You might call it a $66 billion insurance policy.
CVS Health is reportedly in talks to buy health insurer Aetna Inc., an attempt by the Woonsocket, R.I., drugstore giant to insulate itself from tectonic shifts in the health care market.
The acquisition would be the latest in CVS’s efforts to expand the scope of its health care services amid the uncertainties created by Republican efforts to repeal the Affordable Care Act and rising medical costs that have consumers, businesses, and politicians on edge.
It also would serve as a preemptive strike against Amazon.com Inc., which is widely expected to start its own pharmacy business.
“The likely Amazon entry into retail pharmacy is a major threat to CVS, on top of already dwindling front store sales,” Ana Gupte, a health care analyst with Boston-based Leerink Partners, said in a research report.
News of CVS’s interest in Aetna broke Thursday, when The Wall Street Journal reported that the companies were discussing a deal in which CVS would pay $200 per share for one of the nation’s biggest health insurers. There is no guarantee the acquisition will come to fruition, the Journal said.
Buying Aetna wouldn’t necessarily be a play to bring more customers through its doors, as CVS only makes 12 percent of its revenue from retail sales, and those numbers have been declining, said Brian Owens, an analyst with Boston-based Kantar Retail. Rather, the majority of its $177 billion annual revenue is derived from its Caremark pharmacy-benefits management arm, which acts as a middleman between insurers and businesses, negotiating prices for drugs.
An Aetna acquisition would enable CVS to access reams of customer data and help strengthen its negotiating power with drugmakers.
“It’s bringing more of a holistic solution and more people in their network,” Owens said. “If they acquire Aetna they pretty much have all the data on you.”
It also puts the company in a stronger position as it faces increased competition from Walgreens, which is buying more than 2,000 Rite-Aid stores to add to its 13,200 outlets worldwide. Walgreens is closing some 600 other Rite-Aid locations to satisfy government antitrust concerns, a move that suggests CVS couldn’t greatly expand its 9,700 stores without similarly drawing government scrutiny.
Everyone in the drugstore industry is bracing for an Amazon arrival. The Seattle-based tech giant recently made a number of high-profile hires from within the pharmacy industry, and according to a review of records by the St. Louis Post-Dispatch, has acquired wholesale pharmacy licenses in Alabama, Arizona, Connecticut, Idaho, Louisiana, Michigan, New Hampshire, New Jersey, Nevada, North Dakota, Oregon, and Tennessee. Another license is currently pending in Maine.
How Amazon’s wholesale licenses might actually be used in the drug-delivery space has many in the industry speculating.
Amazon could use its fulfillment infrastructure to partner with existing retail pharmacies to expedite deliveries and increase mail order sales, said Owen. In 2016, only $106 billion of the $465 billion total US prescription sales were through mail order, according to Morgan Stanley.
“Amazon’s technological capabilities, vast fulfillment network, and high shopper penetration may be particularly attractive to pharmacies that want to enhance their convenience proposition and reach shoppers where they are today,” he said. They could also seek to partner directly with a drug wholesaler to drive down costs. Walgreens executed a similar deal when it partnered with Valeant Pharmaceuticals in 2015.
And in what might be the biggest direct threat to CVS, Amazon might also move to create its own pharmacy-benefits arm. According to Pembroke Consulting, the three biggest US drug benefit managers are CVS, Express Scripts, and OptumRx, which is part of insurer United Health Group Inc. Together they process about 78 percent of the nation’s prescriptions. Amazon’s move into the space would align with its common motive to drive down prices for consumers, Owen said, and move it into a highly profitable component of the health care industry.