For investors, one big question is whether CVS can
actually afford Aetna.
By Max Nisen | October 11, 2018 at 01:00 PM
Well, this seems to make it official: The
Trump administration only cares about vertical mergers in media. Or at the very
least, it has no problem when it comes to these types of deals and health care.
CVS Health Corp.’s $69 billion
purchase of insurer Aetna Inc. — the fifth-largest health
care deal ever — got conditional approval from the Department of Justice on
Wednesday. The DOJ only requires the already in-progress divestiture of Aetna’s
Medicare drug plans in order to approve the deal. The decision comes less than
a month after the approval of Cigna Corp.’s purchase of Express Scripts Holding
Co., another so-called vertical deal that will join together an insurer and
pharmacy benefit manager — not direct competitors, but both players in the
health care process.
Both deals makes strategic sense. UnitedHealth
Group Inc. has become a highly profitable health care giant through vertical
expansion, the PBM business model has come under scrutiny and could use some
diversification, and Amazon.com Inc. looms as a competitor for retail
pharmacies and others that operate in the pharmaceutical supply chain.
But the size, timing and amount of debt
involved in CVS-Aetna’s tie-up makes the deal look increasingly risky.
Health care is not as closely tied to the
business cycle as most sectors, but it is certainly not recession-proof and CVS
is less insulated than most, which could bode ill should prognosticators
warnings of a possible economic downturn in or around 2020 come true. Its
retail pharmacy accounts for a significant majority of its profits, and a
high-margin quarter of that segment’s revenue came from non-pharmacy purchases
in 2017. Bonds representing more than $23 billion of CVS’s $67 billion debt
load will mature between 2020 and 2023, which could turn out to be pretty
painful timing. (Note: A whopping $40 billion of the debt total are bonds sold
in March to finance the Aetna deal.)
Even if recession fears are overblown, the
Trump administration is also currently seeking to make it tougher for PBMs like
CVS to profit from the drug discounts they negotiate on behalf of employers and
health plans. CVS says “retained rebates” only make up a small portion of its
profits, and adding Aetna should focus that business more on keeping costs low
than scraping extra profits out of every prescription. But the negotiation of
discounts is so central to the business of being a large PBM and there are so
many ways to profit from them that it’s hard to imagine that the business won’t
take a hit. This policy would also likely begin to have an impact in the early
2020s.
The upside of this transaction comes from the fact
that CVS has thousands of stores throughout America, some of which already have
health clinics. If it can successfully turn its pharmacies into more
comprehensive health care hubs, it could pioneer a new business model and bring
costs down for Aetna enrollees. But that will be a time-consuming and expensive
transformation that may not work out, or may be constrained by the new
company’s debt obligations.
Over the last few years, it’s been easy for
companies to deal with debt concerns by extending maturities ad nauseum. With
borrowing rates on the rise and investors’ future appetite for piles of new
debt far from guaranteed, that strategy may not be as available or attractive
going forward.
This deal may deliver on its promise. But the
combined company may also face some strong headwinds first.
For more columns from Bloomberg Opinion, visit http://www.bloomberg.com/opinion.
Max Nisen is a
Bloomberg Opinion columnist covering biotech, pharma and health care. He
previously wrote about management and corporate strategy for Quartz and
Business Insider.
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