Why Might CVS Be Interested In Entering Into A Multi-Billion Dollar Deal With Health Insurer, Aetna?

by Trefis Team
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After posting a better than expected performance in its Q2 earnings, and then introducing vending kiosks to boost its sales even further, it seems pharmacy giant CVS Health (NYSE:CVS) is now on its way to make another big deal that might help grow its business significantly. According to a report by the Wall Street Journal, CVS has proposed to buy Aetna, the third-largest insurer in the United States, for $66 billion. Both the parties have refused to confirm the existence of the deal as of now. The success of this deal will allow the pharmacy company to enter into a new segment of the healthcare domain. Furthermore, the deal will give CVS a distinct competitive advantage in the tough retail pharmacy market, as the 44.7 million people being served by Aetna might be encouraged to buy CVS’s products and services, such as CVS’s retail pharmacies, walk-in MinuteClinics, and home services for infusion drugs, thus growing its business even further. We have an $80 price estimate for CVS Health’s stock, which is around 16% higher than the current market price.

How Will Both The Entities Be Benefited?

According to the same WSJ report, this merger might be a way by which CVS is trying to further strengthen its business in the wake of rumors of Amazon entering the pharmacy business. The news of Amazon’s possible entry into the pharmacy domain has lately dampened the stock prices of the pharmacy retail businesses. Additionally, CVS’s loss of some contracts in the retail pharmacy business made it imperative for the company to enter into new deals to make its business thrive.

Aetna, in turn, will be able to provide further healthcare assistance to its user base by creating better synchronicity between health insurance and healthcare related products and services. Other than its retail pharmacy business, the offerings of CVS include:  pharmacy benefit management – the negotiation of  drug prices on the behalf of insurance companies. Its other services such as MinuteClinics, home infusion services, and long-term care pharmacies, are services that require close relationships with patients and hence, these services will help Aetna’s business as well, as insurers keep striving for building better relations with their subscribers.

The deal is further beneficial for Aetna as health insurers these days are preferring to bring the drug-prices negotiations in-house rather than delegating the job to an outside party such as the pharmacy benefit managers. In case the deal works out, Aetna will join a group of healthcare insurers such as UnitedHealth Group and Anthem who have also brought the services of pharmacy business managers in-house.

The deal might help the customers as well, as the health insurance plans they would get as a result of this merger  might prove more efficient for them.

On The Flip Side…

However, on the flip side, whether such an expensive deal will provide suitable returns on the investment always remains a question. Also, the deal will further perpetuate the industry consolidation that has been going on for quite sometime now. Competition is always a welcome factor in an industry as that ensures that the consumers get to choose the best possible alternative, hence, the growth of consolidation only raises a question about the possibility of a worse deal for customers later on.

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