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Why the CVS-Aetna deal is not about Amazon

Pharmacy chain CVS Health (CVS) is acquiring health insurance giant Aetna (AET) for $69 billion, a deal that has folks speculating it was about thwarting e-commerce behemoth Amazon (AMZN).

While this idea may have some merit, analysts seem to agree that this deal is about much bigger, industry-specific trends.

“Some investors may look at this deal and focus on a company not mentioned in the release — Amazon. We view this deal as offensive by both companies, looking to a more vertically integrated, consumer-directed, value-based care delivery future, and not a response to any threat from Amazon,” RBC analyst George Hill wrote in a note to clients on Monday.

During a conversation with Yahoo Finance, Hill pointed out that not one analyst brought up an Amazon question on the hour-long call.

“We don’t think this is about Amazon,” Hill said. “Look at the genesis of the conversation … They appear to have been in conversations almost nine months before a lot of people were even thinking about Amazon’s entry into pharmacy or healthcare. These conversations predate that.”

As Yahoo Finance reported earlier, in recent months CVS’s CEO Larry Merlo Merlo and Aetna’s CEO Mark Bertolini have both separately spoken publicly about problems in US healthcare and they both advanced solutions they’ve had in mind. Their own words suggested that a merger between CVS, the drugstore retailer that also operates walk-in clinics and a pharmacy benefit manager, and Aetna, the nation’s third-largest insurer, could be the beginning of falling healthcare costs.

“This isn’t about a response to Amazon,” Hill said. “This is about the future of healthcare, which is more vertically integrated, consumer-directed, more value-based. How do you bring more value to consumers in healthcare where it’s only increasing.”

(Photo: Getty Images)

In the last year, there has been a great deal of focus on the next area that Amazon could potentially enter. Amazon recently won approval to become a wholesale pharmaceutical distributor in several states.

“If I write a thousand-word note and one line with Amazon, Amazon becomes a thing,” Eric Coldwell, an analyst with R.W. Baird, said. “Amazon is a viable and real topic, I’m not diminishing that. It does feel like to say CVS would buy Aetna to solely thwart or primarily thwart Amazon’s entry, to me, that seems like a huge stretch.”

It’s possible that Amazon did play a role in the company’s thinking. For starters, the e-commerce giant now sells medical supplies, which can take away some of the retail foot traffic from CVS.

“I’m sure part of this story is how do you drive more consumers to the retail setting and get them stickier in the store. But to say Amazon is the majority of the reason to do this — this I would not say. I would say it was one component,” Coldwell said.

It’s a question of when Amazon enters, not if they enter

Bloomberg Intelligence equity analyst Jonathan Palmer pointed out that CVS has already taken defensive steps as Amazon moves closer the pharmacy business, including announcing last month that the company would begin offering free same-day home delivery for prescriptions.

“I think the Amazon threat is real,” Palmer said. “CVS has viewed them as a very substantial threat in the future. It’s a question of when Amazon enters, not if they enter.”

There are some potential synergies too.

“It creates a differentiated story against other competition,” Coldwell said, noting that UnitedHealth’s (UNH) Optum doesn’t have a retail component, while Walgreen’s (WBA) doesn’t have insurance.

On some level, the deal does help counter Amazon too, but there are still significant hurdles ahead.

“There’s a lot of work ahead,” Coldwell said. “It’s going to take a very long time. It’s going to take a lot of money. It’s going to create a lot of uncertainty. For all of that for not a lot of accretion until at least 2020.”


Julia La Roche is a finance reporter at Yahoo FinanceFollow her on Twitter.