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CVS-Aetna Deal That Aims to Overhaul Health Care Cleared

Bloomberg logoBloomberg 10/10/2018 David McLaughlin and Robert Langreth
a flock of birds flying over a building: CVS© Photographer: Christopher Dilts/Bloomberg CVS

(Bloomberg) -- CVS Health Corp. and Aetna Inc. received conditional approval to proceed with their proposed $68 billion merger, one of the largest in a series of recent deals that stand to transform the U.S. health-care business.

a flock of birds flying over a building: CVS© Photographer: Christopher Dilts/Bloomberg CVS

The combination would create a giant with a hand in insurance, prescription-drug benefits and drugstores across the U.S. By bringing those businesses under one roof, the companies are betting they’ll be better-positioned to face changing consumer habits and the emergence of new rivals.

The Justice Department’s antitrust division signed off on the transaction with the caveat that the companies complete an agreed-to sale of Aetna’s Medicare prescription-drug plans to another insurer. Doing so, the regulator said in a statement, would resolve its concerns that the deal could harm consumers.

“The divestitures required here allow for the creation of an integrated pharmacy and health-benefits company that has the potential to generate benefits by improving the quality and lowering the costs of the health-care services that American consumers can obtain,” Makan Delrahim, the head of the department’s antitrust division, said in the statement.

The Aetna acquisition is among the most significant health-care mergers of the past decade, combining one of the top U.S. drugstore chains with the third-biggest health insurer. Along with its thousands of retail pharmacies, CVS manages drug-benefits plans for employers and insurers.

The approval comes just a few weeks after the U.S. signed off on another deal combining a big health insurer with a pharmacy-benefits manager -- Cigna Corp.’s $54 billion takeover of Express Scripts Holding Co. And it follows a recent foray by Amazon.com Inc. into the drug business with its $1 billion purchase of online prescription company PillPack.

CVS has said the Aetna deal will enable a variety of new services to be brought into its retail stores, part of its evolution from corner pharmacy chain to a health-care hub with thousands of locations nationwide. Steering Aetna customers toward its stores to fill prescriptions -- and shop for shampoo and razors -- could also help CVS cope with a rocky retail landscape.

Amid a broader stock-market rout, Aetna shares declined 0.2 percent to $203.41, while CVS fell 0.7 percent to close at $78.92.

WellCare Pact

To help seal U.S. approval for the deal, Aetna last month agreed to sell its Medicare drug plans to WellCare Health Plans Inc., to alleviate concerns that a takeover by CVS would otherwise harm competition among plans that sell pharmaceutical coverage to seniors. Under the proposed settlement, Aetna will have to help WellCare run the business during the transition and give it the opportunity to hire key employees.

In a statement, CVS said the deal was subject to state regulatory approvals, many of which have already been granted, and that the deal is on track to close early in the fourth quarter, which began this month.

“We are now working to complete the remaining state reviews,” Larry Merlo, CVS’s chief executive officer, said in a statement. The combined company, with its thousands of retail locations, will “be able to offer better care and convenience at a lower cost for patients and payors.”

In separate announcement after the market closed, CVS said that Chief Accounting Officer Eva Boratto will become chief financial officer after the deal closes. Shawn Guertin of Aetna, whom CVS previously said would become CFO of the combined entity, will step away “for personal and family reasons,” while remaining with CVS until June 2019 to manage the integration. CVS also said it would expand the board after the deal closed to add three additional Aetna directors.

Increased Consolidation

Consolidation has increased across health care among hospitals, drugmakers and insurers, though some previous deals were thwarted by antitrust issues. The Cigna and CVS deals came only after the Justice Department blocked Cigna and Aetna from merging with rival health insurers last year.

Completion of the CVS-Aetna deal could put pressure on rivals to come up with their own deals. Walgreens Boots Alliance Inc. is the U.S.’s last remaining giant standalone pharmacy chain, and its deal-friendly CEO, Stefano Pessina, has spoken about bringing together pieces of the medical supply chain. Walgreens holds a 26 percent stake in drug distributor AmerisourceBergen Corp., which helps supply Walgreens stores, and last winter the companies held early discussions about about a merger, according to reports at the time.

Walgreens, which is scheduled to report its fourth-quarter results on Thursday morning, declined to comment.

Humana Inc., whose deal to merge with Aetna was blocked on antitrust grounds last year, is another potential dealmaker. It has held talks with Walmart Inc. for a closer partnership to provide health care to consumers at home and prevent illness. Anthem Inc., whose deal to acquire Cigna Corp. was blocked last year, is another possible acquirer.

The Justice Department’s Delrahim signaled last year that he was taking a tougher stand on deals that unite companies in different parts of an industry’s supply chain when he sued to block AT&T Inc.’s takeover of Time Warner. His view is competition problems arising from so-called vertical deals need to be fixed with asset sales rather than imposing restrictions on how companies operate. The approvals of the CVS-Aetna and Cigna-Express Scripts deals underscore that vertical deals can still get through when companies can show the tie-up will provide consumer benefits.

(Updates with new CVS chief financial officer in 12th paragraph.)

To contact the reporters on this story: David McLaughlin in Washington at dmclaughlin9@bloomberg.net;Robert Langreth in New York at rlangreth@bloomberg.net

To contact the editors responsible for this story: Drew Armstrong at darmstrong17@bloomberg.net, ;Sara Forden at sforden@bloomberg.net, Timothy Annett

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©2018 Bloomberg L.P.

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