Is the CVS-Aetna Deal A Healthy Merger For Consumers?

By Christian Rojas

In December, CVS announced its proffer to purchase Aetna for nearly $69 billion in cash and stock.[1] CVS seeks to consolidate its drugstores and pharmacies with Aetna’s insurance business in the hopes of bringing costs down.[2]  Both companies recently held special meetings for shareholders to vote on the deal.[3] CVS and Aetna subsequently announced in separate press releases that a majority of their shareholders voted in favor of the deal, with more than 98 percent of CVS’ shareholders and more than 96 percent of Aetna’s shareholders approving the deal.[4] Under the proposed merger, “Aetna stockholders are to receive $207 per share—$145 in cash and 0.8378 of a CVS share, or $62, in stock.”[5]

However, a shareholder sued Aetna in January claiming that Aetna shareholders will be “shortchanged” under the transaction.[6] According to shareholder Olivier Miramond, Aetna’s filing with the U.S. Securities and Exchange Commission (“SEC”) in early January was “materially incomplete and misleading.”[7] The alleged misleading information included “(i) financial projections for the company; (ii) the valuation analyses performed by the company’s financial advisor . . . (iii) the terms and details surrounding any alternative indications of interest in the company solicited or received from other company; and (iv) the actual merger consideration.”[8] Miramond stated that analysts’ projections clearly show the offer is undervalued.[9]  Instead of receiving $208 per Aetna share under the current terms, Miramond believes the true value is around $233 per share.[10]  Miramond based her calculation off Aetna’s financial adviser’s discounted cash flow analysis.[11] Under the current terms, however, Aetna shareholders will own about 22 percent of the new company once the deal is complete.[12]

Moreover, the Department of Justice (“DOJ”) requested more information from the companies last month.[13]  CVS CEO Larry Merlo, however, said the companies had factored the DOJ request in the timeline and still plan to have the deal completed in the second half of the year.[14] It is unclear what information was requested, but these requests are common during this stage of mergers.[15] Both companies will need to convince the DOJ that the deal does not impinge on competition and is good for consumers. The American Antitrust Institute (“AAI”) has also alerted the DOJ that the merger would violate consumer protections and disturb competition in the healthcare industry.[16]  According to AAI, allowing CVS, one of the US’s largest pharmacy benefit manager (“PBM”) and pharmacy retailer, to merge with the third largest insurer, would enable the newly created company to exclude competitors.[17] “The warning comes on the heels of a proposed merger between Cigna and Express Scripts, which would contribute to limiting consumer healthcare choices, AAI said.”[18] AAI cautioned that if both mergers were allowed, the US healthcare system would undergo fundamental restructuring.[19] “Assuming both mergers move forward, the three largest integrated PBM-insurer systems (i.e, CVS-Aetna, Express Scripts-Cigna, and Optum RX-United Healthcare) that would dominate the markets would have weak, if any, incentives to compete.”[20]

The CVS Aetna merger has the potential to affect competition, and hence, can be detrimental to consumers.[21] The new company can show favoritism to those individuals who carry Aetna as their insurer, such as lowering the prices of different pharmaceutical drugs. Therefore, CVS-Aetna can drive other insurers out by forcing them to either incur the higher costs, or move their clients to other distributers and pharmacies such as Walgreens. Although it may seem beneficial to those who hold Aetna as their insurer, this may end up driving out other pharmaceutical drugs, therefore limiting their choices because companies will take their drugs to other distributors.[22]

[1] Angelica LaVito, CVS, Aetna Shareholders Approve Drugstore’s Acquisition of Health Insurer, CNBC (Mar. 13, 2018), https://www.cnbc.com/2018/03/13/cvs-aetna-shareholders-approve-merger.html (last updated Mar. 13, 2018 12:48 PM).

[2] Id.

[3] Id.

[4] Id.

[5] Sharon Terlep, Anna Wilde Mathews, and Dana Cimilluca, CVS to Buy Aetna for $69 Billion, Combing Major Health-Care Players, Wall St. J., https://www.wsj.com/articles/cvs-to-buy-aetna-for-69-billion-1512325099 (last updated Dec 3, 2017, 9:09 PM).

[6] Cara Salvatore, Aetna Investors Sue Over $77B Merger With CVS, Law360 (Jan. 16, 2018, 9:14 PM), https://www.law360.com/articles/1002423/aetna-investors-sue-over-77b-merger-with-cvs.

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] Id.

[12] Id.

[13] LaVito, supra note 1.

[14] Id.

[15] Bruce Jaspen, Justice Department Seeks More Information About CVS-Aetna Deal, Forbes (Feb. 1, 2018, 7:36 PM), https://www.forbes.com/sites/brucejapsen/2018/02/01/justice-department-seeks-more-information-about-cvs-aetna-deal/#4b3dbd50fad3.

[16] Thomas Beaton, CVS, Aetna Merger May Face Antitrust, Consumer Protection Issues, HealthPayer Intelligence (Mar. 29, 2018), https://healthpayerintelligence.com/news/cvs-aetna-merger-may-face-antitrust-consumer-protection-issues.

[17] Id.

[18] Id.

[19] Id.

[20] Id.

[21] Id.

[22] Id.

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