The CVS and Aetna mega-merger in the healthcare space is, according to many trusted sources of news, doomed to be rejected in federal court. This merger has been the subject of many other pieces here on Frank’s Forum and the many aspects of this potential deal have been scrutinized.
In a prior piece, the role of the federal judge, Judge Richard Leon, was detailed with the background that he oversaw the AT&T merger with Time Warner, where he dismissed the claims of the Justice Department that it would harm competition and disrupt equal access to content made by Time Warner media properties.
In a few short months, AT&T has tried to limit content to provide an advantage to DirecTV (also owned by AT&T). The decision by Judge Leon has been criticized by numerous groups within the industry.
Then, the news that this same judge would oversee the gigantic proposed deal between CVS and Aetna. The pressure that Leon applied to CVS/Aetna was seen by many to be similar to a “make up call” in sports; where the referee knows they made a mistake earlier, so they make a different call to make up for the prior faulty ruling.
The $69 billion agreement between CVS and Aetna would be a rather landmark “make up call” and would certainly have repercussions across the industries of both healthcare and health insurance. The stock price for CVS took a tumble on Tuesday amid the reports that the court will likely submarine the planned merger.
In the center of the debate is the opinion of Judge Leon that CVS would be given an unfair advantage to their PBM business unit with the addition of over 20 million Aetna subscribers who would be pushed into an exclusivity with CVS for their prescription drug coverage. The secondary concerns have to do with prices on prescription drugs, and the Medicare Part D plans that Aetna offers.
Aetna has agreed to sell the Medicare Part D plans and has a deal in place for that which was a stipulation of the original merger agreement. The case certainly could go badly if the court reverses the ruling, and that will create uncertainty for the future of the merger.
The two parties could explore a recalibrated merger proposal making some types of concessions based on the feedback from the eventual court ruling this summer. The Department of Justice may also have some feedback in the process that would be taken under advisement by both CVS and Aetna. The DOJ could also appeal the decision of the court, though some experts feel that it could be hard to overturn the decision on appeal.
CVS is on a quest to become an elite healthcare company with the acquisition of Caremark and they seek to further transform themselves into with the merger with Aetna so that they are not reliant on just the traditional retail pharmacy channel. That is a smart strategic direction with the emergence of Amazon into the pharmaceutical and healthcare industries.
CVS was hopeful that gaining Aetna would help with the overall valuation of the company in the eyes of Wall Street. Aetna was hopeful that merging with CVS would provide them with a built-in base of consumers who would purchase healthcare products and who had a high brand loyalty to CVS.
The whole merger, and all of the time and money poured into it, which is a significant cost, is at stake. The ruling of Judge Leon will have a dramatic impact on both companies, their stock value, and the entire healthcare industry.
(Some background information courtesy of Barron’s, New York Post, and CNBC)