NEW YORK (Reuters Breakingviews) - CVS Health just revealed the high cost of defending against Amazon. The U.S. drugstore chain and pharmacy-benefits manager is shelling out $77 billion, including debt, to buy insurer Aetna. In time, sending more patients to in-store clinics could lift profit. The plan, however, is more apt to simply stop existing customers from leaving.
There is nothing immediately attractive about the acquisition financially. CVS projects about $750 million of cost synergies within a couple years of completing the deal. Their present value, once taxed and put on a multiple of 10, is worth perhaps a third of the roughly $15 billion being paid over the target’s undisturbed value. And some of those benefits will accrue to Aetna shareholders, who end up with a little over a fifth of the combined company.
This so-called vertical merger of companies in different parts of the healthcare chain is evidence of the mounting pressure to rein in expenses. It is a notoriously inefficient sector. The United States spends about 18 percent of its GDP on medical services, yet receives relatively poor outcomes compared to other industrialized nations.
Times are changing, though. The growth in outlays has slowed dramatically over the past few years, as the government, insurance providers and companies attempt to clamp down on costs. Aetna, for example, will probably have a stagnant top line in 2018 as it withdraws from the individual policy market for Obamacare.
The industry’s weaknesses and myriad unhappy customers has caught Amazon’s eye. It already has received approval from multiple states to distribute pharmaceuticals. The company isn’t rushing to do so, but the mere prospect has sent shivers through other middle-men and drugstores. And the e-commerce goliath is famously satisfied with growth over profitability.
CVS will be able to steer Aetna customers to its chain and drug-distribution network. If more patients go to its more than 1,100 in-store clinics instead of the emergency room, there also could be substantial savings. It’s a big if, and rival insurers may prefer other pharmacies to one tied to Aetna. With more than $20 billion of debt on its books, and another $49 billion lined up for the deal, CVS may find fending off Amazon puts its own financial health at risk.
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