Tuesday July 7th, 2020 7:20PM

CVS expands into insurance with $69 billion Aetna bid

By The Associated Press
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CVS Health wants to do much more than fill your prescription or jab your arm with an annual flu shot.

The drugstore chain is buying the nation's third-largest health insurer in order to push much deeper into customer care. The evolution won't happen overnight, but in time, shoppers may find more clinics in CVS stores and more health care they can receive through the network of nearly 10,000 locations that the company has built.

The $69 billion deal announced Sunday evening will push the drugstore chain more forcefully in a direction it has been heading for years, according to analysts on Wall Street. It already has about 1,100 clinics in its store network, and it has methodically expanded what they do. The clinics started off as a place to treat basic health care needs like sinus infections or strep throat.

Gradually, the company has added services like blood draws or monitoring of chronic conditions such as high blood pressure and diabetes. Expect that trend to continue, as the drugstore switches more from selling products in its stores to services that can't be bought online, where retailers face formidable competition from the likes of Amazon.

"I think over time you're going to see less of that front-store retail and more health care services in their stores," said Jeff Jonas, a portfolio manager for Gabelli Funds who follows drugstores.

The mammoth acquisition pairs a company that runs more than 9,700 drugstores and 1,100 walk-in clinics with an insurer covering around 22 million people. CVS Health Corp. is also one of the nation's biggest pharmacy benefit managers, processing more than a billion prescriptions a year for insurance companies, including Aetna.

Analysts say the combined company could add more clinics and expand in-store services to include eye care or maybe centers for hearing aids. That could gradually turn CVS Health a one-stop-shop for health care, a place where patients can get a hearing aid checked, then see a nurse practitioner and pick up prescriptions.

"If you think about it, we actually don't have anything like that," Jefferies analyst Brian Tanquilut said recently.

Analysts say clinics aren't especially profitable, but they are important because they draw people into the stores and help build deeper customer relationships. That's crucial because drugstores are learning that customers have less loyalty to them than was previously thought, Tanquilut said. He noted that customers will fill their prescriptions wherever their coverage tells them to visit.

"I'm not going to leave my job just because they took CVS out of my network," he said.

The clinics have become an attractive option for customers in need of basic health care because they are usually open longer than the family physician, and a clinic visit can be $30 cheaper or more for someone who doesn't have insurance. But they have drawbacks. Family doctors say they know their patients better and can check on a patient's broader health when she comes in for a visit, rather than dealing with just the one thing that brought that person in.

CVS isn't the only health care giant delving into clinical care. The deal will help it compete with others like UnitedHealth Group Inc. The nation's largest health insurer also runs clinics and doctor's offices. Like CVS, it also has one of the nation's largest pharmacy benefit management businesses. PBMs manage prescription drug plans for insurers like Aetna and also large employers, among other clients.

CVS also is on the defensive with this deal. Locking up Aetna helps secure a large client that can send millions of customers to its stores. It also keeps Aetna from turning to Amazon, if the retail giant decides to expand into prescription drugs.

Investors have been worried about that prospect since reports about the possibility first appeared earlier this year. Amazon has not commented on the possibility.

Amazon is already hurting drugstores in some markets with a same-day delivery service that competes with the products stores like CVS sell in the front part of their stores, outside their pharmacies. CVS actually is starting its own same-day delivery service this month in New York.

CVS Health Corp. will pay about $207 in cash and stock for each share of Aetna Inc., a person with knowledge of the matter said Sunday. That represents a 29 percent premium to the price of Aetna shares on Oct. 25, the day before The Wall Street Journal first reported about the possibility of a deal.

The source said the boards of both companies have approved the deal.

But antitrust regulators still need to approve the deal, and that is not guarantee.

The Justice Department said last month that it is suing AT&T to stop its $85 billion purchase of Time Warner. Regulators also sued to stop the Aetna's approximately $34 billion purchase of rival Humana Inc. — a deal that fell apart earlier this year.

Hartford, Connecticut-based Aetna and Woonsocket, Rhode Island-based CVS both manage Medicare prescription drug coverage. Some of that business may have to be sold to address antitrust concerns. But otherwise, Leerink analyst David Larsen thinks a CVS-Aetna combination has decent odds of getting past regulators, in part because the businesses have little overlap.

"We also believe that the Trump administration is more business-friendly, and regulators may view a CVS/(Aetna) combination as a way to continue to put pressure on manufacturers and drug prices," he said in a recent research note.

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