CVS-Aetna prospects increase after AT&T-Time Warner approval, but challenges remain

Closeup of stock prices
Federal approval of a merger between AT&T and Time Warner certainly doesn't hurt CVS and Aetna's chances, industry experts tell FierceHealthcare. (Getty/Pashalgnatov)

Court approval of a merger between AT&T and Time Warner bodes well for CVS and Aetna, according to the stock market and industry experts.

However, the road ahead still has some major bumps.

On Tuesday, a federal judge ruled that AT&T, the world's largest telecommunications company, can purchase Time Warner without preconditions. The Department of Justice, which challenged the merger, argued that the $85 billion deal would put too much control into the hands of one company and would lead to higher prices. Meanwhile, the companies argued such a move was critical to survive in the media market.

The court ruling boosted confidence among investors of a similarly planned acquisition in the healthcare sector.

CVS and Aetna stocks both rose by about 3% shortly after the market opened Wednesday, signaling stronger optimism in the marketplace about the $69 billion proposed merger.

"This is certainly not an 'all clear' signal, but investors and the market are clearly happy," Rita Numerof, president of healthcare management consulting firm Numerof & Associates, told FierceHealthcare.

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"If the court ruled against this, then it would have shut down all these proposed healthcare mergers, so it's definitely not a bad thing for [CVS-Aetna]," David Friend, chief transformation officer of the BDO Center for Healthcare Excellence & Innovation, told FierceHealthcare.

The AT&T-Time Warner decision would bode equally well Cigna-Express Scripts. Cigna's stock, however, was down 1.5% on Wednesday, while Express Scripts was up more than 3%.

The DOJ is looking closely at both mergers, requesting additional information from all four companies over the last several months.

The courts have ruled against healthcare acquisitions in the past, nixing a deal between Anthem and Cigna in 2017. However, unlike Anthem-Cigna, CVS-Aetna would be a vertical acquisition since the companies are not direct competitors and come from different parts of the supply chain.

Still, critics warn that the planned merger would lead to reduced competition and further consolidation in the healthcare sector, similar to the DOJ's failed arguments in the AT&T-Time Warner case.

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"The courts have shown that they are OK with vertical mergers if they can show that prices will go down as a result," Friend said.

CVS and Aetna might have a steeper hill to climb due to ever-increasing healthcare costs.

"Regardless of the recent ruling, approval for CVS-Aetna will depend on whether these companies can prove that these mergers are good for consumers," Numerof added.

"Proving that a merger will reduce healthcare costs is a very high bar," Friend said. "Saying they can at least slow price increases compared to the rest of the market is another argument, but that will be hard or difficult to show to a judge."

CVS has said it expects the deal to close in the second half of 2018 if all goes as planned.