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CVS Is on Sale

Tuesday, 2 Oct 2007 | 7:52 PM ET

Walgreen and Rite Aid are watching their margins thin out thanks to lower reimbursement rates for generic drugs. It’s a problem all pharmacies face. But CVS was smart enough to plan ahead – it bought Caremark. Now CVS Caremark is profiting from the very thing that’s hurting WAG and RAD.

Big 3 Pharmacies
Mad Money host Jim Cramer compares the big three pharmacies.

According to Cramer, pharmacies usually make a lot of money in the first few months after a drug goes generic, “when their margins on that drug swell up.” But then as more generic competitors jump into the mix, the margins get thinner. This is one of the factors that caused Walgreen’s earnings miss Monday.

But Caremark, as a pharmacy benefits manager, is the company that makes money when these reimbursement rates drop. The lower drug prices go, the better for Caremark because its job is to pay less for the drugs that it covers in its benefit programs.

Despite this strong move by CVS Caremark, its stock still dropped after the WAG quarter. “WAG sneezes, CVS stock catches pneumonia,” Cramer said. “That’s how the market works.” But “if anything, its stock should have gone higher on yesterday’s news, thanks to that acquisition of Caremark,” Cramer said.

Also, CVS is growing at 15% but trades at only 19 times next year’s earnings, something Cramer called “absurd.”

“When the market’s looking real stupid, you can make big money,” Cramer said – especially on stocks like CVS.

Jim’s charitable trust owns CVS Caremark.

Questions for Cramer? madmoney@cnbc.com

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