Remember Cigna and Anthem, a Merger Made In Hell? This Editor loves to follow up a good public slugfest which has been going on in Delaware Chancery Court since May of 2017. As our Readers may recall, the Doomed To Fail merger, finally pounded into the ground by the Federal courts, soon degenerated into what a former VP of your Editor’s would call a ‘Who Shot John’ scenario. Anthem would not pay Cigna the breakup fee of $1.85 bn. Cigna then demanded an additional $13 bn in a ‘Funny Valentine’ of damages, accusing Anthem of harming Cigna’s business. Anthem then in turn claimed $20 bn in damages. Three years later, other than a blip of news in March 2019, the imminent decision was to be at the end of February or even March this year (Axios, Reuters). We all know what happened in March–a pandemic that shut the courts. The timing could not be worse, as COVID has bitten hard into payer profits, and a settlement could bite even harder, putting either company into the red–going back years.
Whatever company wins may, after legal fees, may have enough money to buy one of these–before the concours restoration.
Within two to three weeks, we will know whether Judge Richard Leon of the Federal District Court will–or can–block the CVS-Aetna merger. Already a fait accompli, the merger itself would have to unwound if this is the decision–and uncertainty reigns on whether this actually can be done, as the companies have been merged for several months and have divested what DOJ requested (e.g. PDP to WellCare).
The CVS-Aetna vision is for HealthHubs–combined stores, data, MinuteClinics, kiosks, and the retail business, ultimately combined at a macro level with pharmacy benefit management, external data, and also Aetna’s insurance business. While the HealthHubs are in test, the reach of CVS on both the national and local/individual levels will be huge, if only starting with the data and analytics side. And the retail side is no slouch. Their growth on the retail pharmacy side has been over three times the industry.
In the prescription drug plan (Medicare PDP) market, that horse already left the barn. 70 percent of the PDP market is controlled by three companies: CVS Health, Express Scripts (Cigna), and Optum (UnitedHealth Group). The concerns expressed at the hearings about premiums rising and reduction of competition has already largely happened, with a market not truly private and highly restricted.
Uncertainty may very well be the theme of the rest of the year as it has been since last fall. The smart money is betting that Judge Leon will block the merger on anti-competitive grounds, leading to another round of court actions. Both companies are healthy and will fight it. If forced to part, the Seeking Alpha analyst bets on CVS doing just fine long term, which leaves little in choices for Aetna with its way forward in merging with other insurers blocked.
The deal is done, but expect unhappy holidays. As expected, the $69 million CVS-Aetna merger closed the week after Thanksgiving, on Wednesday 26 November, and are proceeding with their integration. Later that week, a Federal judge in the Washington, DC District Court complained at a hearing that both companies had treated him as a “rubber stamp” for the agreement. He was “less convinced” than the Department of Justice that the merger was legal under US anti-trust law. Yesterday (Tuesday 3 Dec), Judge Richard Leon ordered both companies and the DOJ to file briefs by 14 December “to show why their integration should not be halted while he considers whether or not to approve the consent decree reached in October,” according to Reuters.
This is despite various pounds of flesh:
- The Department of Justice imposing the condition that Aetna sell its Medicare Part D drug plan business to far smaller WellCare Health Plans
- New York State’s Department of Financial Services extracting concessions around their concerns: acquisition costs will not be passed onto consumers through increased premium rates or to affiliated insurers; maintaining current products for three years; privacy controls; cybersecurity compliance. Oh yes, a small $40 million commitment to support health insurance education and enrollment. (Healthcare Finance 26 Nov)
- But New York is a piker in its demands compared to California. The Department of Managed Health Care Director approved the merger based upon:
- Minimal increases in premiums–and no increase due to acquisition costs
- Investing $240 million in the state healthcare delivery system, including $166 million for state healthcare infrastructure and employment; $22.8 million to increase the number of healthcare providers in underrepresented areas like Fresno and Walnut Creek by funding scholarships and loan repayment programs; and $22.5 million to support joint ventures and accountable care organizations (ACOs) in value-based care (Healthcare Finance 15 Nov)
A CVS spokesman said in an email after the hearing: “CVS Health and Aetna are one company, and our focus is on transforming the consumer health experience.” (CNBC) That transformation according to CVS president Larry Merlo involves expanding healthcare services beyond their present clinics to managing high-risk, chronic conditions, and transitions in care. Aetna’s expertise will be invaluable here as well as in an rumored expansion to urgent care (Seeking Alpha). All to out-maneuver Amazon, of course, which is promoting (on TV) PillPack and has applied for additional pharmacy licenses to ship drugs to customers in Washington, New Mexico and Indiana from their Phoenix facility (Healthcare Finance).
It appears that Judge Leon has his own serious reading of the 1974 Tunney Act, which requires a Federal court to ensure the agreement is in the public interest, despite the states and the DOJ.
Obviously, CVS is confident of an approved merger and that it will work. CVS issued $40bn of investment-grade debt today (6 March) to finance the purchase of Aetna, according to sources talking to Bloomberg. The attraction was premium interest and other incentives, up to 1.95 percentage points above Treasuries in the 30-year portion of the nine-part offering. This serves to refinance a bridge loan of $49bn from 20 investors that was taken in December to initially finance the $67.5 bn acquisition.
By Bloomberg’s calculation, the bond sale ranked only behind $40bn +blockbusters from Verizon (2013) and AB InBev (2016). Analysts and portfolio managers cheered at the terms. It’s expected to close by second half 2018. No word yet from DOJ, however, which asked for additional information on 1 Feb which further extends their waiting period. Mutual shareholder meetings are still scheduled for 20 March [TTA 2 Feb].
Another positive investor take is over at Seeking Alpha, citing excellent fundamentals, a diverse revenue stream, and innovation in “management’s commitment to evolve the company for the future” as well as “trying to revolutionize the doctor-patient-pharmacy relationship, and using its convenience store appeal to support it.” But we knew that already! The article goes on to extrapolate on the Amazon Effect and where CVS, with a bit of tweaking (healthier food choices with pre-made options in stores, much as many Duane Reade/Walgreens have in NYC), could steal a march. (Our prior coverage and mentions are here.)