Healthcare Megadeal Sets Pulses Racing


What's going on here?

Healthcare company CVS announced late on Sunday that it had agreed to buy American insurer Aetna for a cool $69 billion. Check your blood pressure: it’s the biggest deal of 2017 (tweet this).

What does this mean?

Aetna is America’s third-largest provider of health insurance. CVS runs about 10,000 pharmacies and also helps companies manage their pharmacy benefits programs (e.g. negotiating prices for employees’ prescriptions). So these companies sit at very different positions in the healthcare food chain.

One major aim of the takeover is to marry up Aetna’s data-heavy insurance offering with CVS’s physical presence (e.g. provide some clinical services normally covered by health insurance, like eye care, in-store). Also, Aetna’s insurance offering can be combined with CVS’s pharmacy benefits management service to compete against key rival UnitedHealth, which has already moved to combine the two and is experiencing encouraging growth.

Why should I care?

The bigger picture: This deal will help test the legality of so-called “vertical mergers”.

Investors were surprised last month when the US Justice Department sued to block AT&T’s takeover of Time Warner. Because AT&T is a telecom company and Time Warner a media company, most investors assumed that the deal would not run into trouble with competition law. Similarly, CVS and Aetna are not competitors – they have fairly separate businesses, although they can be combined to offer customers a more integrated service. Given its willingness to go after the AT&T/Time Warner deal, investors are concerned that the government may also try to block this mega-merger.

For markets: It’s partly a defensive move against Amazon.

Amazon is reportedly considering entering the pharmacy industry – which would, of course, be a threat to America’s biggest pharmacy chain. By beefing up its services division and thereby giving its customers more reasons to physically visit its pharmacies, CVS is building a bigger moat around its business model.

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