- CVS Health has agreed to purchase Aetna in a deal valued at $69 billion.
- The deal would combine CVS's retail pharmacy services with Aetna's health insurance business, resulting in a company with annual revenue of $240 billion — second only to Walmart in the U.S.
- The transaction is expected to close in the second half of 2018. "Aetna will operate as a stand-alone business unit within the CVS Health enterprise and will be led by members of their current management team," a joint statement noted.
In a massive deal that will ripple through the healthcare industry, CVS Health's acquisition of Aetna creates a behemoth healthcare company with significant market power.
The implications of the massive deal are many, but also not fully clear. Moody’s Vice President Mickey Chadha said the deal creates a company of “unsurpassed scale and reach in the industry and the potential to reshape the entire health plan market.”
Chadha said combining Aetna’s membership data and strong Medicare Advantage growth with the pharmacy operations of CVS creates a compelling combination. “However, the transaction will result in significant weakening of CVS’s credit metrics as it will be financed largely with debt and will come with high execution and integration risks,” he said.
As a result, the deal could yet face antitrust scrutiny from regulators. A challenge from the U.S. Department of Justice ultimately broke up a planned merger between Aetna and Humana earlier this year. Antitrust concerns also forced Walgreens to scale back its planned acquisition of Rite Aid earlier this year.
The deal comes as CVS has shown an interest in expanding its business beyond pharmaceuticals. The company currently has more than 1,100 retail clinics, which have been showing strong revenue growth, as well as a pharmacy-benefit management arm.
The deal reflects several industry trends. One is a growing demand from consumers for convenience. More and more providers are snapping up retail spaces to use for clinics. The deal also echoes an industry movement toward care consolidation and the idea that patients can have all their needs addressed without the need for multiple trips. One major company to attempt managed care is UnitedHealth Group, which has seen its shares more than quadruple in the past five years.
Also, M&A activity has been hot in 2017. In Q3, the industry saw more than 200 deals for the 12th quarter in a row, according to the PricewaterhouseCoopers. The total deal value over 211 deals for the industry was $17.4 billion, a 16% year-over-year decrease versus the time period a year ago.
The companies say they are aiming to use their combined power to reduce healthcare costs, but there is little evidence that merging services can do that.
Writing in The New York Times, health economist Austin Frakt said there is some cause for optimism the CVS-Aetna merger would benefit consumers. “Let’s imagine that Aetna could leverage CVS’s pharmacies and clinics to help patients – who require medications to avoid hospitalizations – stay on their drug regimen. That could save the merged organization money. It could also translate into both better care and lower premiums, though there is not guarantee at this stage of either.”
Aetna recently reported relatively strong financials for Q3, with a 39% increase in net income and a plan to increase the full-year 2017 earnings projection. CVS common stock decreased 2.8% at the open of business compared to the previous close, Aetna increased 2%.
According to Wall Street Journal's sources, CVS is preparing to retrofit portions of its pharmacies to become community health centers where consumers can ask questions about health coverage and costs. This idea aligns with recent comments from Aetna CEO Mark Bertolini, who has signaled a sweeping change within Aetna to become more of a healthcare company, instead of just an insurance company. “If you have to go to the hospital, we have failed you," Bertolini said at the Healthcare of Tomorrow conference last month. "What if that were the way the system was designed?”
The CVS/Aetna deal may also have been prompted by the looming threat of Amazon’s apparent interest in entering the pharmacy business. The online retailer has received approval from several state pharmacy boards to become a wholesale distributor. If Amazon does indeed move into the pharmaceutical space, CVS and Walgreens would find themselves up against a competitor that has a history of major disruption. However, the filings with the regulators suggest that Amazon is not looking to sell drugs on its marketplace.
While the deal will face antitrust scrutiny, Aetna and CVS's customer bases do not overlap in a major way. CVS will want to consider how to meld the two companies together if the deal is approved, as they have very different portfolios.