(Chris Devlin) #1



generally negative guidance, analysts predict that it will earn just
$10.5 billion in after-tax operating income for this year, $500 million
below 2018, and $1.6 billion less than the amount needed to achieve an
adequate return on the Aetna deal.
Sounds bad. But keep in mind that investors have radically
marked down CVS stock. So what matters now is how its future
earnings compare with its beaten-down price. “The expectations
are so low that if CVS meets that reduced $10.5 billion forecast
and improves from there, our models show that its stock is un-
dervalued by as much as 80%,” says Stewart. By valuing CVS at a
lowly $72 billion, investors are forecasting that it merely achieves
But the team at CVS had much bigger aspirations in mind.


N HIS OFFICE AT CVS’S campus-like headquarters in the
sleepy town of Woonsocket, R.I., CEO Larry Merlo is
making his case: namely, that the big price for Aetna
was deserved because the combination will establish a
new paradigm for health care. “We don’t look at this as overpay-
ing,” says Merlo, a folksy, mustachioed former pharmacist who
famously banished tobacco products from his stores in 2014. “It’s a
tremendous opportunity to transform the health care experience,
to put the community at the center of care.” Indeed, on a May 1
conference call in which CVS announced better-than-expected re-
sults, Merlo discussed plans to make HealthHUBs the cornerstone
of the new CVS. Investors liked what they heard. Shares surged
5.4%, adding almost $4 billion in value.
CVS is relying on two pillars to make its convenience-store ap-
proach to health care a success. The first is its giant footprint. It
operates 9,900 drugstores, standing in a virtual tie with Walgreens
as the nation’s largest drugstore owner. Eighty percent of America’s
families need to walk or drive 10 miles or less to reach a CVS. Today,
it’s already running 1,100 MinuteClinics, which provide such basics
as flu shots and shingles vaccinations, more than twice the number
of walk-in outlets in Walgreens stores. Walmart, the No. 3 pharmacy
owner, has just a smattering of in-store clinics in three states. In
early May, CVS unveiled plans to grow its three Houston Health-
HUBs to 20, or one for every seven stores in the metro area, and
pledged to announce a bigger rollout plan in June. If CVS applies
the same “hub-and-spoke” ratio nationwide that it now uses for the
MinuteClinics by expanding the existing MinuteClinics into Health-
HUBs—and analysts think that’s likely—a HealthHUB, by Fortune’s
calculations, could be within 10 miles of three-quarters of America’s
The second mainstay is the clout of a giant insurer. The new
CVS-Aetna is a colossus that combines the pharmacy industry’s
three major areas: retail stores, insurance, and a pharmacy benefit
manager (or PBM, which manages prescription drug plans). Amer-
ica’s largest insurer, UnitedHealth Group, operates a PBM, physi-
cians’ practices, and about 200 walk-in clinics, but no retail stores.
Walgreens partners with a PBM but doesn’t own an insurer, and
fifth-ranking insurer Cigna recently acquired the largest PBM—
Express Scripts—and runs HMOs but doesn’t operate neighbor-

profit after tax (NOPAT) of $7.7 billion,
and Aetna achieved $3.3 billion, for a total
of $11 billion, numbers that both easily beat
their 5.4% cost of capital, though the CVS
figure was already sliding. Bennett Stewart,
a senior adviser to ISS, reckons that the new
CVS would have needed to earn $1.1 billion
more, or $12.1 billion, just to break even on
the big premium paid for Aetna. The rub
is that the combined enterprise is making
not more, but less now than in 2018 when
the deal closed. For 2019, based on CVS’s


Mergers have accelerated

as companies seek out
new growth opportunities
in the booming business of
keeping people well.




December 2018
$54 billion


November 2018

$70 billion


September 2018

$753 million



March 2018

$4.2 billion



November 2017

$4.3 billion [PENDING]