Will The Healthcare Landscape Change With The $69B CVS-Aetna Deal?

After weeks of speculation, CVS Health (NYSE:CVS) announced its decision to acquire Aetna (NYSE:AET) , one of the nation's leading diversified health care benefits companies. The cash and stock deal will see Aetna shareholders receive $145 per share in cash and 0.8378 CVS Health shares for each Aetna share with Aetna being valued at approximately $207 per share or about $69 billion ($77 billion including the assumption of Aetna's debt).

News about a possible merger between the pharmacy giant and the health insurer had surfaced in late October when the Wall Street Journal reported that the companies were in talks with CVS proposing to pay more than $200 per share for the acquisition.

With this deal, slated to go through in the second half of 2018, the companies are looking to change the healthcare landscape. The announcement comes at a time when insurers are under pressure to cut medical costs while companies like CVS are facing the prospect of fierce competition especially given the rumors about tech giant, Amazon.com (NASDAQ:AMZN) , planning an entry in this space. While there’s low visibility on how Amazon expects to enter this market, 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 pharmacy benefit management ("PBM") business with a wider coverage.

Pharmacy benefit managers (PBMs) provide a wide range of services including 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.

A key responsibility is the negotiation of 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 will be able to expand coverage to the full ambit of healthcare including the medical benefits space. The combined company is also expected to 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 combined company should be well-positioned to meet the health needs of many more people, especially the 50% of Americans with chronic conditions that account for more than 80% of all health care costs. Moreover, CVS Pharmacy locations will add additional products and services including space for wellness, clinical and pharmacy services, vision, hearing, nutrition, beauty, and medical equipment. Post-merger, CVS will find itself in the positon of an integrated retailer, pharmacy benefits manager and health plan provider.

What Next?

Of late, insurers and PBMs have been coming together especially if one keeps in mind the UnitedHealth-OptumRx combination. Given the changing healthcare scenario and the demand for more transparency where drug pricing is concerned, there could be more such mergers round the corner.

Meanwhile, all eyes are focused on Amazon and its plans to enter the healthcare sector. Just last week, a CNBC report said that Amazon is in preliminary discussions with generic drugmakers including Mylan (NASDAQ:MYL) and Novartis’s generic arm, Sandoz, about entering the pharmacy market. There has also been news about Amazon having obtained wholesale distribution licenses from the pharmaceutical boards of certain states. With not much information being available, there is a lot of speculation and discussion among industry watchers about the way the tech giant is planning to enter the market – as a drug wholesaler or a retailer.

CVS and Aetna are both Zacks Rank#3 (Hold) stocks. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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