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October 27, 2017

CVS wants to buy Aetna. Here’s what you need to know.

Daily Briefing

    CVS Health this month offered to buy Aetna for more than $66 billion—more than $200 per share—people familiar with the proposal said on Thursday.

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    After the Wall Street Journal broke the news of the proposal, Aetna shares rose by about 12 percent to $178.60 while CVS shares dipped by nearly 3 percent to $73.31. Aetna and CVS are already established business partners, with CVS in 2010 agreeing to provide Aetna's pharmacy-benefit services, the Journal reports.

    Proposal details and implications

    Were the deal to go through, it would be the largest merger this year and the biggest in CVS history, according to the Journal. The combined entity would have roughly $240 billion in annual revenue and significant bargaining power in negotiating with hospitals, drugmakers, and employers, Axios reports.

    According to the Journal, the deal would secure CVS "a huge number" of customers for its pharmacy-benefit management (PBM) arm and bring in customers to its drugstores. Further, the deal would bring CVS deeper into the health care space, allowing it to offer comprehensive benefits management services to clients, according to the Journal.

    For Aetna, the deal would allow the company to manage care more efficiently for its roughly 44.7 million members, the Washington Post's "Wonkblog" reports. For instance, Aetna might be able to improve care coordination through use of insights from CVS clinics and pharmacies.  

    Moreover, the combined entity would have a significant volume of diversified health data, according to the Journal.

    A person familiar with the proposal said CVS was spurred to make the offer in part by expectations that Amazon will enter the pharmacy business. Another factor that influenced CVS' proposal was regulators' rejection of Walgreens Boots Alliance's proposal to acquire Rite Aid, according to an individual familiar with the discussions. Walgreens scaled down that deal and agreed to buy half of Rite Aid's stores.


    While the discussion may not result in a deal, one of the people familiar with the proposal said CVS CEO Larry Merlo and Aetna CEO Mark Bertolini have met several times over the last six months or so.

    According to the Journal, the proposal would likely draw "close scrutiny" from federal regulators, who've shown concern about consolidation in health care. The Department of Justice has challenged health insurer mergers—including a proposed merger between Aetna and Humana—while the Federal Trade Commission challenged Walgreens' proposed Rite Aid takeover as well as several hospital mergers. However, according to Axios, while CVS and Aetna serve a combined 7.6 million Medicare Part D members, they have fewer overlapping businesses overall than Aetna and Humana do, making the rumored proposal perhaps slightly more likely to garner regulatory approval.

    Complicating the issue, Axios reports, is CVS' recent agreement to serve as Anthem's PBM. Anthem on Thursday said that its PBM agreement with CVS will be successful, the Journal reports.

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    Spokespeople for CVS and Aetna declined to comment on news of the proposal, Reuters reports. However, according to "Wonkblog," analysts had been expecting the proposal.

    Brian Tanquilut, a stock analyst at the investment banking firm Jefferies, said, "The strategic value that [the deal] brings is in the sense that health care has changed so much—that all these insurance companies need or want to be as close to the patient and beneficiary or plan members as possible."

    Separately, Adam Fein, president of Pembroke Consulting, said the deal makes sense, citing CVS multiple, establish methods of connecting with consumers and the insurer's goal to contain costs.

    In addition, Fein noted, "Depending on how it's structured, this could potentially be of great benefit to consumers, because there will be an opportunity to offer more efficient and more effective health insurance plans" (Johnson, "Wonkblog," Washington Post, 10/26; O'Donnell/Roumeliotis, Reuters, 10/26; Herman, Axios, 10/26; Herman, Axios, 10/27; Haefner, Becker's Hospital Review, 10/26; Mattioli et al., Wall Street Journal, 10/26) .

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