Why CVS Health Crashed 15.7% in October — The Motley Fool

What occurred

Reports that the corporate is searching for to accumulate Aetna, Inc. (NYSE:AET) in a deal valued at greater than $66 billion despatched shares in CVS Health (NYSE:CVS) tumbling 15.7% in October, in accordance with S&P Global Market Intelligence.

So what

CVS Health is at a crossroads. It’s too large to learn from small bolt-on acquisitions, and foot site visitors at its shops may face a giant risk if rumors that Amazon.com (NASDAQ:AMZN) will get into the pharmacy enterprise are true.

A man listens through a wall using a styrofoam cup.

IMAGE SOURCE: GETTY IMAGES.

If CVS Health needs to keep up its market share, it’ll should get inventive. According to the Wall Street Journal, that might imply making a giant push into medical health insurance.

Last month, the enterprise paper reported that CVS Health provided greater than $200 per share to accumulate Aetna, a number one supplier of health-insurance merchandise, together with Medicare Advantage plans. The deal would broaden CVS Health considerably past its present SilverScript Medicare Part D plans and create a healthcare large with properly over $200 billion in trailing 12-month income.

CVS Revenue (TTM) Chart

CVS Revenue (TTM) knowledge by YCharts.

Most of Aetna’s membership comes from business health-insurance plans. However, 1.four million individuals are enrolled in Aetna Medicare Advantage plans, 724,000 are enrolled in supplemental Medicare plans, and a pair of.1 million individuals are coated by the state Medicaid plans it manages. Aetna additionally offers drug companies by way of its PBM enterprise to three.1 million Medicare drug-plan members. This Medicare publicity is especially engaging to CVS Health as a result of ageing and longer-living child boomers symbolize a giant proportion of its CVS Health’s clients.

However, this deal would additionally saddle CVS Health with quite a lot of debt, or dilute current shareholders if it finally ends up being an all-stock acquisition — and that is undoubtedly weighing on traders’ minds.

Now what

CVS Health may gain advantage from driving Aetna’s membership to its shops and mail-order pharmacy with reductions, a method it is efficiently used with its SilverScript Medicare Part D plans. It may additionally leverage Aetna’s membership to spice up site visitors to its greater than 1,100 in-store MinuteClinics. These clinics badist over-the-counter gross sales and solidify prescription market share by offering routine healthcare companies.

However, since it is a vertical growth, there aren’t quite a lot of methods to ex-out prices to badist pay for the deal, and that might make it arduous to show a revenue shortly on the acquisition. If the acquisition is not accretive to earnings, it may scale back the chance of future dividend will increase, which might be disappointing for earnings traders who personal CVS Health due to its aggressive 2.9% yield.

Overall, Amazon.com’s potential to disrupt the pharmacy distribution channel and threaten CVS Health’s gross sales development should not be ignored. Amazon.com hasn’t stated if it’s going to enter this market, or when it’s going to decide, however it’s been extensively reported that the corporate is trying into it. Until we all know what Amazon.com is planning and the way CVS Health expects to finance an Aetna acquisition, it is in all probability greatest to be a spectator on these shares.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of administrators. Todd Campbell owns shares of Amazon. His purchasers could have positions within the corporations talked about. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure coverage.


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