By Glenn Fleishman
October 11, 2018

The Department of Justice’s approval of CVS’s blockbuster $69 billion acquisition of insurance giant Aetna on Oct. 10 hit a pothole in the stock market just one day later. In the face of broad stock-market weakness, CVS Health closed down over 7%, losing $6 billion in market capitalization. The drop stems in part from investor concerns about the potential for earnings growth and the potential for efficiency in the merged entity.

CVS’s largest competitor, Walgreens Boots Alliance, announced earnings Oct. 11 that were lower than analysts predicted. While sales increased 11% to $33.4 billion, that was $400 million shy of expectations, and same-store sales were up just 0.3% year over year. Much of the increased revenue resulted from its acquisition of nearly 2,000 Rite Aid stores, however. Walgreens stock declined 2%.

CVS also suspended any increase in its dividend. The company had routinely increased its dividend over time, more than doubling it from 22.5 cents a share in 2013 to 50 cents a share by January 2017. It’s remained constant since then.

The merger will cause CVS to assume $8 billion of debt from Aetna, as well as the costs of financing the merger, while the company said it expects to save just $750 million a year starting two years after the deal closes.

However, the CVS/Aetna merger will result in the only U.S. firm that combines retail pharmacies, a pharmacy benefit manager, and a health insurer. The stock rose a modest 1% on the news on Oct. 10, or about $1 billion in value, before the Oct. 11 drop.

The DOJ’s approval of this merger was preceded Sept. 17 by the agency’s green light on insurer Cigna acquiring pharmacy benefit manager Express Scripts in a $52 billion deal. Express Scripts is the largest such manager in the U.S.

Analysts and investors expect more challenges ahead due to Amazon’s signals about entering retail pharmacy, starting with an acquisition earlier this year. In June, CVS, Walgreens, and Rite Aid plunged a combined $11 billion in market value as Amazon announced its purchase of a specialized online pharmacy, PillPack. Amazon’s stock value grew $20 billion that day.

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