According to the news report in Reuters, CVS Health announced on Sunday that it was going to buy Aetna Inc., a US health insurance firm, for the price of $69 billion. This will be the year’s largest buyout and will join one of America’s biggest pharmacy benefits managers and pharmacy operators with one of the country’s oldest health insurance companies.
CVS Health, a pharmacy chain and healthcare company, is number 7 on the Fortune 500 list for 2017, number 18 on the Fortune Global 500 and has an annual revenue of $177 billion. Aetna (the name is derived from “Etna”, the most active volcano during the time that the company was founded) is a direct descendent of the Aetna (Fire) Insurance Company, founded in the 1810s, making it one of the oldest insurance companies in the US. Aetna is also a part of the Fortune 500 list.
With this deal, Aetna shareholders will earn $207 per share. The break up will be a cash payout of $145 a share and 0.8378 of CVS shares per Aetna share. 22% of the shares of the combined company will be owned by Aetna shareholders, while the other 78% will be owned by CVS shareholders.
The acquisition is targeted to be closed by the second half of next year. Cost synergies or savings on operating costs for the second year after the deal is closed would amount to about $750 million. These savings will be added to the earnings per share.
The idea behind the deal is to offer lower cost medical services at pharmacies in an effort to combat soaring medical expenses.
According to The New York Times, this deal has the potential to reshape the healthcare industry in America. The current landscape of the healthcare industry is extremely turbulent. The entire country is braced for the impact on Medicare and other government run programs due to the proposed tax cuts by the Republican government. The future of the Affordable Care Act is in question, and medical and prescription drugs costs are soaring. Throw into this already boiling pot changing technology where basic medical and healthcare items can be bought online from retailers like Amazon.com and Wal-Mart.
Fortune reported that subsequent to the announcement of the deal, CVS CEO Larry Merlo and Aetna CEO and Chairman Mark Bertolini told CNBC’s “Squawk Box” that this merger was going to impact costs in health care “immediately”.
CVS CEO Merlo stated that this deal was going to create a new platform that would help customers by making healthcare more affordable and more easily accessible. Aetna CEO Bertolini added, saying that healthcare costs were the highest in any household’s budget and the current system was really confusing to navigate.
The current healthcare system is now valued at more than $3.5 trillion and the pace at which it is growing is considered unsustainable. Healthcare spending is expected to continue to grow at 5.6% per annum for the next 10 years, according to the Department of Health and Human Services. Currently, about 50% of Americans have at least one chronic disease and this accounts for almost 80% of all health care costs in the country.
The two CEOs hope to create a new avenue for patients across America, where the pharmacy will also be able to offer low cost medical services. Their vision is that these pharmacies/clinics will by not just health clinics with some medical equipment, but will also offer help in vision, hearing and nutrition.
A combination of insurance and pharmacy benefits manager would be able to offer lower drug prices and offer an alternative to expensive ER visits.