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The CVS-Aetna Deal: A Transaction Spurred by Amazon

By Pierre-Georges Roy, Van Hamilton Barbeau 02 Nov 2017

Aetna_shutterstock imageAt last week’s Connected Health Conference, we had the opportunity to talk to over 50 companies, including health insurers, about the changing dynamics in the healthcare industry. The week ended with reports signaling an important change in the drugstore and health insurance industries that will have ripple effects, namely CVS Health Corp.’s proposed acquisition of Aetna Inc. CVS, the nation’s largest drugstore chain offered to acquire Aetna, the nation’s third largest health insurer for over $66 billion. In the anticipated deal, CVS would pay a 25% premium to Aetna’s share price. If the two companies agree to the proposed acquisition, it will be the largest US M&A transaction of the year as well as the largest US health insurance deal of all time. One obstacle the deal faces will be to obtain approval from the Justice Department as well as the Federal Trade Commission, which will share antitrust enforcement. The proposed Aetna acquisition is largely a product of the looming threat of Amazon entering the pharmacy business. The expectation that Amazon will break into the pharmacy market was underscored last Thursday, when it was announced that Amazon received wholesale pharmacy licenses in 12 states. The following day, reports of the CVS proposal to acquire Aetna surfaced.

The Aetna acquisition would give CVS 46.7 million members for its pharmacy benefit management (PBM) arm, customers for its drugstores, and a large store of health data. The proposed acquisition is a sign that dynamics are changing in the healthcare industry, especially as it relates to PBMs. PBMs manage the list of drugs that insurers will pay for, and in recent years, PBMs have started to play a large role in creating mail-order pharmacies. The CVS-Aetna deal demonstrates that the era of the standalone PBM is over. The proposed CVS deal is aligned with the UnitedHealth Group model, where you find under one roof the largest US health insurer as well as a health services arm that includes a PBM, clinics, and physician practices. As the healthcare industry continues to move away from PBMs that are not associated with a health insurer, standalone PBMs like Express Scripts could become attractive acquisition targets. If the CVS-Aetna deal goes through, Express Scripts would be the largest standalone PBM, which would make it an appealing target for drugstore companies like Walgreens and Rite Aid, as they try to keep up with CVS. Alternatively, Amazon could look to acquire Express Scripts and gain an immediate foothold in the PBM and mail-order pharmacy business. Ultimately, the proposed acquisition of Aetna would signal a shift from the past practice of separating pharmacy benefits from the rest of a medical coverage plan. Combining the two services would arguably make it easier to verify whether drugs are worth the cost and whether they are keeping people out of the hospital. As we continue to combine these two services, we see M&A opportunities for Express Scripts and other PBMs.

Ultimately, the CVS-Aetna transaction would create a scenario where the combined company would own a significant part of the lifecycle of the consumer, from prescribing drugs to offering the health plans that pay for them. This vertical integration will likely have a positive impact on drug prices, as the company will be able to leverage its oversight of health insurance to negotiate drug prices that are tied to patient outcomes. In addition to this positive impact on drug prices for the company’s members, this transaction will likely lead to an overall increase in M&A, as standalone PBMs are acquired as part of a trend to offer health insurance and healthcare services under one roof.

 

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Pierre-Georges Roy

Partner

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Van Hamilton Barbeau

Analyst

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