CVS and Aetna's mega-merger could get blocked, and we'll soon get a hint of what's going to happen next

Reuters

CVS Health President and CEO Larry J. Merlo

• CVS Health and Aetna announced their plans to merge in December 2017.
• It's a big deal that creates a new, vertically integrated company that includes a health insurer, a retail pharmacy, and a company that negotiates prescription drug prices with drugmakers called a pharmacy benefits manager.
• While CVS and Aetna shareholders have approved the deal, it remains to be seen if the DOJ or state regulators will step in to block the deal. The DOJ's trial with Time Warner and AT&T, another vertical merger, could have big implications on how the Trump administration treats healthcare mergers.
• Both Aetna and CVS have said in recent months that they expect the deal to close in the second half of 2018.

CVS Health's proposed $69 billion megamerger with Aetna would create a new company that operates a number of healthcare businesses, including a health insurer, a retail pharmacy, and a company that negotiates prescription drug prices with drugmakers called a pharmacy benefits manager.

Because the deal combines a number of different healthcare businesses in a vertical fashion, it's raised the question of whether it will be blocked by the US government on the grounds that it would impact competition within the healthcare system.

A fair amount of that will be determined by what happens with Time Warner and AT&T, another vertical merger that the Department of Justice has taken to court, Matthew Cantor, a partner at law firm Constantine Cannon, told Business Insider.

"We're in the Wild West somewhat as to what antitrust policy is going to look like, as we are with so many aspects of the Trump administration, " Cantor said. "I think a lot will be decided by AT&T-Time Warner."

The proposed merger would combine Time Warner, which creates content through its businesses like HBO and Warner Bros., with AT&T, which distributes that content. The DOJ's trial with Time Warner-AT&T trial is currently in its fourth week.

Once that's decided, it will likely have implications as to how the Trump administration will address some of the healthcare mergers that have been unfolding over the past few months. CVS and Aetna were the first to combine, but since then, Cigna has made a $67 billion deal with Express Scripts, the US's largest standalone PBM, and reports have circulated that Walmart might be interested in acquiring Humana.

The deal-closing timeline

Right now, the DOJ is working on getting information to see if the agency wants to challenge the deal like it did AT&T and Time Warner.

In February, the DOJ asked for an extension to collect more information from CVS and Aetna. The two companies now have to provide all that the DOJ asked for before a 30-day waiting period ahead of the deal closing can kick off. That process of collecting the information for the DOJ can take a while, Cantor said.

The companies will have to prove to antitrust authorities that the deal is good for consumers.

"They have to test whether those efficiencies will be gamed, or at least whether or not it is likely that the merger will result in a substantial lessening of competition, which could include price increases of pharmaceutical drugs to non-Aetna competitors who may not get the benefit of rebates that Aetna will get," Cantor.

While that's unfolding, plans to approve the deal have moved on. In March, both CVS and Aetna shareholders approved the union. And as recently as March, the companies have said they expect the deal to close in the second half of 2018.

Apart from the national government, states could also challenge this, something the two companies have acknowledged.

"Completion of the transaction remains subject to customary closing conditions, including expiration of the federal Hart-Scott-Rodino antitrust waiting period and approvals of certain state departments of insurance and other regulators," Aetna said in a March release. Should states decide to investigate, they could be the ones halting the deal the deal rather than the national government.

The termination fee for the merger, should it be called off, is $2.1 billion, or roughly 3% of the total deal price. On December 4, the day after the deal was announced, Aetna closed at $178.70.

As of Thursday, the stock was trading around $173.47, a 3% decrease.