New Script at CVS

The looming marriage between CVS (CVS) and Caremark (CMX) has left investors with cold feet.

Shares of both companies dropped sharply Wednesday, dragging their pharmacy industry peers with them, after the surprising union was announced. The merger will, for the first time, unite a giant drugstore chain with a leading pharmacy benefit manager. It could reshape the entire drug-supply business.

But some observers were left wondering whether CVS isn't in over its head trying to integrate two big mergers at once. Others wondered why Caremark would be eager to sell out in a no-premium transaction -- particularly when its shares have fallen more than 15% since Wal-Mart (WMT) stunned the industry with a plan to sell generic prescription drugs cheaper.

SunTrust Robinson Humphrey analyst David Magee understands the market's nervousness even though he embraces the union himself. For one thing, he points out, CVS is still digesting its big acquisition of the Sav-On pharmacy chain. For another, he notes, CVS was supposed to be focusing more on organic growth. And finally, he adds, CVS could now look as if it is simply playing defense against Wal-Mart because of the retail giant's new $4 monthly generic-drug plan.

"Although one could argue that much of the difficult work with the merger integration(s) will be complete by year-end -- and that the impact of the WMT pricing action has been overestimated anyway, thus providing the buying opportunity for assets in this space -- we believe these points will fall on deaf ears," Magee wrote on Wednesday. "Net-net, we view this as a short-term negative for CVS but are cautiously optimistic regarding longer-term implications."

In a conference call late Wednesday, the companies made similar arguments. They insisted that recent developments -- particularly cheap generics at Wal-Mart and proposed changes to the average wholesale pricing system -- didn't force them to act.

Rather, they said they began discussing a possible merger around this time last year and, after much planning, finally decided to move right now. They defended the price tag on the deal as well.

Some investors feel perplexed because CVS will pay less for Caremark's stock than Caremark has paid for its own shares in the past. But Caremark CEO Mac Crawford feels no such uneasiness himself.

"There will be skeptics," Crawford admitted. "I accept that and understand that ... (But) we think this is a transaction that makes an awful lot of sense."