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Reports that the company is seeking to acquire Aetna, Inc. (NYSE: AET) in a deal valued at more than $66 billion sent shares in CVS Health (NYSE: CVS) tumbling 15.7% in October, according to S&P Global Market Intelligence.
CVS Health is at a crossroads. It's too big to benefit from small bolt-on acquisitions, and foot traffic at its stores could face a big threat if rumors that Amazon.com (NASDAQ: AMZN) will get into the pharmacy business are true.
If CVS Health wants to maintain its market share, it's going to have to get creative. According to the Wall Street Journal, that could mean making a big push into health insurance.
Last month, the business paper reported that CVS Health offered more than $200 per share to acquire Aetna, a leading provider of health-insurance products, including Medicare Advantage plans. The deal would expand CVS Health significantly beyond its current SilverScript Medicare Part D plans and create a healthcare giant with well over $200 billion in trailing 12-month revenue.
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Most of Aetna's membership comes from commercial health-insurance plans. However, 1.4 million people are enrolled in Aetna Medicare Advantage plans, 724,000 are enrolled in supplemental Medicare plans, and 2.1 million people are covered by the state Medicaid plans it manages. Aetna also provides drug services through its PBM business to 3.1 million Medicare drug-plan members. This Medicare exposure is particularly attractive to CVS Health because aging and longer-living baby boomers represent a big proportion of its CVS Health's customers.
However, this deal would also saddle CVS Health with a lot of debt, or dilute existing shareholders if it ends up being an all-stock acquisition -- and that's undoubtedly weighing on investors' minds.
CVS Health could benefit from driving Aetna's membership to its stores and mail-order pharmacy with discounts, a strategy it's successfully used with its SilverScript Medicare Part D plans. It could also leverage Aetna's membership to boost traffic to its more than 1,100 in-store MinuteClinics. These clinics support over-the-counter sales and solidify prescription market share by providing routine healthcare services.
However, since this is a vertical expansion, there aren't a lot of ways to ex-out costs to help pay for the deal, and that could make it hard to turn a profit quickly on the acquisition. If the acquisition isn't accretive to earnings, it could reduce the likelihood of future dividend increases, which would be disappointing for income investors who own CVS Health because of its competitive 2.9% yield.
Overall, Amazon.com's potential to disrupt the pharmacy distribution channel and threaten CVS Health's sales growth shouldn't be ignored. Amazon.com hasn't said if it will enter this market, or when it will make a decision, but it's been widely reported that the company is looking into it. Until we know what Amazon.com is planning and how CVS Health expects to finance an Aetna acquisition, it's probably best to be a spectator on these stocks.
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