Healthcare companies with pending M&A — not a small group these days — can feel better about their chances to clinch deals after this week's ruling letting the proposed media merger of AT&T and Time Warner move forward.
The decision holds promise for CVS' pending $69 billion acquisition of Aetna, expected to close in the second half of fiscal year 2018, as well as Cigna's proposed $67 billion acquisition of Express Scripts, analysts said.
Judge Richard Leon on Tuesday blocked the Department of Justice's lawsuit to stop AT&T's $85.4 billion acquisition of Time Warner, without conditions. The judge rejected the DOJ's argument the vertical merger would stifle competition and raise costs.
"Judge Leon's decision, in our view, makes it more difficult for the DOJ to successfully support a case for the CVS-AET deal harming consumers," Jefferies analysts wrote.
"The only area of potential antitrust concern in the CVS and AET businesses is in the Medicare Part D plan (PDP) business, though we note that such issues could be remedied structurally through a divestiture of assets," the analysts said.
Leerink also pointed to Medicare Part D as the more pressing area for antitrust concerns for CVS, though noted that DOJ Assistant Attorney General for the Antitrust Division Makan Delrahim has said he prefers such remedies.
Healthcare companies turned to vertical mergers after a series of horizontal pacts, including proposals to merge Aetna with Humana and Cigna with Anthem, were rejected. Ironically, Delrahim was a lobbyist at Anthem before moving to DOJ.
Mizuho healthcare analyst Ann Hynes wrote that the media decision is a good sign for all four healthcare companies, especially CVS and Aetna, with a recently announced a management restructure that would bring two of Aetna's executives into CVS' C-suite post-merger.
"Based on past checks with DOJ experts, vertical deals, like the CVS and Aetna deal are very difficult to block," Hynes wrote. "Given the pending Cigna/ESRX deal, we think the DOJ will look at how both deals could impact the competitive landscape together, especially the impact on mid-size managed care companies, but we continue to believe both deals are ultimately approved."
Leerink expressed a similar degree of certainty about the pending healthcare mergers, writing in a note that the precedent set by the Time Warner case "bodes well for both of the pending deals" and noting it continues "to believe that both deals will gain regulatory approval."
Optimism for both healthcare megamergers was rapidly reflected in the market. Stocks for all four healthcare companies rose after hours on Tuesday, with CVS up 2%, Aetna up 3%, Cigna up 1% and Express Scripts up 5%.
Large vertical integrations like CVS/Aetna and Cigna/Express Scripts would shake up the healthcare industry substantially. In a recent PwC report, several vertical integrators said their new scale and negotiating power will allow them to reduce costs of services and products. A recent analysis from Moody’s found the CVS-Aetna merger would create a company “with a diversified revenue stream, unsurpassed scale and the potential to reshape the entire health plan market.”
Of course, there are no guarantees the companies will pass on cost savings to consumers, and skeptics point to research that mergers do not always lead to lower prices.
And not everyone is bullish on the connection between the mergers.
Antitrust lawyer David Balto, a former policy director of the FTC, told Healthcare Dive he believes the significance of the media merger's approval is overstated in its insinuations for healthcare mergers.
"We're talking about dominant PBM firms," Balto said, referring to Express Scripts and CVS' Caremark.
"The markets involved are dramatically different and the nature of competition in those markets is dramatically different."
Balto said the DOJ has made it a priority to protect competition in the insurance market.
Mergers like CVS/Aetna and Cigna/Express Scripts, he said, would "weaken the fragile nature of competition." Evidence of exclusionary practices is one of many reasons why Balto believes the DOJ will take a more critical look at vertical integrations in healthcare, specifically with insurance companies and PBMs.
"The two merged firms would be able to use their power over PBMs to go harm insurance rivals, and that's a much stronger concern than existed in the AT&T merger," he said.
Despite the differences that can be counted between large mergers in media and those in healthcare, Leerink's confidence in what it believes will be the approval of both CVS/Aetna and Cigna/Express Scripts is reduced harm to consumers, not competitors.