Cigna ‘Dramatically Overpaying’ for Express Scripts, Icahn Says

(Bloomberg) -- Activist investor Carl Icahn said shareholders in Cigna Corp. should vote against the $54 billion takeover of pharmacy-benefits firm Express Scripts Holding Co. because the health insurer is “dramatically overpaying” for a company facing existential threats.

“Cigna management is offering to pay an all-time high price for a company that, as a result of secular changes, is currently standing on very dangerous ground,” the billionaire wrote in an open letter to shareholders on Tuesday. “It’s a travesty to complete this deal.”

Icahn disclosed a 0.56 percent stake in Cigna and said he’s betting against Express Scripts. He said Cigna should pursue a multiyear partnership with a firm such as Express Scripts -- which helps insurers and employers manage their prescription-drug benefits -- instead of a takeover, and use its cash to buy back shares.

Cigna agreed in March to a cash-and-stock deal for Express Scripts with the goal of streamlining different parts of the health-care system by bringing them under one roof, saving money for clients of the combined firm.

Tight Deadline

The activist investor filed proxy material with regulators Tuesday soliciting votes against the deal, and to oppose postponing a special shareholder meeting slated for Aug. 24 if the company doesn’t have sufficient support for the transaction.

Launching the proxy fight with a little more than two weeks until the vote is an unusual move for the activist. Such campaigns typically kick off months in advance in order to allow sufficient time to solicit other shareholders’ backing.

Cigna, in a statement late Tuesday, called Icahn’s views “misguided and short-sighted” and said it remains committed to the transaction. Brian Henry, an Express Scripts spokesman, said earlier Tuesday that the company is well-positioned for growth and remains confident in the deal.

“The assertions in Mr. Icahn’s letter are value-destructive and demonstrate a clear lack of understanding of the dynamics of the health-care industry,” Cigna said.

Ana Gupte, an analyst at Leerink Partners, said Cigna should proceed with the transaction. She called Icahn’s proposals “unrealistic.”

“A majority of current shareholders are likely to vote in favor of the deal,” Gupte said in a research note.

Icahn criticized the rationale behind the proposed tie-up.

“We strongly disagree with the idea that Cigna’s only route to offering a more integrated solution is to make a $60 billion leveraged bet on a company with as many challenges as Express Scripts,” he wrote. Cigna’s stock could advance to become worth more than $250 a share “in a reasonable time frame,” while Express Scripts is currently worth less than $60 apiece, he argued.

Shares of Bloomfield, Connecticut-based Cigna rose less than 1 percent to $188.27 at the close of regular trading in New York. Express Scripts gained 2.8 percent to $78.95.

Flawed Rebates

Icahn said he believed Express Scripts faces a number of challenges, including regulatory hurdles stemming from opposition to its “highly flawed” rebate system that will dramatically reduce its profitability. The company also faces potential competition from the likes of Amazon.com Inc. and from former and existing customers, such as Anthem Inc., which could establish their own competitive service.

“When Amazon starts to compete, as we believe they will with their 100 million Prime users and scale distribution system, they will have no trouble breaking into the so-called ‘ecosystem,’" Icahn’s letter said. “With lower prices, the beneficiary will be American consumers, not the owners of Express Scripts.”

The Trump administration has targeted pharmacy benefit managers, which are intermediaries in the drug-supply business, as it works to lower prescription-drug prices. PBMs negotiate rebates from drugmakers and have been criticized for keeping some of the funds instead of passing them to consumers or employers. Some critics say that creates incentives for pharmaceutical companies to raise prices.

“Regulatory risk due to opposition to the highly flawed rebate system will likely lower Express Scripts’ profitability dramatically,” Icahn said in his letter.

Both Cigna and Express Scripts said last week they continue to support the transaction after reports that Icahn had built a sizable stake in Cigna and planned to oppose the deal.

‘Worst Blunders’

David Cordani, Cigna’s chief executive officer, said on a conference call Thursday that he continues to believe the takeover is in the best interest of shareholders. He also said it would immediately add to earnings and give Cigna “exceptional financial flexibility in a dynamic marketplace.”

Icahn said he believed the transaction would be disastrous for his fellow Cigna holders.

“Purchasing Express Scripts may well become one of the worst blunders in corporate history, ranking up there with the Time Warner/AOL fiasco and General Electric’s long-running string of value destruction,” he said.

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