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CVS-Aetna Deal Wins Approval Only to Face Debt Cliff

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Well, this seems to make it official: The Trump administration only cares about vertical mergers in media. Or at the very least, it has no problem when it comes to these types of deals and health care.

CVS Health Corp.’s $69 billion purchase of insurer Aetna Inc. — the fifth-largest health care deal ever — got conditional approval from the Department of Justice on Wednesday. The DOJ only requires the already in-progress divestiture of Aetna’s Medicare drug plans in order to approve the deal. The decision comes less than a month after the approval of Cigna Corp.’s purchase of Express Scripts Holding Co., another so-called vertical deal that will join together an insurer and pharmacy benefit manager — not direct competitors, but both players in the health care process.

Both deals makes strategic sense. UnitedHealth Group Inc. has become a highly profitable health care giant through vertical expansion, the PBM business model has come under scrutiny and could use some diversification, and Inc. looms as a competitor for retail pharmacies and others that operate in the pharmaceutical supply chain.

But the size, timing and amount of debt involved in CVS-Aetna’s tie-up makes the deal look increasingly risky.

(Related: Bond ETF Outflows Suggest Higher Rates Are Starting to Hurt)

Health care is not as closely tied to the business cycle as most sectors, but it is certainly not recession-proof and CVS is less insulated than most, which could bode ill should prognosticators warnings of a possible economic downturn in or around 2020 come true. Its retail pharmacy accounts for a significant majority of its profits, and a high-margin quarter of that segment’s revenue came from non-pharmacy purchases in 2017. Bonds representing more than $23 billion of CVS’s $67 billion debt load will mature between 2020 and 2023, which could turn out to be pretty painful timing. (Note: A whopping $40 billion of the debt total are bonds sold in March to finance the Aetna deal.)

Even if recession fears are overblown, the Trump administration is also currently seeking to make it tougher for PBMs like CVS to profit from the drug discounts they negotiate on behalf of employers and health plans. CVS says “retained rebates” only make up a small portion of its profits, and adding Aetna should focus that business more on keeping costs low than scraping extra profits out of every prescription. But the negotiation of discounts is so central to the business of being a large PBM and there are so many ways to profit from them that it’s hard to imagine that the business won’t take a hit. This policy would also likely begin to have an impact in the early 2020s.

The upside of this transaction comes from the fact that CVS has thousands of stores throughout America, some of which already have health clinics. If it can successfully turn its pharmacies into more comprehensive health care hubs, it could pioneer a new business model and bring costs down for Aetna enrollees. But that will be a time-consuming and expensive transformation that may not work out, or may be constrained by the new company’s debt obligations.

Over the last few years, it’s been easy for companies to deal with debt concerns by extending maturities ad nauseum. With borrowing rates on the rise and investors’ future appetite for piles of new debt far from guaranteed, that strategy may not be as available or attractive going forward.

This deal may deliver on its promise. But the combined company may also face some strong headwinds first.

— For more columns from Bloomberg Opinion, visit

Max Nisen

Max Nisen is a Bloomberg Opinion columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.