Novartis Cuts in Line at the Drugstore

If peace on earth suddenly breaks out this holiday season, it likely won't extend to the pharmacy-benefits management industry. Monday, Express Scripts (Nasdaq: ESRX  ) launched a bid to acquire larger rival Caremark (NYSE: CMX  ) , in an attempt to break up Caremark's planned merger with drugstore chain CVS (NYSE: CVS  ) .

Whatever the outcome of this three-party tug-of-war, one thing is clear -- consolidation is in the air in this industry. Investors can debate the merits of an Express Scripts-Caremark deal vs. a Caremark-CVS combination, but whichever merger takes place, the result will be a bigger, beefier company with more buying power in the drug market. Buying power means leverage, and that leverage will be applied to drug companies.

This is yet more evidence that drug manufacturers will face greater pricing pressure. One way or another, whether through lower prices or bigger rebates, drugmakers such as Pfizer (NYSE: PFE  ) , Wyeth (NYSE: WYE  ) and GlaxoSmithKline (NYSE: GSK  ) will feel more of a crunch in their dealings with pharmacy benefits managers. Still, one company will likely be better-positioned than others when it sits down at the negotiating table: Swiss drugmaker Novartis (NYSE: NVS  ) .

Back in February 2005, Novartis made a huge move by buying two large generic manufacturers, Eon Labs and Hexal. Novartis' generic assets could give it room to maneuver when pharmacy benefits managers begin to ratchet up the pressure. How would this work? Well, when asked to lower a price for a particular branded medicine, Novartis could counter by proposing a volume discount.

In other words, Novartis can offer lower prices across the board for its branded medicines and generics, but only if pharmacy benefits managers give preferential status to lots of Novartis' medications in their formularies and purchase generics from Novartis. Buying from Novartis would also make things simpler for pharmacy benefits managers, by cutting down on the number of generic and branded drug companies with which they must bargain.

Of course, investors can't expect Novartis' medicines to dominate drug formularies -- managers will have to cover medicines proven to be most effective for each condition, and Novartis can't claim that it has the best treatment in every category. Even so, Novartis' portfolio of branded and generic drugs gives it an important edge as pressure on big pharma grows.

For related Takes:

Pfizer is an Inside Value recommendation, and GlaxoSmithKline is an Income Investor pick.Let the Fool help you boost your prospects for the new year.

Foolanthropy is celebrating its 10th year! To learn more about our five Foolish charities or to make a donation, visit www.foolanthropy.com.

Fool contributor Brian Gorman does not own shares in any of the companies mentioned.


Read/Post Comments (0) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 518489, ~/Articles/ArticleHandler.aspx, 12/19/2014 7:57:55 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement