By Sy Mukherjee and Clifton Leaf
October 27, 2017

Yesterday’s report by the Wall Street Journal that CVS Health was “in talks” to buy health insurer Aetna sent ripples through much of the healthcare realm. The combination of CVS Health, the seventh-biggest company in the U.S. by revenue, with Aetna (No. 43 on the Fortune 500) would, if it were to go through, create a corporate behemoth with $240 billion in annual revenue across a wide swath of the healthcare continuum, from retail pharmacy and benefit management to insurance.

As a rule, any creation of a new behemoth generates buzz. But this time, there has been equally breathless talk about why—Why, that is, CVS would offer what, presumably, would be a jaw-dropping $13 billion premium for Aetna’s stock? (The reported $200-a-share offer would have been roughly $40 bucks above Aetna’s closing share price on Wednesday, before word of the potential deal leaked out on Thursday, sending Aetna’s stock due north. On June 30, according to the insurer’s latest 10-Q, the company had 332 million shares outstanding.)

For the answer, all eyes turned to that other buzz-worthy behemoth, Amazon.com, which has given signs it’s moving into CVS Health’s pharmacy territory. Those rumors got more weight after the St. Louis Post-Dispatch reported that “The Everything Store” had applied for and received wholesale pharmacy licenses in at least 12 states.

Others pointed to more fundamental concerns of competition, suggesting that CVS Health needed Aetna (or something like it) to better compete with UnitedHealth Group, which has both a managed care organization (MCO) and a pharmacy benefit manager (PBM) under the same roof. Indeed, the Oracle of Delphi award ought to go to Robert Flynn, a principal at Fuld & Company, who spelled out back in June “Six Reasons Why CVS Health Should Acquire Aetna . . . Soon.” (Reading the post now, in hindsight, it’s actually pretty brilliant.)

But the purported offer got me thinking not about the why but about the who—particularly, about the leader of the sought-after company, Aetna CEO Mark Bertolini.

Bertolini has figured out a clever way of rewarding shareholders. And that’s largely by focusing on the wellbeing of his employees. Witness one high-profile move the CEO made two and a half years ago, when Bertolini announced at the annual JPMorgan health confab that Aetna would substantially raise the minimum wage of its U.S. employees and also help offset worker healthcare costs.

Though, at the time, others scoffed at the largesse, Aetna’s shareholders have benefitted remarkably. Since that announcement in January of 2015, Aetna has returned an annualized 29% to its stockholders including dividends, compared with 11.1% for the S&P 500. Shareholders who held stock on the date of Bertolini’s announcement and still hold it today have seen the value of their original stake more than double (compared with the more modest 34% gain for the S&P 500 during the same period).

That said, when I spoke to Bertolini late in the summer, he didn’t seem remotely satisfied—at least with the direction that much of America’s corporate enterprise seems to be headed. Indeed, he says, if the capitalist system that has driven the American Experiment to success is to continue driving to success, it needs to figure out a way for American workers to share more, and feel a greater stake in, that prosperity.

“Here’s the way I think about it,” he told me at the end of August. “CEOs are required to paint a stark reality of what the world looks like in five to 10 years. So it’s not what it is today versus other alternatives today. It’s about what should we be versus what it’s going to look like in five to 10 years from now. And doing nothing, in the current model around capitalism, will destroy capitalism. When 65% of people under the age of 35 believe that socialism is a better model, we have a problem. We have a problem. So unless we change it, it will change—and maybe not in a good way.”

Bertolini continued: “My call to other CEOs is: ‘If we don’t step up to change it, as captains of capitalism, somebody else will—and it will not be pretty when that happens.’”

“I think there’s a clarion call to make a difference here,” he went on. “And unless we do it on our own—unless people speak out and talk about how we can be better, and we can lift all boats versus just the 1 percent—We’re in for a really bad time. So I’m very focused on that message with a lot of folks because that’s the reality in the future.”

When I saw Bertolini in late September, at Fortune’s and Time’s CEO Initiative, he reiterated the sentiment.

It seems unlikely that Aetna’s chief would remain in the new corporate fold if the purported CVS acquisition were to happen. And one has to wonder whether the corporate culture Bertolini has built there would survive as well. It would be too bad if it didn’t—and seemingly, for shareholders, too.

Clifton Leaf, Editor in Chief, FORTUNE
@CliftonLeaf
clifton.leaf@fortune.com

DIGITAL HEALTH

Amazon is making moves to get into the drug distribution business. There’s a spooky specter out there for drug distributors everywhere this Halloween. It’s name is Amazon. The St. Louis Post-Dispatch reported that the company has won regulatory approval from a dozen states to become, what would essentially, turn it into a major digital prescription drug operation. The thing is, this is just a first (if important step). There are plenty of other regulatory headaches Amazon would have to survive in order to become a real, wide-scale medicine distributor. But the fact it’s already taken these steps suggests its ambitions in the field may be more than just wishful speculation. (Fortune)


INDICATIONS

The world’s best-selling drug may just keep on growing. AbbVie’s Humira, the anti-inflammatory drug which has long reigned supreme in all global prescription drug sales (it brought in a cool $16 billion last year) may actually become even more lucrative. The biotech giant projected Humira sales to reach $21 billion in 2020, in part thanks to a deal that will keep cheaper “biosimilar” versions off the market until at least 2023.  (Reuters)


THE BIG PICTURE

Kids’ absurd amount of Halloween sugar consumption isn’t the scariest part of the story. There’s always some hand-wringing over kids’ excessive candy and sugar consumption over Halloween. Fair enough—some surveys suggest the average trick-or-treater consumes 3 cups of sugar during the spooky festivities. But a couple of days of candy largesse, while not necessarily wise, isn’t the real problem. The troubling amount of sugar American children take in on a daily basis is. (Fortune)

CVS-Aetna underscores how vertical is the new horizontal in health care mergers. Cliff highlighted the most important aspects of the proposed CVS Health deal to snap up insurer Aetna. One key note? This is part of a shifting strategy for health care M&A; spurned by regulators rejecting horizontal mergers between insurance companies, these firms are increasingly opening up to more “vertical” arrangements with health care outfits across the supply chain (drug companies, retail pharmacies, and benefits managers alike). More on this soon.


REQUIRED READING

How Big Can These Tech Giants Get? by Reuters

American Airlines Leads the Industry in Complaints of Racial Discriminationby Grace Donnelly

CVS’s Transformative Dealby Alan Murray

Catalonia Declares Independence from Spainby Geoffrey Smith

Produced by Sy Mukherjee
@the_sy_guy
sayak.mukherjee@fortune.com

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