CVS Health’s $69 billion acquisition of Aetna will change the pharmacy and health-care industries alike. The deal creates the first health-care triple threat, combining CVS’s pharmacy and pharmacy benefit manager platform with Aetna’s insurance business.

The threat to pharmacies — or those that own them — is the way in which the two will leverage Aetna’s network of 46 million members to drive traffic to CVS stores. Aetna subscribers will be able to pick up prescription medicine in CVS stores while receiving pharmacy and medical services. Eventually, they may also be able to find a lower co-pays only CVS.

“Over the next couple of years, you’ll see a dramatic change in terms of the store not just being about products but also service offerings that can help people on their path to better health,” CVS CEO Larry Merlo told CNBC earlier Monday.

Retailers are now facing an entirely new form of competitor, while contending with the potential threat of Amazon encroaching into their space. They have already begun to examine what the deal means for their business, and the solution may entail acquisitions, industry advisors say.

The pool of retailers directly impacted is relatively small. They include Kroger, Wal-Mart and Walgreens Boots Alliance and — to a lesser extent — Rite Aid.

Of the retailers, Walgreens arguably has the most to lose. It the most similar to CVS in business model and the most reliant on drug sales to drive traffic into stores. The household and personal care products it sells can now be found online and often for less. The retailer generated 69 percent of its U.S. sales in its pharmacy. Abroad, where the retail industry is less competitive, it generated 35 percent of its sales in its pharmacy.

But Walgreens many years ago set itself down a road different than CVS. Rather than diving into healthcare, as CVS did, Walgreens doubled down on real estate and international expansion. It acquired British pharmacy giant Alliance Boots in 2014, opening it up into Europe. It attempted to acquire Rite Aid a year later, in a $17.5 billion deal that looked to bring with it 4,600 stores. Regulators, though, whittled the deal down to a purchase of 1,932 stores for $4.37 billion.

The essentially blocked deal makes Walgreens particularly sensitive to regulatory risks posed by further deals that could come in reaction to CVS/Aetna, industry advisors say.

One possible route for Walgreens is to acquire the wholesale drug distributor AmerisourceBergen, with whom it has been partnering since 2013. Walgreens CEO, Stefano Pessina is familiar with the industry, having come from pharmaceutical wholesale.

It could also more closely follow CVS’s path, acquiring Humana, the remaining party from the abandoned Aetna-Humana tie up.

As for Rite Aid, it is now left as a distant third player to CVS and Walgreens. The retailer has a $2 billion market capitalization and roughly 4,700 stores, compared to CVS’ 10,000 and Walgreen’s 8,100. Analysts last month speculated it could be a target for Amazon, if the retail juggernaut wanted to tap Rite Aid’s pharmacy licenses and regulatory cleared stores. Amazon would also inherit pharmacy licenses in 19 states and six distribution centers.

If Amazon wanted acquire a pharmacy benefits manager platform as its entree into health care, it could look to Express Scripts. The company’s CEO recently told Bloomberg he would be “open to” a deal with an insurer. A PBM typically is a third party that negotiates prescription drug benefits for a commercial health plan. Acquiring such a company would give Amazon access to tap drug rebates for its customers.

Meantime, Walmart generates roughly 11 percent of its sales in what its calls “health and wellness,” a category that includes pharmacy, optical services, clinical services, over-the-counter drugs. With a stock that has grown 40 percent this year, giving it a $290 billion market cap, it may not feel particularly under the gun to make a large defensive play. The retailer’s focus more recently, meanwhile, has been expanding its digital initiatives, propelled by its acquisition of Jet.com.

The big box store also tends to be price conservative and averse to heavily regulated industries, as demonstrated by its resistance to unions. A deal with an insurer would flout both those predilections.

Kroger likewise has a business that far exceeds pharmacy sales. Of its 2,796 supermarkets, 2,255 have pharmacies, which generated 9 percent of its sales last year.

Diving into health-care space may be a distraction for Kroger, as it works to reinvent its food business to compete with the Amazon-Whole Foods tie up. Its still-strong food business, meanwhile, provides the company reason to draw shoppers into its stores beyond household staples. With Kroger’s stock down 22 percent this year, and it focusing on reinvesting in its core food business, it may not have the appetite for a large scale deal.

Of course, defense does not need to come in deal form. Walmart and Kroger could in theory partner with a PBM, which it could use to get better drug rates. Doing so could create an entity that rivals the scale of Walgreens.

Source: Tech CNBC
In wake of CVS Aetna tie up, deal speculation abounds. Here are the players to watch