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Well, that seems to make it official: the Trump administration is only interested in vertical mergers in the media. Or at least that is not a problem with these types of cases and health care.
The purchase of insurance company Aetna Inc., CVS Health Corp.'s fifth largest healthcare contract worth $ 69 billion, has received conditional approval from the Department of Justice Wednesday. The Department of Justice is only asking for the transfer of Aetna Medicare drug plans, which are already underway, to approve the transaction. This decision comes less than a month after approval of the purchase by Express of Scripts Holding Co., another so-called vertical transaction, which will involve an insurer and a pharmaceutical benefits manager – not direct competitors, but both market players. health care process.
Both offers have a strategic meaning. UnitedHealth Group Inc. has become a hugely profitable healthcare giant through its vertical expansion, the PBM business model has been the subject of careful scrutiny and could use some diversification, and Amazon.com Inc. is profiling itself as a competitor for retail pharmacies and other pharmaceutical supply chains.
But the size, timing and amount of debt involved in the CVS-Aetna merger make the deal more risky.
Health care is not as closely tied to the business cycle as most sectors, but they are certainly not immune to the recession and the CVS is less isolated than most others, which could be ominous if forecaster warnings announced a possible economic recession around 2020. The majority of its profits come from the retail pharmacy, and revenue from this segment came from non-pharmacy purchases in 2017. The bonds representing More than $ 23 billion of the debt of 67 billion CVS will mature between 2020 and 2023, which could prove to be a pretty painful timing. (Note: $ 40 billion of total debt is bonds sold in March to fund the deal with Aetna.)
Although fears of recession are exaggerated, the Trump administration is also trying to make it more difficult for PBMs like CVS to take advantage of discounts on drugs they negotiate on behalf of employers and health care plans. CVS states that the "retained savings" represent only a small portion of its profits and that Aetna should focus its efforts on reducing costs rather than eliminating the additional benefits of each order. However, discount trading is an essential part of being a great supply chain manager and there are so many ways to take advantage of these benefits that it's hard to imagine that trade will not be affected. This policy should also begin to have an impact in the early 2020s.
The advantage of this transaction comes from the fact that CVS has thousands of stores across America, some of which already have health clinics. If he manages to turn his pharmacies into more comprehensive health care centers, he could launch a new business model and reduce costs for Aetna registrants. But it will be a costly transformation in time and money that may not work or will be limited by the obligations of the new company.
In recent years, it has been easy for companies to cope with debt problems by extending their ad nauseum maturities. Given the rise in borrowing rates and investors' future appetite for stacks of new debts that are not guaranteed, this strategy may not be as available or attractive in the future.
This agreement can keep its promises. But the company resulting from the merger could also face strong headwinds.
To contact the author of this story: Max Nisen at [email protected]
To contact the editor responsible for this story: Beth Williams at [email protected]
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Max Nisen is an editorialist with Bloomberg Opinion, specializing in the areas of biotechnology, pharmacy and healthcare. He had previously written on management and business strategy for Quartz and Business Insider.
© 2018 Bloomberg L.P.
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