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CVS Caremark Cites Numerous Inaccuracies in Antitrust Memo Submitted to Longs Board


CVS Caremark Corporation (NYSE:CVS) today took strong exception with a memorandum recently submitted to the Board of Directors of Longs Drug Stores Corporation (NYSE:LDG) by a law firm retained by CtW Investment Group, as follows:

We are aware that the Board of Directors of Longs recently received a memorandum from a law firm retained by the CtW Investment Group, which purports to offer an "independent" antitrust analysis of the regulatory timing and substantive risk posed by a potential acquisition of Longs by Walgreens. While not attempting an exhaustive rebuttal, we feel it is important to point out the basic factual inaccuracies and analytic deficiencies contained in this highly misleading memorandum, which attempts to equate the regulatory risks of a CVS/Longs combination and a Walgreens/Longs combination.

The Analysis Contains Numerous Inaccuracies

Some of the basic inaccuracies in the arguments made in the memorandum include:

  • Erroneous calculation of store overlaps. The memorandum claims that "in CVS/Longs, the FTC chose not to engage in a long investigation even though almost 2/3 of all Longs stores overlapped with CVS stores..." While the memorandum did not disclose specifically how it defined an "overlap," this assertion is plainly inaccurate, since there are 13 Metropolitan Statistical Areas (MSAs) across which Longs operates approximately 200 stores and across which CVS has none. Furthermore, in the San Francisco MSA, Longs has 22 stores while CVS has no retail pharmacies and only one specialty pharmacy and in Oakland, Longs has 62 stores while CVS has no retail pharmacies and only two specialty pharmacies. Thus, approximately 284 of Longs' 521 pharmacies, or over 54%, are located in MSAs where CVS has zero retail pharmacies.
  • Overgeneralization of store overlaps. The memorandum takes Nipomo, California, one of the few isolated overlaps posed by the CVS/Longs transaction, and attempts to use it as a standard example by which the several hundred similar situations posed by a Walgreens/Longs transaction would be judged and approved. There is no basis whatsoever to assume that the discretionary judgment of the FTC staff in one isolated situation would be applied as a rule of decision in a deal that features hundreds of overlaps and high MSA-level concentrations, and says nothing about the outcome of an analysis of the larger third party payor market.
  • False statements regarding CVS intention to enter Hawaii market. The memorandum claims that "CVS had plans to enter the Hawaii market," which "seemed to be of little concern to the FTC." This claim is patently false, as CVS has never had plans to enter Hawaii. Therefore, the FTC's handling of CVS/Longs provides no insight into how it would handle the combination of Walgreens and Longs, for which Hawaii would be a problem. As has been publicly disclosed, the "Hawaii problem" is already an area of inquiry in the document request that Longs received from the FTC.
  • Inaccurate assessment of Walgreens' antitrust concerns in Hawaii. The memorandum attempts to finesse the important antitrust problem that Walgreens would face in the Hawaii market--where Longs is by far the largest retail pharmacy--by dropping a footnote to compensate for a huge factual mistake. In its footnote, the memorandum acknowledges that "they are unable to assess" the potential competition concerns regarding Walgreens' entry into Hawaii "without access to Walgreens' internal company documents," even though the memorandum acknowledges elsewhere that Walgreens is in the process of negotiating its eighth location in Hawaii and has announced plans to open a total of 25-30 stores in Hawaii over the next several years.
  • Disregard of market share issues resulting from a Walgreens/Longs combination. The memorandum focuses primarily upon the FTC's review of the Rite Aid/Eckerd transaction, and its focus on local markets for the retail sale of pharmacy services to cash customers in that transaction. In so doing, the memorandum ignores the huge MSA-level market dominance that would result from combining Walgreens and Longs in MSAs throughout California, Nevada, and Hawaii, and fails to analyze other relevant markets in which such dominance would be both relevant and problematic.
  • Analytically incomplete. The analysis offered by the memorandum is significantly deficient because it fails entirely to assess the sale of pharmacy services to third party payors, which is the market analyzed in previous FTC actions such as CVS/Revco (1997), J.C. Penney/Thrift Drug (1996/97), and Rite Aid/Revco (1996). As we know from the FTC's inquiries regarding the CVS tender offer and the document request Longs has received in connection with the Walgreens expression of interest, this market remains a highly relevant focus of inquiry and concern. The memorandum's claim that "market share data at the level of metropolitan areas should not play a meaningful role in the FTC's analysis" of a Walgreens/Longs transaction is simply wrong.
  • Loose definition of competitors. The memorandum plays fast and loose with its definition of which competitors belong in the relevant market. The memorandum argues that grocery pharmacies, pharmacies in mass merchandise stores, and independent pharmacies should be included in any market share analysis. Yet the CtW letter accompanying the memorandum claims that "CVS and Longs together account for approximately 40% market share in a number of metropolitan statistical areas, including San Diego, Los Angeles, Santa Barbara, Las Vegas, and Reno," which would only arguably be true if all the other pharmacy types included in the law firm memorandum were excluded. When these competing pharmacies are included, a CVS/Longs combination would not even result in a 35% market share in any MSA.
  • Assertions regarding relevant geographic markets in a Walgreens/Longs combination are inconsistent with the federal Merger Guidelines and with precedent. The contours of a relevant geographic market are defined through a factual inquiry grounded in empirical data, trade patterns, and perceptions of the market participants. And in most urban settings, contrary to the memorandum's claim that "a larger radius may be more appropriate," geographic markets are often smaller than in suburban or rural areas.
  • Distortion of facts regarding potential timing of an investigation. The memorandum uses Rite Aid/Eckerd as a benchmark and claims that the antitrust review took approximately six and one-half months, from September to April, when Rite Aid first announced an agreement in principle with the FTC. However, the FTC did not announce an agreement and consent decree until June--two months later. The additional time was required to finish negotiations with the interested State Attorneys General, who had their own parallel investigations and their own views as to the appropriate scope of relief. Further, the memorandum makes no attempt to assess the interests of, or the timing delays that could be caused by, the Attorneys General of California, Hawaii, and Nevada in a Walgreens/Longs transaction.

