CVS-Aetna Merger Accelerates Healthcare's Transformation

The Justice Department recently approved CVS’s mega $69b purchase of Aetna, conditioned on Aetna’s sell-off of its private Medicare drug plans. In addition to owning almost 10,000 retail stores in the U.S., CVS provides drug plans to more than 90 million people. It plans to use its pharmacy locations to provide consumers with more local care options, repurposing portions of its stores to become community health centers.

Companies across the healthcare spectrum are searching for ways to squeeze costs and bolster their leverage against other players in the food chain. That is creating opportunities, but also new fault lines as new threats like Amazon and Wal-Mart loom.

The Justice Department’s approval came recently after it cleared Cigna insurance’s $50b purchase of Express Scripts.  This deal-making represent how the lines between traditional segments in health care are blurring as companies, saddled with mature businesses and in many cases restricted from buying rivals, enter new areas.

After the merger, CVS can segregate Aetna’s 22 million insurance subscribers, so they get primary care treatment and medications at their own pharmacies. CVS can offer lower drug prices in its “preferred pharmacy network,” or even grant exclusivity to its locations so Aetna customers can only access drugs at their local CVS. This would obviously hurt competing pharmacies, who have already felt CVS Caremark’s pressure in reduced reimbursements for numerous prescription drugs.

At a higher level, the pharmaceutical industry is bifurcating. The vast majority of people can be treated with generic drugs at a very low cost; the more complex part of the market involves high priced specialty drugs that treat patients with complicated conditions or needs for a personalized medicine, genomic approach. CVS Caremark, Express Scripts, and OptumRx have dominated the PBM market with enormous resources and opaque pricing policies. But with the mergers, Congressional pressure to offer more pricing transparency, and the new market dynamics, PBMs will need to evolve into contoured, publicly-acceptable fits within the specialty drug market.

Keywords: Healthcare Investment Banking, Healthcare M&A, Healthcare mergers