CVS Caremark (NYSE:CVS) isn't shy when it comes to spending big money on acquisitions. The company spent $21 billion acquiring Caremark in 2006 to become the second largest pharmacy benefit manager in the country. Then, CVS out bid Walgreen (NASDAQ:WBA) to acquire Longs Drug Stores in 2008 for $2.9 billion. Now CVS is paying $2.1 billion to buy specialty infusion drug services company Coram LLC from privately held Apria Healthcare.
The Coram deal catapults CVS into the top position for delivering injectable drugs to patients both in-home and in outpatient settings. It also strengthens CVS's product line with margin friendly services; allowing it to better compete with competitors Walgreen and Rite Aid (NYSE:RAD).
Growing demand for at-home infusion
CVS continues to broaden its reach beyond simply filling prescriptions. The Coram acquisition makes CVS the largest player in delivering at-home and outpatient infusion drugs to patients suffering from chronic conditions like multiple sclerosis and rheumatoid arthritis.
Buying Coram gives CVS 85 infusion locations, including 65 outpatient infusion suites. It also gives CVS Coram's nationwide specialty drug business. Both businesses offer growth as payors reduce their reliance on expensive hospital and nursing home care.
As a result of new specialty drug treatments and aging baby boomers, more than 1,500 participants compete against Coram in the $11 billion infusion services market. That fragmentation offers CVS plenty of room to grow Coram's roughly 11% market share.
The outlook is similarly strong for specialty drug pharmacies. The influx of new drugs and an increasingly insured population may drive spending on specialty drugs up 67% by 2015, according to Express Scripts.
The growth in both markets has CVS expecting that Coram will add $1.4 billion a year in sales and boost CVS earnings per share by as much as $0.05 in 2015.
Competing for patients
Apria acquired Coram for $350 million in 2007, and over the past six years the company has grown from 70 locations and $500 million in sales to 85 locations and more than $1 billion in sales. Those locations, staffed with specially trained nurses rather than high-cost doctors, serve as important caregivers to 20,000 patients a month.
But it's not just Coram benefiting from the improving demand. After Apria acquired Coram in 2007, Walgreen bought the second largest infusion company, Option Care, for $850 million in 2008. Walgreen added Omnicare's infusion business to Option Care in 2010, and the business has been rebranded as Walgreen's Infusion Services, which currently employs 1,400 clinicians.
Playing catch up
CVS' acquisition leapfrogs Walgreen's position in the home infusion market. But both CVS and Walgreen remain far ahead of Rite-Aid in diversifying their revenue base across patient care. CVS and Walgreen operate the two largest networks of retail health care clinics, with CVS planning to increase the number of its MinuteClinics to 1,500 by 2017.
Rite-Aid has taken a much more cautious approach -- likely because its financial footing has been more suspect than both CVS and Walgreen's. As a result, Rite-Aid has limited its participation in patient care to flu shots and immunizations.
Evolving demand and delivery
A significant shift is occurring in how pharmacy retailers serve consumers. Retail pharmacies CVS and Walgreen have moved into the middle market pharmacy business to serve employer and government health care plans better and have made big investments on in-store clinics to solidify patient relationships, protect prescription market share, and boost over-the-counter and front-end sales.
CVS' latest move to become the largest provider of infusion services reinforces this commitment ahead of what's likely to be a wave of demand growth tied to aging baby boomers and an increasingly insured population. That suggests that the industry will continue to capture a larger proportion of America's health care spending.