We're seeing something amazing in the world of health care: massive consolidation. Shake-and-bake deals coming fast and furious. This morning's acquisition where CVS (CVS) bought Omnicare (OCR) in a $12 billion deal is one more example of what's been going on in this group, and I can tell you that we are in the early innings of these mergers.
Omnicare is a company that provides critical medical care to senior citizens, typically in assisted-living facilities. This is a fabulous niche business that won't be niche as baby boomers get older.
Now, we know CVS already owned a pharmacy benefit manager, Caremark, not that long ago and, when it took tobacco out of its stores, it became CVS Health, much less a drugstore chain and much more a health care provider.
Not that long ago, Rite Aid (RAD) made a similar move to purchase a pharmacy benefit manager, a move I liked very much.
Now I think it is the turn of Walgreens Boots Alliance (WBA) to step up to the plate and buy a company that controls drug costs, or merge with one.
It's one of the reasons why I think McKesson (MCK) never seems to go down, as it is a formal partner of Walgreens, but I see no reasons why they can't merge. Sure, Walgreens used to own a pharmacy benefit manager and shed it, but that was the old management team and this group isn't bound by history.
Plus, it wouldn't surprise me one bit to see more consolidation in the health maintenance world. Do we really need Anthem (WLP) and Humana (HUM) and Aetna (AET) and Cigna (CI) and United Health (UNH)? I can see a world where five becomes three very easily.
Then there's the rampant talk of mergers in acquisitions among the drug companies. I was amazed yesterday when Deutsche Bank (DB) put out a piece suggesting that Pfizer (PFE) might be soon merging with GlaxoSmithKline (GSK). There was a time when no major firm would even think of having a piece of research that would speculate about such a merger. Now it's a given that a deal has to be done.
Same with the generics. Think of all the combinations there: Mylan (MYL) wants to buy Perrigo (PRGO). Teva (TEVA) wants to buy Mylan. We have come to expect that Valeant (VRX) is always about to pounce on a company in the industry. Even after Actavis (ACT) did the biggest deal of the year in 2014, $70 billion, we keep hearing that CEO Brent Saunders is queueing up another major acquisition.
Why is all this happening? First, there are way too many players bashing each other's heads in the health care segment. Every deal I have seen has raised gross margins dramatically.
Second, many of the users of health care, like the hospitals or doctors, really don't want as many providers calling on them.
Third, the government's gotten stingy, and without the largesse of Medicare, many of these companies can't make their long-term profit margins.
That's why I always reiterate that I like Rite Aid, a company that is asked about on Twitter (TWTR) @jimcramer more than any other. That's why my trust owns Walgreens because any deal it makes will be viewed like the Omnicare deal that CVS did that drove that stock up almost $2.50 today.
It's why I think owning a drug or a biotech is a must.
I understand there are several deals being worked on that could be imminent before the summer begins involving just the players I have reeled off.
My bottom line: Every time there's a deal, the whole group moves. Own one of these; right now it's the single best group in town.
