Three Takeaways From The CVS-Aetna Merger

12.4.17 | Forbes

By Steve Brozak

To read the entire article on Forbes, please click here.

In a joint press release Sunday night, CVS Health and Aetna stated that one of the goals behind the nation’s largest pharmacy chain acquiring one of its largest health insurers is to save the healthcare system money. This reminds me of the time when Pfizer claimed its acquisition of Allergan was not about a tax inversion. Spoiler alert: It was all about the inversion. Pfizer and Allergan called the deal off after the Obama administration stepped in to block the deal.

Recently disparate players in the healthcare sector have been forging new alliances as they continue a quest for growth in new areas, especially after the U.S. Department of Justice began to exert its power earlier in the year, quashing both Aetna’s proposed $39 billion acquisition of Humana, and Anthem’s $48 billion acquisition of Cigna Health Insurance. With insurers retreating from Obamacare exchanges, they are seeking growth anywhere else they can.

For CVS Health, the $69 billion acquisition of Aetna makes perfect sense. The company’s shrinking retail sales and increasing competition from e-commerce players are well documented. I even wrote a few years ago how CVS and Walgreens needed to shake up their retail models lest they go the way of Blockbuster video because of the threat from Amazon. More recently, I wrote about how Amazon’s entry into healthcare could take shape.

The CVS-Aetna deal is a case of a sector self-disrupting before an actual disruptor shows up. Proponents of the merger claim the combined company will redefine the healthcare experience. CVS Health’s 9,700 pharmacies and 1,000 Minute Clinics could evolve to become even more focused on the delivery of actual medical care. Acquiring Aetna adds new services and powerful data informatics components to its enterprise.  Most importantly, it gives CVS greater control over patient flow.

There are three main takeaways from the announced deal between CVS Health and Aetna.

1. Amazon Has Become A Deal Catalyst

Amazon.com sparked many unintended consequences when its plans to enter the healthcare sector became more apparent earlier in the fall. Sensing cataclysmic disruption, healthcare companies across the spectrum began to assess the landscape and are already employing defensive moves to prepare for a perceived invasion. Long rumored, the CVS and Aetna merger is an obvious consequence. Over the years both companies have grown strategically closer through various business relationships, particularly through CVS Health’s pharmacy benefit management (PBM) division, which is contracted by Aetna to provide its members with PBM services. While several outlets are reporting that healthcare players are nervous or worried about Amazon’s entry, savvier management teams should look at 2018 as an opportunity to pursue deals that would not have been possible without an existential threat like Amazon looming.

The one thing I’ve learned over the years covering the healthcare industry is that you shouldn’t write any company’s obituary prematurely. Amazon’s entry into healthcare is being perceived as a major threat, and it could very well be, but remember that the U.S. healthcare industry is fiercely competitive.  How Amazon decides to enter and what it decides to do afterward will be interesting to watch as it makes and takes on new adversaries.

Much of the speculation around Amazon’s entry into healthcare has revolved around the e-commerce giant jumping headlong into the mail order pharmacy model, acquiring a small network of pharmacies, or building pharmacies into its Whole Foods network. Combining such activities with a PBM would allow Amazon to control greater margin (remember, CVS enjoys its profitability from its PBM/specialty pharma services divisions). While these are viable strategies for Amazon to enter the healthcare market, it’s already been reported that Amazon has acquired wholesale pharmacy licenses in 12 states, signaling a business-to-business model. Such an approach buys more time for pharmacies like CVS and Walgreens, PBMs like ExpressScripts, and health insurance plans. However, the shareholders of McKesson Corporation and AmerisourceBergen Corp. should take notice of Amazon.

2. There Is Moderate Regulatory Risk To The CVS-Aetna Merger

The deal is being touted as a vertical merger, and, according to attorneys for both sides, is anticipated to clear any regulatory hurdles. Shareholders shouldn’t celebrate too soon, though. There is an element of unpredictability with the current administration and there is reason for some concern the impact such a merger would have for patients. So while technically there is little business overlap between CVS Healthcare and Aetna, it is impossible to tell how the combined company’s leverage could be used. Such a concentration of power in the healthcare system is unprecedented and could lead to some very innovative product and service offerings. Or the breadth of products and services offered between the organizations could adversely impact consumer choice.

The scope of the proposed transaction is so far reaching; how the U. S. government will respond is unpredictable no matter what the experts say. It is reasonable to expect significant questions will be raised if the government does its job to balance the implications of the proposed merger. If it sails through regulatory, only time will tell how an ultimate combination changes the healthcare system.

3. It Provides A Template For Future Deals

Deals beget other deals. Whether or not the CVS-Aetna deals closes, bankers have been on the phones for weeks trying to set up and close transactions, and Sunday’s announcement will only fuel more deal discussion. Transactions that were once thought too far-fetched by management teams inside and outside of healthcare will now be put back on boardroom tables for discussion. Through the proposed merger, CVS would become a one-stop shop for healthcare services, providing a template for future deals. That could all lead to greater consolidation in the healthcare services sector, and, ironically, toward a free market version of a single payer-like system. There are benefits and disadvantages to highly concentrated healthcare services companies, but new players like Amazon and potentially Walmart may force the old guard into groundbreaking innovation as they battle for hegemony in healthcare.