CVS Health likely to buy Aetna as it runs ahead of Amazon

CVS Health is on the path to become a triple-pronged healthcare provider combining the advantages of an insurer, a pharmacy and a pharmacy benefit manager.

CVS Health, a drugstore operator, is negotiating to buy Aetna, a health insurer, for a reported $200 per share in a move that will push aside any potential deal with Amazon. Previously, Amazon was reported to be negotiating with pharmacy benefits managers (PBMs) in a move that could lead to partnerships or direct threats. PBMs act as the link between drug manufacturers and insurers, ensuring that the insurers’ pharmacy benefits are administered prudently. Due to their role in negotiating prices, the PBMs represent a vital component in the drug supply chain.

If the deal between CVS and Aetna is finalized, CVS will have more muscle in negotiating prices for over the counter prescription drugs. Aetna on the other hand has a huge brick-and-mortar presence that it can leverage for in-store clinics and cost-effective distribution that could lead to cheaper co-payments on its insurance.

According to a source briefed on Amazon’s plans, the online retail giant is in the closing leg of strategy formulation that will guide its entry into the drug supply chain and a decision could be reached before Thanksgiving. The company has received approval for wholesale pharmacy licenses in 12 states.

Amazon’s strength, with a market capitalization that hit $530 billion last week, is bound to be disruptive in a major way. The U.S. prescription drug market is estimated to be worth $560 billion every year making it a lucrative niche that Amazon can leverage. If the e-commerce giant starts selling drugs then foot traffic into CVS stores will dwindle as consumers find it easier to find assorted items online or at other retailers at improved discounts.

Data from last year shows that pharmacy sales for CVS grew by 3.2 percent. It therefore makes sense for the company to make the move to own an insurer which strengthens its position to deal with the threat of Amazon’s moves. Not that Amazon can’t buy an insurer; it’s just that the regulatory procedures may pose huge challenges in the current volatile atmosphere where the cost of prescription drugs has gone through the roof.

CVS, which bought Caremark pharmacy, a pharmacy benefit manager in 2007, is poised to grow into a fully fledged health-care provider as it moves into the deal with Aetna.

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