While long rumored, news that CVS (CVS) was buying Aetna (AET) for $69 billion still managed to catch a lot of consumers off guard. What possible interest could the owner of the neighborhood drug store have in an insurance giant?
As with any deal of this magnitude, the answer is a complex, layered one—the sort of thing that money wonks go crazy over analyzing. But for the rest of the world, it largely comes down to Amazon.
2017’s retail apocalypse hasn’t gone unnoticed by any industry. If Amazon and other retailers can so thoroughly take the wind out of the sails of so many long-standing chains at the local mall and main street, they can certainly widen their net and hurt other companies that aren’t considered competitors today.
Amazon has long sold over-the-counter items like Aspirin and contact lens solution that people typically get at drug stores, but the requirement that patients go to a pharmacy for prescription drugs has always meant a steady stream of foot traffic for retail pharmacies. In October, though, Amazon won approval from 12 states to become a wholesale drug distributor.
Americans spend an average of $255 billion on branded drugs each year, with another $115 billion going for generics. CVS is one of the largest players in that field. (A 2015 report from Barclays estimated CVS and Walgreens together controlled between 50% and 75% of the drugstore market in each of the country’s 14 largest markets.)
CVS has nearly 9,700 stores nationwide. In November, it beat analyst expectations and reported revenues of $46.2 billion.
The transition of CVS from a drug store chain into a health care company actually started in 2007 with the purchase of the Caremark, a third-party pharmacy benefit manager program that negotiates prescription drug benefits for commercial health plans.
By acquiring Aetna, CVS will have even stronger bargaining power against major pharmaceutical companies. It will also be able to remain competitive against a potential Amazon entry despite its widespread brick and mortar presence (and the expenses that come with those stores).
And even if Amazon opts against selling prescription drugs, the Aetna deal could give CVS a big advantage to gain market share over Walgreens, Walmart, and any other business that operates a pharmacy.
That raises questions about whether the deal could be anti-competitive. Earlier this year, the Justice Department blocked a merger between Aetna and Humana, saying it would reduce competition. Regulators also scaled back another merger between Walgreens and Rite-Aid.
Could they move to block this deal? It’s unclear. But one way or another, CVS is likely in for some sort of fight in the months and years to come. With the Aetna deal, CVS is making it clear that it doesn’t plan to back down to anyone.