Close Close
ThinkAdvisor

Life Health > Health Insurance > Health Insurance

Omnicare at almost $10 billion still worth it for CVS

X
Your article was successfully shared with the contacts you provided.

(Bloomberg) — For Omnicare Inc.’s potential suitors, even a $9.8 billion price tag could more than pay for itself.

The supplier of drugs and services to nursing homes closed Thursday at a record $86.31 a share after people with knowledge of the matter said it’s exploring a sale. Yet a bid for as much as $101 a share, or $9.8 billion — which some analysts say is conceivable — still wouldn’t be expensive. Instead, it’d be a way for industry buyers such as CVS Health Corp. (NYSE:CVS) or Walgreens Boots Alliance Inc. (NYSE:WBA) to further boost next year’s profits and payouts to their own shareholders.

CVS and Walgreens, along with Express Scripts Holding Co., AmerisourceBergen Corp., McKesson Corp. and Cardinal Health Inc., could increase next year’s earnings by acquiring Omnicare at that price, according to analyses by Credit Suisse Group AG and Cowen Group Inc.

“I would certainly think that people would at least take a look,” Charles Rhyee, a New York-based analyst for Cowen, said in a phone interview. A sale to CVS would make the most sense, he said.

A representative for Omnicare said the Covington, Ky.-based company doesn’t comment on speculation. Representatives for Walgreens and AmerisourceBergen declined to comment, and representatives for CVS, Express Scripts, McKesson and Cardinal Health didn’t respond to phone calls or emails. 

Managing meds 

Roughly three-quarters of Omnicare’s revenue and operating profit comes from its long-term care group, which helps senior-living facilities manage their residents’ medications. That business dispensed about 111 million prescriptions last year. Omnicare’s smaller specialty-care division focuses on high-cost drugs with bigger reimbursement challenges for treatment areas such as rheumatoid arthritis, multiple sclerosis and cancer.

Omnicare is on the block less than a month after UnitedHealth Group Inc. agreed to buy Catamaran Corp. for about $13 billion including net debt. And in February, Rite Aid Corp. agreed to buy EnvisionRX from private-equity owner TPG for about $2 billion.

Pharmacy-services providers are combining as they seek to gain a bigger piece of a market that’s benefiting from increasing demand. Patients, insurers and companies are trying to manage costs amid rising drug prices.

A takeover of Omnicare for $101 a share translates into 21 times trailing 12-month Ebitda, which would be in line with other industry transactions. The median multiple is about 20 for those struck during the past decade that exceeded $1 billion, according to data compiled by Bloomberg. Ebitda stands for earnings before interest, taxes, depreciation and amortization.

Market leaders

Express Scripts became the biggest pharmacy benefits management company after purchasing Medco Health Solutions Inc. three years ago for $34 billion including net debt. It’s still the industry’s largest deal.

CVS has the second-biggest market share. Other possible suitors — AmerisourceBergen, Cardinal Health and McKesson — are the dominant pharmaceutical distributors. Walgreens is the largest U.S. drugstore chain by revenue.

An Omnicare purchase may make the most sense for CVS, Cowen’s Rhyee said. Both are big in Medicare Part D, a federal program that subsidizes medicine for retirees, so there could be benefits from having the added scale. Also, as some drugstore customers age, CVS could continue serving them when they move into assisted-living centers and nursing homes, he said.

Two sides

For other suitors, buying all of Omnicare may be a tougher sell. For that reason, it may even be possible that Omnicare gets broken up, according to Vicki Bryan, an analyst for Gimme Credit.

As Credit Suisse’s Glen Santangelo put it, the specialty-pharmacy and manufacturer-services side “is one of the coveted assets in the industry.” The slower-growing long-term care business is “generally less attractive,” which may make it harder for some to justify a large takeover premium, the New York-based analyst wrote in a report Thursday.

For Omnicare, selling itself makes sense because it wouldn’t be able to achieve the same amount of scale as the big distributors and pharmacies on its own, said Jonathan Palmer, a New York-based analyst for Bloomberg Intelligence.

“Everybody else around them is getting bigger,” Palmer said in a phone interview. “While Omnicare is the biggest company in the institutional pharmacy market, they’re still a niche player in the overall health-care services market — and that niche is pretty attractive to all those big companies.”