On Sunday December 3rd, CVS Health agreed to purchase Aetna Inc., the No. 3 health insurance company. The deal has a $69 billion price tag, and values Aetna shares at $207. CVS arranged to pay $145 per share in cash, along with an additional $62 in newly issued CVS stock. The allegiance of CVS, the nation’s largest pharmacy chain, with Aetna, would undoubtedly result in a powerful superstore with revenue potential superior to any other US company, except maybe Walmart. The chain would gain an advantage over competitors, and potentially even drive prescription prices lower. This would likely lead to closures in small stores, and spur a frenzy of similar mergers from other drug chains, such as Walgreens. The NY Times said the deal could “reshape the American health care industry”.
The acquisition is considered a vertical merger, as the two companies’ industries do not directly overlap, and therefore may not hand government regulators much of an opportunity to stop the unification. Recently the government has been reviewing and delaying AT&T’s $85 billion merger with Time Warner, which is also a vertical merger. But, as Randall Stephenson, AT&T’s chief executive said, the government has not blocked a vertical merger in more than 40 years.
“This transaction fills an unmet need in the current health care system and presents a unique opportunity to redefine access to high-quality care in lower cost, local settings whether in the community, at home, or through digital tools,” CVS said in a statement, whilst announcing the deal.
As reported by the NY Post, CVS, which owns roughly 10,000 pharmacies, insists that it enters the merger to protect itself from online rivals, who have in the past succeeded to undercut their chain. Amazon which has already taken over a good chunk of the cosmetic and household goods market from conventional drugstores, has been acting to obtain state pharmacy licenses, as a prelude to its entry into the retail pharmacy business.
CVS also has over 1000 clinic networks in the back of its stores, which offer treatment. Aetna boasts 23.1 million medical members and 15.3 million pharmacy benefit management services members. Owning Aetna could help drive down prices at the CVS clinic, as well as help lead the insurer’s clients into CVS stores, potentially increasing sales of other in-store items. Regulators may disapprove of CVS forcing Aetna customers to get their pharmacy prescriptions filled there, and of providing preferential pricing to Aetna.
It is not as yet clear whether the Federal Trade Commission or the Department of Justice would handle the review of this merger. The FTC generally does drug store deals, while the DOJ handles insurance company acquisitions. Last February, a federal judge blocked Aetna’s $34 billion acquisition of Humana, concluding that the merger would spark an increase in prices for consumers.
By: Hadassa Kalatizadeh