By Caroline Humer
NEW YORK (Reuters) - CVS Health Corp and Aetna Inc on Monday said their $69 billion deal to combine the pharmacy and drug benefit manager and the No. 3 U.S. health insurer would transform healthcare and deliver cost savings, but investors took a pessimistic view of the combination in the short term.
CVS and Aetna announced on Sunday that they had reached an agreement for a deal that will allow CVS 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.
CVS 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 CVS and Aetna and combining some drug health 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 also concerned that CVS earnings would not grow as much as expected next year due to deal costs.
CVS shares fell 4.7 percent, or $3.51, to $71.59 and Aetna fell just under 1 percent, or $1.26, to $168.63.
LONG-TERM GROWTH, SHORT-TERM PAIN
CVS and Aetna envision a new healthcare system in which patient health 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' MinuteClinics.
"Financially, though, it's really a stretch," he said. CVS' 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, Moody's 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 that investors were increasingly skeptical, and that attaining the $750 million in savings would be difficult given the stiff competition with rivals and pricing pressure on health insurance products and pharmaceuticals. But she said that 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-Aetna combination is a "vertical" integration in which the companies do not directly overlap operations. Several antitrust experts said they expected the CVS-Aetna deal to gain approval for that reason, but that it would be scrutinized closely.
Large corporate customers were a major factor in the antitrust litigation on the insurer mergers, and benefits consultants said they are taking a wait-and-see attitude about the companies' promises for the CVS deal.
Addressing investor skepticism during a conference call with analysts on Monday, Aetna's top executive Mark Bertolini said that the companies - which were already working together on pharmacy benefits and to expand MinuteClinics - needed to merge so that CVS could have more control on finding the savings and other opportunities.
"Owner economics matter here," Bertolini said when asked by a Wall Street analyst why the two companies did not simply partner.
(Reporting by Caroline Humer; Editing by Chizu Nomiyama and Nick Zieminski)