A No-Brainer For CVS

On the last day of the year, CVS Caremark (NYSE: CVS) announced that they are effectively buying the Medicare Part D business of Universal American Financial (NYSE: UAM) for $1.25 billion in cash. With this deal, CVS will more than double the size of its Medicare Part D business - from 1.2 million covered lives to 3.1 million covered lives.

In actual fact, the deal is a little more complicated that prior paragraph suggests. CVS is actually buying all of UAM, for roughly $12.80 to $13.00 per share in cash, but also simultaneously giving each UAM shareholder a share in the "NewCo" that will be created to continue UAM's current Medicare Advantage and other insurance businesses. So, at the end of it all, each UAM shareholder walks away with about $13 a share and shares in a UAM that will no longer have this Part D business.

For CVS this looks like a no-brainer type of deal. CVS is paying less than $660 per covered life. To put that in scale, the average senior citizen pays about $2,800 for prescription drugs each year and a year's prescription for a common drug like Pfizer's (NYSE: PFE) Lipitor or Merck's (NYSE: MRK) Fosamax is about $900.

Now, it is absolutely true that pharmacy benefits companies like CVS, Express Scripts (Nasdaq: ESRX), and MedcoHealth (NYSE: MHS) make only tiny margins on their drug businesses, but there are significant advantages to scale in the business. Moreover, Medicare Part D isn't exactly like "regular" PBM operations, so CVS is no doubt looking at this deal as a way of expanding a more protected and potentially more lucrative niche at a time when the standard PBM business is not doing as well.

This looks like a reasonable deal for UAM, though I think the surviving company is going to have a hard time getting much attention or much analyst/institutional investor love. In point of fact, I would not be surprised to see another company (say, maybe, Coventry (NYSE: CVH)?) come in and acquire what's left of this business after the CVS transaction. That leverage and scale I mentioned goes both ways, and I think UAM's Medicare Advantage business is not going to be all that appealing on its own - at least not in the form of a publicly-traded company.