CVS-Caremark – Implications for the diabetes market
Yesterday CVS Corp. (NYSE:CVS) and Caremark Rx (NYSE:CMX) announced a merger agreement that could have far reaching implications for companies in the diabetes sector. Although the merger is not a done deal and could take up to a year to complete, should it become a reality its potential impact on the diabetes sector is far reaching.
It is well known that one of the fastest growing segments of the pharmacy benefit managers has been mail order delivery of prescriptions. Companies like Caremark favor mail order delivery as a method of containing cost and chronic disease states such as diabetes are a perfect fit for this approach. Patients with diabetes, type 2 diabetes in particular, use oral medications as their primary treatment regimen, medications that can easily be delivered via the mail. Although insulin and Byetta are supposed to refrigerated, with the proper packing they too can be delivered through the mail.
The same is true for glucose monitoring products. PolyMedica’s (NASDAQ:PLMD) Liberty Medical unit has already proven quite successfully that glucose monitoring supplies can be delivered through the mail. More alarming for the major BGM players is the prospect of CVS/Caremark moving towards a co-branded or private label glucose monitor as the primary option for their diabetic patient population. CVS/Caremark could easily follow Liberty’s deal with AgaMatrix. Even the threat of such a move could have serious implications for the major players who are already dealing with increasing pressure to their once fat margins. For several years Diabetic Investor has discussed the possible impact of a PBM or major private payor favoring a co-branded or private label glucose monitor, the CVS/Caremark deal could move this from the idea stage to reality. It should be noted that Home Diagnostics (NASDAQ:HDIX) already has a deal in place with CVS for providing private label glucose monitoring products.
Speaking of PolyMedica this deal could spark renewed interest in the company as possible takeover candidate. Although the stock initially sold off after the deal was announced. Diabetic Investor believes Liberty’s one million customers, brand name recognition and advanced systems would make an ideal fit for a company looking to compete with CVS/Caremark. While Liberty’s primary business centers around Medicare patients with diabetes, the model can be easily expanded to other chronic disease states. Prior to the CVS/Caremark deal the major retail pharmacies were making a major push into the Medicare market. Facing the prospect of competing against CVS/Caremark will Walgreens (NYSE:WAG) or another PBM take a closer look at PolyMedica?
The bottom line with this deal, at least initially, is a CVS/Caremark combination couldn’t have come at a worse time for drug or device companies in the diabetes sector. Already facing pricing pressure both drug and device companies will face further pressure should this deal become a reality. For drug companies such a deal would accelerate the move towards generics. For device companies, BGM companies in particular, any move towards private label or co-branded monitoring products would place further pressure on already declining margins. Anyway you want to look at this deal it does not appear to be positive for the companies in the diabetes sector, with the possible exceptions of PolyMedica and Home Diagnostics.
David Kliff
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