Caremark’s (and AdvancePCS) stock jumped today because (as expected) the FTC has approved their merger. Both these stocks are at significant all time highs (or at least Caremark is up 8-fold since it got out of the physician business in 1997-8, and AdvancePCS is 50% above its high of 2001 and nearly 40% above where it was immediately after when the merger’s announcement last September).

The market has drunk the kool-aid (and likes it!) regarding the conversion of the AdvancePCS lives to mail-order (to increase margins) and the big opportunities in the Medicare PDIMA drug coverage market.  No-one seems to be paying any attention to the various court cases in this market, or the inability of PBMs to control drug costs.  My suspicion is that the PBMs will find the next few years to be fairly heavy sledding as they get ready for Medicare drug coverage, and the stocks will react accordingly–it’s tough to maintain P/E ratios in the high 20s and low 30s in the health care insurance business (United’s is 20 and Wellpoint’s is 17). Even Medco, which beat profit forecasts this morning but has since sold well off its early highs, has a P-E only in the low 20s. Where the top for the sector is exactly, I don’t know, but I think it’s sometime this year.

Unless of course PBMs can really innovate in health management and reap some rewards from that, which I doubt (but they don’t) and get someone else to pay them for it.