Is A CVS Health (CVS) - Aetna (AET) Deal In The Cards?

Pharmacy giant, CVS Health (NYSE:CVS) , has reportedly made an offer to acquire the nation's third-largest health insurer Aetna, Inc. (NYSE:AET) for more than $66 billion. According to the Wall Street Journal, the companies are in talks and CVS has proposed to pay more than $200 per share for the acquisition.

Why Aetna – the Rationale behind the Deal

CVS is one of the key players in the pharmacy benefit management ("PBM") business in the United States. Pharmacy benefit managers (PBMs) provide formulary management, Medicare Part D services, mail order, specialty pharmacy and infusion services, retail pharmacy network management services, prescription management systems, clinical services, disease management services and medical spend management.

They negotiate prices with drugmakers looking for additional rebates and discounts so as to lower out-of-pocket costs for consumers. Formulary coverage and exclusion lists are issued by PBMs to keep consumers aware of drugs that are covered without extra out-of-pocket costs being incurred.

Clients include insurance companies with the focus being on providing drugs that are beneficial as well as cost-effective. By merging with Aetna, CVS would be able to expand coverage to the full ambit of healthcare including the medical benefits space. The merged company would also be in a better position to negotiate discounts with drug manufacturers. Moreover, Aetna’s insurance plans could help boost coverage and diversify CVS’s business.

The potential Amazon.com (NASDAQ:AMZN) threat could be another reason for CVS’s interest in acquiring Aetna. Amazon, which is rumored to be preparing to enter the pharmacy supply channel, would be a formidable competitor for PBMs. While there is not much visibility on how Amazon plans to enter the prescription drugs business, its potential entry poses a major threat for retail pharmacy chains like CVS. By merging with Aetna, CVS would be able to strengthen its position in the PBM business with a wider coverage.

Changing the Healthcare Industry

The merger, if it goes through, would change the healthcare industry the way we know it today. Of late, insurers and PBMs have been coming together especially if one keeps in mind the UnitedHealth-OptumRx combination. Given the changing healthcare scenario, the efforts to repeal and replace Obamacare, the uncertainty faced by insurers as the “repeal and replace Obamacare” scenario plays out and the demand for more transparency where drug pricing is concerned, there could be more such mergers round the corner.

Of course, it eventually remains to be seen whether the deal actually goes through. The insurance industry has seen quite a few failed deals recently including Aetna’s attempts to acquire Humana (NYSE:HUM) and Anthem’s plans to acquire Cigna (NYSE:CI) with both deals running into regulatory roadblocks.

While CVS is a Zacks Rank #3 (Hold) stock, Aetna is a Zacks Rank #1 (Strong Buy) stock. You can see the complete list of today’s Zacks #1 Rank stocks here.

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