Cigna's $54 Billion Buy Seen as `Best Case' for Drug Middleman

(Bloomberg) -- Cigna Corp.’s $54-billion purchase of Express Scripts Holding Co. is being called the “best case scenario” for the pharmacy-benefits manager’s beleaguered investors.

The deal is “clearly a positive turn of events” for Express Scripts, Evercore ISI’s Ross Muken wrote. The company’s role as a middleman hired by insurers and employers to negotiate discounts from drugmakers has been under fire from everyone from the head of the Food and Drug Administration to short-sellers. Other analysts noted uncertainties on how the interconnected agreements between insurers and benefits managers would play out once the deal is completed.

Humana Inc. is among the peers caught in the middle, sinking as much as 3 percent after the deal was announced. WellCare Health Plans Inc., which also had been seen as a potential acquisition target for Cigna, is falling as well. UnitedHealth Group Inc. is also under pressure and may be the most directly affected as its OptumRX unit has an existing pharmacy benefits deal with Cigna.

Express Scripts shares climbed 12 percent as of 10 a.m. in New York, paring back from an initial 16 percent rise, the biggest intraday gain in nine years. Cigna shares tumbled as much as 10 percent.

Here’s a look at what analysts are saying about the deal.

Evercore ISI, Ross Muken

“Overall, this transaction is not entirely surprising to us, and obviously comes on the tail of a series of industry consolidation events in the pharma supply chain (most recently Albertsons-Rite Aid) and is evidence of the industry’s desire to continue to gain scale and have solutions that address both pharmacy and medical spend,” said Muken, who rates Express Scripts in-line.

The market may react to uncertainties on Express Scripts’s true earnings run rate after its Anthem contract ends, and there’s “some skepticism” given “potential M&A alternatives.” Muken doesn’t see a “significant or immediate earnings impact” for UnitedHealth Group’s loss of Cigna’s PBM business, and he estimates OptumRx accounts for about 13 percent of UnitedHealth’s earnings, with Cigna not likely worth more than 1 percent.

Jefferies, David Windley and Brian Tanquilut

“Investors were getting a little restless” with Cigna’s “slow capital deployment,” Windley wrote, and “this certainly addresses that” concern. The analysts take a positive view on the deal’s cost and coordination benefits, as well as the expectation for double-digit accretion in 2019.

The deal may pressure shares in other publicly traded managed-care organizations, especially UnitedHealth, as Cigna will likely move pharmacy benefit management over to Express Scripts. Humana Inc. shares may slip too as Cigna’s interest in expanding into Medicare Advantage “was widely understood,” wrote Windley, who has a buy rating on Cigna.

While a deal for Express Scripts is unsurprising, Cigna as the buyer is unexpected, Tanquilut wrote, adding he had viewed Amazon.com Inc. as “the most logical” acquirer, “if they truly had aspirations of entering the pharmacy retailing market.” The 31-percent premium for the company looks “fair,” and competing bids are unlikely to arise, he added. He also rates Express Scripts a buy.

JPMorgan Securities, Gary Taylor

A “defensive deal” may surprise and disappoint the Street, wrote Taylor, who has an overweight rating on Cigna. Still he sees a “fairly reasonable acquisition multiple” with forecasts for transaction synergies and accretion and “relatively attractive” financials.

Like CVS Health Corp.’s pending acquisition of the insurer Aetna Inc., Taylor sees the value but questions if it’s “worth the squeeze” for added debt for Cigna. The deal would leave Anthem to stand alone among the big five health insurers without an owned and integrated pharmacy benefit manager.

Veda, Spencer Perlman

“The days of the stand-alone PBM are numbered and have been for some time,” Washington policy analyst Perlman writes. “The entire notion of the rebate as a value proposition that justified PBM’s fees has been exposed for what it is -- a rent-seeking profit-enhancing gimmick that keeps drug prices high.”

Criticism over Gilead Science Inc.’s high-priced hepatitis C drugs dating back to 2014, which the drug-maker eventually blamed on middlemen like Express Scripts, was “the first nail in the coffin” for stand-alone pharmacy benefit managers. A speech Wednesday from FDA Commissioner Scott Gottlieb “marks a second (and perhaps final) nail.”

Perlman says the management of drug and medical benefits under one roof will likely change the dynamic of the drug rebate “by qualitatively and quantitatively lowering its value to channel participants.”

--With assistance from Richard Richtmyer

To contact the reporter on this story: Cristin Flanagan in New York at cflanagan1@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Courtney Dentch, Richard Richtmyer

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