$69 billion pact to buy Aetna combines insurer, provider of
pharmacy services
By Sharon Terlep, Anna Wilde Mathews and Dana Cimilluca
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (December 4, 2017).
CVS Health Corp. agreed to buy Aetna Inc. for about $69 billion
in cash and stock in a move to transform the pharmacy company and
capture more of what consumers spend on health care.
Aetna stockholders are to receive $207 per share -- $145 in cash
and 0.8378 of a CVS share, or $62, in stock, the companies
announced Sunday. That represents a premium of about 29% to where
Aetna shares were trading before The Wall Street Journal reported
that the companies were in talks in October.
The proposed deal is the latest and most dramatic sign of 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 in search of
growth.
Companies from insurers to hospital chains are also looking 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 companies find themselves competing against
erstwhile partners.
"Everyone's moving into one another's space to position
themselves for whatever happens," said Lawton Robert Burns, a
professor at the University of Pennsylvania's Wharton School.
The chief executives of CVS and Aetna said in a joint interview
that by pairing Aetna's medical expertise with CVS's ubiquitous
physical-store presence, the new company would be well positioned
to curtail runaway health-care costs.
These costs are growing at "an unsustainable rate," CVS's Larry
Merlo said in the interview. The combined company "can meet an
unmet need in terms of improving access and reducing cost and
helping people achieve their best health."
Combining Aetna's vast trove of data with CVS's retail expertise
will enable better treatment of costly chronic diseases, Aetna's
Mark T. Bertolini said. "This is about how to get the payer more
involved at the local level," he said. "As we look at 50% of the
population driving 80% of cost, we need to find a more convenient
and more effective way to meet customers' needs."
Mr. Merlo will be chief executive of the combined company, which
will maintain Aetna as a standalone unit. Mr. Bertolini won't have
an operational role, though he will take a seat on the CVS board
along with two other Aetna directors.
The deal -- the biggest announced in more than a year -- pulls
together two giants from very different corners of the health-care
industry. CVS, with annual revenue of $178 billion, is a major
pharmacy-benefits manager in addition to operating a vast
collection of drugstores, some of which already have retail
clinics. Aetna, with revenue of around $63 billion, is the
third-largest U.S. health insurer, providing coverage to around
22.2 million members enrolled in employer, Medicare, Medicaid and
other plans.
The logic of the deal centers on a plan to use CVS's nearly
10,000 U.S. pharmacy locations to provide consumers with more local
care options. CVS, which has for years been seeking to move further
into health care, plans to repurpose portions of its pharmacies so
they become community health centers where customers can get
answers about their health and coverage -- and how to manage the
cost of it, the companies said. The pharmacies will have space
dedicated to wellness and could provide services in areas like
vision, hearing and nutrition.
The locations will be staffed variously by pharmacists, nurse
practitioners and experts such as nutritionists. It is possible
they will one day include physicians, Mr. Merlo said, though there
are no immediate plans for that.
Both companies have challenges in their core operations.
CVS faces the potential threat of Amazon.com Inc., which may
enter the pharmacy business. The company's retail business accounts
for a shrinking share of its overall sales, with most revenue now
coming from its pharmacy-benefits manager, which acts as a
middleman overseeing drug-benefit plans for employers and
insurers.
An antitrust challenge led Aetna earlier this year to give up
its planned acquisition of Humana Inc. and the insurer has
retreated from the unprofitable Affordable Care Act exchange
business, leaving it with an unclear path to future growth,
analysts say. It also lacks the diversity of larger rival
UnitedHealth Group Inc., which has a fast-expanding health-services
arm that includes a pharmacy-benefits manager as well as doctor
practices and surgery centers.
"This transaction is about growth and expansion, not
contraction," Mr. Merlo said. The companies expect $750 million in
"near-term synergies" from the deal.
The combination faces substantial challenges, including the huge
operational task of knitting together the companies' diverse
operations so that customer experiences are smooth and seamless.
The deal isn't likely to deliver as many cost-cutting benefits as
combinations with more direct overlap, such as Aetna's scuttled bid
to buy Humana, analysts said.
It must also pass muster with regulators, which isn't a sure
thing especially after the Justice Department sued to block
AT&T Inc.'s planned purchase of Time Warner Inc., another
so-called vertical combination of companies in different parts of a
supply chain.
Mr. Bertolini said the companies had looked at the AT&T
challenge "very thoroughly" and that the proposed tie-up was
fundamentally different from an antitrust perspective.
Barclays PLC and Goldman Sachs Group Inc. advised CVS and
Centerview Partners advised its board. Shearman & Sterling LLP,
Dechert LLP, and McDermott Will & Emery LLP provided legal
advice. Lazard and Allen & Co. advised Aetna, and Evercore
advised the company's board. Davis Polk & Wardwell LLP provided
legal advice to Aetna.
Barclays, Goldman and Bank of America Corp. are providing $49
billion of debt financing.
--Dana Mattioli contributed to this article.
Write to Sharon Terlep at sharon.terlep@wsj.com, Anna Wilde
Mathews at anna.mathews@wsj.com and Dana Cimilluca at
dana.cimilluca@wsj.com
(END) Dow Jones Newswires
December 04, 2017 02:47 ET (07:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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