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CVS, Aetna executives defend $69 billion deal to sceptical Wall Street

Reuters  |  NEW YORK 

By Caroline Humer

NEW YORK (Reuters) - Corp and Inc said on Monday their $69 billion deal to combine the pharmacy and drug benefit manager and the No. 3 U.S. insurer would transform healthcare and deliver cost savings, but investors took pessimistic view of the combination in the short term.

and announced on Sunday that they had reached an agreement for deal that will allow to expand cheaper medical services in its pharmacy-based MinuteClinics and rein in soaring U.S. healthcare costs for consumers, large corporations, and the government.

CEO Larry Merlo said on an investor call on Monday that he expects the deal to close in 2018 after an antitrust review, and that he expects $750 million in savings from eliminating duplicate corporate functions at and and combining some drug plan and drug benefit management areas.

But investors on Monday described the savings as modest and worried that they will not kick in until 2020 at the earliest. Investors are also concerned that earnings would not grow as much as expected next year due to deal costs.

shares fell 4.6 percent to close at $71.69 on Monday and shares fell 1.4 percent to close at $178.70.


and envision new healthcare system in which patient is improved as the companies integrate pharmacy and medical claims and increase preventative services in clinics from the current emphasis on flu shots to include other areas such as vision, hearing and nutrition.

Strategically, Gabelli Funds portfolio manager Jeff Jonas said, he likes the idea, which could drive customer growth in CVS's MinuteClinics.

"Financially, though, it's really stretch," he said. CVS's plan to cancel share buybacks likely means lower earnings per share next year and the deal - the biggest merger of 2017 - will increase the company's debt costs.

Two ratings agencies, and S&P, said on Monday that the debt load from the deal could spur them to lower credit ratings on the companies. The companies are turning to several banks to provide $49 billion in financing to fund the cash portion of the deal.

Leerink analyst Ana Gupte said investors were increasingly sceptical, and that attaining the $750 million in savings would be difficult given the stiff competition with rivals and pricing pressure on insurance products and pharmaceuticals. But she said the deal would probably be approved after regulators ask for small asset sales of Medicare drug plans to maintain market competition.

Antitrust regulators last year blocked two separate mergers proposed by the large insurers: Aetna's plan to buy Humana Inc and Anthem Inc's acquisition of Cigna Corp , saying they would hurt consumers.

Unlike those deals, the CVS-combination is "vertical" integration in which the companies do not directly overlap operations. Several antitrust experts said they expected the CVS-deal to gain approval for that reason, but that it would be scrutinized closely.

Large corporate customers were major factor in the antitrust litigation on the insurer mergers, and benefits consultants said they are taking wait-and-see attitude about the companies' promises for the deal.

Addressing investor scepticism during conference call with analysts on Monday, Chief Executive Officer Mark Bertolini said the companies - which were already working together on pharmacy benefits and to expand MinuteClinics - needed to merge so that could have more control on finding the savings and other opportunities.

"Owner economics matter here," Bertolini said when asked by analyst why the two companies did not simply partner.

The payout from the deal for Bertolini, who plans to remain director, could be worth as much as $85 million if he leaves the company, as he is due to receive $6.7 million in severance, more than $9 million in deferred compensation and his unvested stock awards vest, according to data from the company's filings.

That would be on top of the roughly $120 million from the 574,000 shares he already owns, as well as additional money from shares that will vest between now and the deal's closing.

(Reporting by Caroline Humer in New York; Additional reporting by Michael Erman in New York; Editing by Nick Zieminski and Matthew Lewis)

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First Published: Tue, December 05 2017. 04:47 IST