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Category: Industry News, Net Lease Retail Tags: aetna, CVS, E-commerce, health, mergers, net lease retail, Walgreens

Over the past couple of years, the retail sector has seen significant changes. With the Amazon threat now looming over the pharmacy industry, we’ve seen mergers and acquisitions heavily increase to compete with the e-commerce giant. According to leading research, the drug store industry generates $271 billion in annual revenue with retailers CVS, Walgreens, and Rite Aid capturing a significant amount of the market share. Matthews™ reviews the top three drugstore unions recently made in the sector, where Amazon stands between them, and what investors should expect from this activity.

Analytics Meets Human Touch: CVS Acquires Aetna

In December 2017, CVS announced a merger, under which CVS Health would acquire all outstanding shares of Aetna for a combination of cash and stock. The transaction values Aetna at approximately $207 per share or $69 billion. Including the assumption of Aetna’s debt, the total value of the transaction is $77 billion. This transaction, expected to close in the second half of 2018, claims to “fill an unmet need in the current health care system and present a unique opportunity to redefine access to high-quality care in lower cost, local settings whether in the community, at home, or through digital tools.” If completed, the merger would be the largest health insurance deal on record, creating a new hybrid in healthcare industry consolidation.

“When this merger is complete, the combined company will be well-positioned to reshape the consumer healthcare experience, putting people at the center of health care delivery to ensure they have access to high-quality, more affordable care where they are, when they need it,” said Larry Merlo, CVS Health president and CEO in the company’s press release. “At the same time, our company will benefit from a stronger market position, with the potential to deliver increased value through the development of innovative new products and services and generate long-term growth opportunities that help produce stronger, more consistent results for shareholders as a uniquely integrated healthcare company,” Merlo concluded.

Adding ammunition to its artillery, the CVS-Aetna merger would pair up the largest retail pharmacy chain and one of the largest Pharmacy Benefit Managers (PBMs) with the third largest health insurer in the United States. CVS would now be equipped with the capability to collect massive amounts of consumer data and develop highly targeted recommendations for individuals based on previous purchase patterns or that of similar customer profiles. Intermixing this consumer data not only allows a deeper reach into patient health behaviors, but it may allow CVS to incorporate the retail analytics of a storefront with the health management analytics of a healthcare provider.

As of March 2018, growing opposition continues to try and block the merger as the American Antitrust Institute (AAI) joined the American Medical Association (AMA) in expressing skepticism about the merger, both focusing on the lack of competition we’ll see in the market if this merger closes.

Possible Impact for Investors Interested in Drugstores

While the impacts of the merger won’t be felt for some time, the effect of the Aetna acquisition should favor CVS landlords. With the threat of e-commerce and Amazon, the CVS-Aetna merger is a great opportunity for CVS to evolve beyond a traditional brick-and-mortar retailer. Once the deal closes, the industry should anticipate more health clinic-services at CVS stores.

Operating 1,100 Minute Clinics, over twice as many as Walgreens, CVS is likely to double down on enhancing customer care and has already begun testing vision and audiology centers in their stores. With the average CVS store occupying 10,000 to 13,000 square feet, they have the space available to repurpose their floorplans and implement such programs. If the merger is successful, CVS pharmacy will maintain a relevancy that cannot be duplicated by traditional competition (Walgreens) or new competitors (Amazon and other e-commerce threats).

Eventually, we may start to see less focus on everyday items at CVS stores as they make more room for the higher value health care services; a move telegraphed by the company in 2014, when they changed their name from CVS Caremark to CVS Health. After all, you can buy dental floss at a number of places, but you can’t get your blood pressure checked just anywhere.

As for expansion, CVS will continue to selectively build new stores, but one should not anticipate any rapid development. CVS has already slowed construction, only building new stores in the case of a relocation, or to enter new markets that have a void

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