The Memorandum's Conclusion is Inherently Flawed

In summary, any suggestion that the regulatory risks involved in a CVS/Longs transaction and those involved in a Walgreens/Longs transaction are comparable is nonsense. The CVS regulatory review is over, and no action was required by either the FTC or the State Attorney General involved. In contrast, the FTC has just commenced a broad and searching review of the difficult antitrust issues raised by a potential Walgreens/Longs transaction. The Walgreens proposal entails meaningful regulatory risk, and regulatory delay is now certain. The two situations are completely different.

CVS Caremark continues to believe that its offer is a compelling, certain proposition for Longs shareholders. Our offer has cleared all regulatory hurdles, is fully financed and ready to close.

About CVS Caremark

CVS Caremark is the largest provider of prescriptions in the nation. The Company fills or manages more than 1 billion prescriptions annually. Through its unmatched breadth of service offerings, CVS Caremark is transforming the delivery of health care services in the U.S. The Company is uniquely positioned to effectively manage costs and improve health care outcomes through its more than 6,300 CVS/pharmacy stores; its Caremark Pharmacy Services division (pharmacy benefit management, mail order and specialty pharmacy); its retail-based health clinic subsidiary, MinuteClinic; and its online pharmacy, General information about CVS Caremark is available through the Investor Relations section of the Company's Web site, at, as well as through the press room section of the Company's Web site, at

Forward-looking statements

This announcement contains certain forward-looking statements. These forward-looking statements may be identified by words such as 'believes', 'expects', 'anticipates', 'projects', 'intends', 'should', 'seeks', 'estimates', 'future' or similar expressions or by discussion of, among other things, strategy, goals, plans or intentions. Various factors may cause actual results to differ materially in the future from those reflected in forward-looking statements contained in this announcement, among others: (1) macroeconomic conditions and general industry conditions such as the competitive environment for retail pharmacy and pharmacy benefit management companies; (2) regulatory and litigation matters and risks; (3) legislative developments; (4) changes in tax and other laws and the effect of changes in general economic conditions; (5) the risk that a condition to closing of the transaction may not be satisfied; and (6) other risks to consummation of the transaction.

Additional Information and Where to Find It

This announcement is for informational purposes only and does not constitute an offer to purchase or a solicitation of an offer to sell Longs' common stock. The tender offer is being made pursuant to a tender offer statement on Schedule TO (including the offer to purchase, letter of transmittal and other related tender offer materials) filed by CVS Caremark with the Securities and Exchange Commission (SEC) on August 18, 2008. Longs filed a solicitation/recommendation statement with respect to the tender offer on Schedule 14D-9 on August 18, 2008. These materials, as they may be amended from time to time, contain important information, including the terms and conditions of the offer and Longs' Board of Directors recommendation of the tender offer, that should be read carefully before any decision is made with respect to the tender offer. Investors and stockholders can obtain a free copy of these materials and other documents filed by CVS Caremark or Longs with the SEC at the website maintained by the SEC at The tender offer materials may also be obtained for free by contacting the information agent for the tender offer, Morrow & Co., at (203) 658-9400 or (877) 366-1576 (toll-free). The solicitation/recommendation statement and related materials may also be obtained for free by contacting (925) 979-3979.

Source: CVS Caremark Corporation

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