(Chris Devlin) #1



would have posted sales of $256 billion and catapulted to fourth
place behind Walmart, Exxon Mobil, and Apple.
The CVS purchase of Aetna was the largest merger of 2018, edg-
ing another health care milestone, Cigna’s $54.4 billion acquisi-
tion of Express Scripts. But this big deal is totally unlike the usual
combinations of oil, mobile communications, or media giants that
provide their customers with similar products and services. The
CVS-Aetna union brings together two distinct, and heretofore
separate, fields of health care: an insurer that’s a master of IT,
deploying machine learning and A.I. to predict the next step for
a vast population of enrollees; and an old-line, brick-and-mortar
merchant, a marketing machine that uses displays, promotions,
and coupons to get people to buy everything from drugs to cosmet-
ics. Of all the big health care mergers, this bet that marrying big
data and neighborhood drugstores will create a healthier America
is the most daring—and the riskiest.

Today the master plan is to combine
Aetna’s claims data and analytics that
identify which of its 22 million members
are at risk for, say, developing diabetes
or cardiac disease, with CVS’s capacity to
guide them to testing and treatment before
the disease progresses, at the pharma-
cies and HealthHUBs. That formula is
targeted to generate big savings by curbing
readmissions to hospitals and getting
patients to adhere to their drug regimens.
Phase 2 consists of recruiting CVS’s biggest
customers, mostly other insurers, to adopt
a fresh model that gives CVS a share of
the potentially giant savings to come from
counseling and screenings at their corner
clinics that keep patients out of operating
and emergency rooms.
Investors, however, think it’s CVS that
could use a checkup. Its stock’s steep slide
over the past three years is a reversal from
a long history of outperformance. Over the
decade through 2015, CVS delivered total
annual returns of 15.3%, double the trend
for the S&P 500. The cratering started in
the spring of 2016, then accelerated after re-
ports of an Aetna deal surfaced in October
of 2017. Since CVS’s decline began, its stock
price has dropped 28%, from $76 to $56.
The problem is twofold. First, Wall
Street is judging that CVS way overpaid
for the insurer. When rumors of a merger
spread, the companies’ combined market
caps stood at $128 billion. Today that
figure is $72 billion, meaning that a stag-
gering $56 billion, or 44% of the total, has
vanished. The rub is that CVS paid a 32%
premium for Aetna and, in the process,
loaded an additional $78 billion in capital
on its books.
Second, CVS did this deal just when its
own core businesses were deteriorating.
Hence, it’s so far generating weak returns
on all the extra capital added by purchasing
Aetna. A good measure of how far the per-
formance has declined is Economic Value
Added, a tool deployed by research firm
ISS EVA, a branch of governance adviser
Institutional Shareholder Services. EVA
measures whether companies are earning
their “cost of capital,” the minimum require-
ment for rewarding investors. In the year
prior to the merger, CVS had net operating


Karen Lynch
came to CVS with
Aetna and runs
a major growth
engine, Medicare