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Drug Price Squeeze Is Driving CVS and Aetna Talks

Outside Aetna headquarters in Hartford, Conn.

A deal between the No. 1 drugstore chain and the No. 3 health insurer by revenue is less surprising than it might seem. CVS owns a large pharmacy-benefits manager, a business that was created to cut drug costs for payers, such as insurers. The steady march higher of drug costs has led insurers to buy or start their own PBMs. UnitedHealth bought Catamaran in 2015 to significantly bulk up its own PBM business, a deal which has paid off handsomely.

Last week, Anthem announced it would start its own in-house PBM after its contract with Express Scripts Holding expires in two years. That decision was the culmination of a nasty legal fight in which Anthem claims that Express Scripts overcharged it for drugs by billions of dollars over several years. CVS buying its own insurer would be a simple variation on that trend. Express Scripts is starting to look like the last PBM company left standing.

The whole drug industry is facing new pressures. Prices were falling for generic drugs even before regulators started to aggressively approve new offerings, and a series of big price increases on branded drugs sparked outrage among the public and in Washington.

The latest surprise came just hours before news of the CVS-Aetna deal when the St. Louis Post-Dispatch reported that Amazon has obtained wholesale pharmacy licenses in at least a dozen states. Pharmacy and drug distributor stocks fell sharply.

Granted, CVS is taking a big risk with this offer. Swallowing a company like Aetna would put some stress on the CVS balance sheet, which had about $25 billion in net debt at the end of June, according to FactSet.

And Aetna shares closed more than 10% below the offer price Thursday, in a sign that investors have some reservations that this deal will close successfully.

Still, given the state of affairs in the drug business, the real risk for CVS shareholders might be standing pat.