirmed, various sources have identified
December 22 as the current HSR expiration date. Thus, a calendar entry
will be made to reflect this potential event.
CMX does claim that the first proxy filing is being targeted
before the end of the year.
CMX also notes that there is a small possibility that the
transaction will be subject to review under Competition Canada. This is due to
solely CVS' retail presence in Canada, and therefore a formal review will
probably be waived in this case.
December 15, 2006 (9:40a) - Initial
Analysis
The first step in assessing this merger requires
revisiting the '03/04 AdvancePCS (ADVP) - Caremark (CMX)
transaction which provides virtually every possible regulatory scenario that
could arise in this case.
In retrospect, the four month HSR review in ADVP-CMX was
indeed an educational exercise, spurred on by concerns originating from state
attorneys general. This publication stressed throughout that deal that no
antitrust issues existed and this turned out to be the case as unconditional
HSR clearance was ultimately granted. Why it took so long for the FTC to reach
its decision can only be attributed to the nature of the PBM industry and the
fact that the regulatory simply chose that deal to fully understand the
implications of consolidation.
As to the first concept, the PBM industry is somewhat of an
enigma in terms of understanding how the market is viewed. There are no less
than three sets of market share data (see below), all of which provide a
different overview of the industry. This is never a good thing where the FTC is
concerned, especially when the top players are involved in a merger. The
ADVP-CMX deal brought together two big players in a highly fragmented and
competitive field, but no one (especially the FTC) could precisely define the
field. Thus, the lengthy HSR review.
Of the three market share charts below, the only one that
really seems to matter is "Enrollment" or "Covered Lives"
data. This data essentially represents the actually number of consumers,
regardless of type of drug plan or cost, currently managed by each company. As
the chart clearly indicates, as of year-end 2005, CMX-CVS had a combined market
share of roughly 25% -- mare than twice that of Medco (13%), but by no means in
a dominant market position. In fact, the data for covered lives market share is
a perfect illustration of a "fragmented" market, even when CMX and
CVS is combined.
As to the second concept -- that of FTC education in
anticipation of consolidation -- this transaction would appear to be exactly
the situation that the ADVP-CMX review was geared to understand. This is not to
say that the FTC will not look into this deal -- it certainly will -- but the
mechanics of the review should already be in place. What remains uncertain, and
perhaps troubling, is that the PBM industry continues to remain somewhat of a
mystery even to those within the pharmaceutical industry.
This
September 2006 article from Managed Care Magazine provides
excellent insight into PBM's unusual status:
"Payers know little of how PBMs function,
what deals they cut, how they profit, or even what specific services they
perform. That lack of knowledge has led to suspicion. Many plans and employers
have come to suspect that it is sleight of hand, and that the wizard may be
getting rich at Dorothy's expense.
"PBMs are, in fact, notoriously opaque in how they make
their money. Academic and federal studies have found that the companies profit
in primarily two ways: on rebates from manufacturers and on the spread (the
difference between what the PBM charges the employer or health plan for a
prescription and what it pays pharmacies for it, exclusive of the dispensing
fee).
"'This is all the result of the [PBM] industry being so
competitive,' says Joseph Coffini, RPh, a principal of Trivantage Pharmacy
Strategies, a consulting company in Milwaukee. 'Outside of the Medicare
population there are precious few new opportunities where a PBM can expand its
market share.'"
Just as telling, the same report provides the following
chart which demonstrates both the fragmentation discussed above and
contradicts the 2005 enrollment/covered lives data below. According to this
chart, Medco currently has almost four times the covered lives as CMX (note
that CVS' PharmaCare PBM is not included):
| Largest PBMs, 2006 (all figures in millions) |
| Company |
Revenue |
Covered Lives |
| Medco Health |
$35,400 |
62 |
| Caremark Rx |
$25,500 |
16 |
| Express Scripts |
$14,500 |
N/A |
| Restat |
$965 |
3.5 |
| Prescription Solutions |
$705 |
5.7 |
| RxAmerica |
$620 |
4.9 |
| Catalyst Rx |
$475 |
3 |
| BioScrip |
$300 |
7 |
| National Pharmaceutical |
$260 |
1.5 |
| Health Trans |
$75 |
13 |
On the data alone, there seems to be very little reason for
the FTC to even bother looking into this combination. And if the PBM industry
did not have the shroud of mystery attached to it, in all likelihood a very
quick HSR review could be confidently predicted. But the companies are
obviously aware that the "opaque" nature of the PBM industry will
generate enough interest to warrant a second request and a potentially lengthy
review since, after all, even industry sources can not agree on how to define
the market.
This publication feels that the ADVP-CMX transaction does in
fact provided the necessary foundation for the FTC to at least understand the
basics of the PBM industry and therefore will not need a full year to sort
through this case. That just seems absurd, given the available data, regardless
of its inconsistencies. Add to this the fact (again, despite the various data)
that Medco is very clearly a powerful competitor to CMX, and one that will in
no way be severely compromised by this merger (Note that the 2005
ACDO-Medco deal sailed through the HSR review). Even if
the FTC lacked a recent reference, it should not take six months to reach the
conclusion that this combination does not present any real antitrust issues --
much in the same way that ADVP-CMX did not.
In sum, this transaction will not encounter the long-end of
the regulatory review factored in by the companies. A close in six months, or
even five, is the current projection.
December 14, 2006 (10:30a) - Market Share
Data
PBM Market Share by Number of
Prescriptions Per Year (Q1 2005)
 |
Pharmacy Benefit Management PBM Market
Share PBM Market Share by Enrollment (Q1 2005)
 |
Top 10 PBM's by Revenue
(2005)
| Company Name
|
Annual Revenues
|
Market Share
|
| Medco Health Solutions,
Inc.
|
$2,800,000,000
|
12.17%
|
| Caremark Specialty
Pharmacy
|
$2,121,000,000
|
9.22%
|
| Priority Healthcare
Corporation
|
$1,720,013,000
|
7.48%
|
| Accredo Health,
Incorporated
|
$1,516,868,000
|
6.60%
|
| Walgreens Specialty
Pharmacy
|
$1,300,000,000
|
5.65%
|
| PharmaCare Specialty
Pharmacy
|
$1,225,000,000
|
5.33%
|
| McKesson Specialty
Pharmaceutical
|
$800,000,000
|
3.48%
|
| Chronimed Inc.
|
$559,964,000
|
2.43%
|
| Florida Infusion Services,
Inc.
|
$478,000,000
|
2.08%
|
| Option Care, Inc.
|
$401,702,000
|
1.75%
|
|
December 14, 2006 (9:55a) - Timelines -- Recent
Related Transactions
|