U.S. health insurer Cigna Corp. struck a $52-billion deal to buy pharmacy benefits manager (PBM) Express Scripts Holding Co on Thursday, looking for new ways to hold onto their profits as the industry faces greater scrutiny for rising healthcare costs.
The pharmacy benefits business, which tries to negotiate down the price of prescription medicines for large employers, has drawn fire from the Trump administration and Congress, who have questioned whether those discounts are really being passed on to consumers.
Cigna’s deal follows close on the heels of a rival $69-billion merger between CVS Health Corp and health insurer Aetna Inc, announced in December. Together, the transactions would represent a massive consolidation of the market for managing employees’ prescription drug benefits, prompting some experts to question whether they will be approved.
“Employers are growing increasingly frustrated with the cost of prescription drugs and a lack of transparency into the economics of how this works,” said Jim Winkler, senior vice president for health at benefits manager and broker Aon, part of Aon Plc.
Cigna and Express Scripts say the combination will lower costs for corporate clients by giving them more coordination between medical care and pharmacy benefits, particularly for pricey specialty drugs.
“Our employer clients will be delighted with that,” Cigna Chief Executive David Cordani said in an interview.
It could help Cigna more closely manage how costly drugs are prescribed and delivered to patients, and fend off potential competition from new players such as Amazon.com.
All told, the companies project $600 million in annual savings.
Express Scripts shares were up 8 percent at $79.29 on Thursday afternoon, but they were trading 12.6 percent below the current value of the bid, suggesting that some investors see difficulties closing the deal.
Cigna shares fell 11.5 percent to $171.86.
Deals in Tandem
PBMs administer prescription drug programs for health insurers, self-insured companies and government agencies, negotiating deals with drug manufacturers, working with pharmacies and processing claims.
The largest U.S. health insurer, UnitedHealth Group, in 2015 expanded its in-house pharmacy benefits business, OptumRx, with the $13-billion purchase of Catamaran. CVS, Express Scripts and UnitedHealth control more than two-thirds of the PBM market, a top U.S. health official said on Wednesday.
Anthem Inc in October said it would expand its own pharmacy benefits business, and hired CVS to do so.
Antitrust experts said the Trump administration would need to review how both deals between Cigna and Express and between CVS and Aetna would affect the U.S. market, already the world’s most expensive healthcare system.
“Having two simultaneous deals significantly raises the risk,” said David Balto, an antitrust lawyer with expertise in the health industry. “There’s a significant risk that both deals get challenged.”
In 2016, the Obama administration scuttled two major health insurer mergers – Anthem Inc’s purchase of Cigna and Aetna’s purchase of rival Humana – largely on concerns the consolidation would raise costs for consumers.
Today’s deals between an insurer and PBM represents a so-called vertical integration of players within the health industry. But it could limit the ability of large employers to choose who manages both prescription drug benefits and medical coverage for their employees.
“This type of merger would create a market-straddling giant, with new profit-maximizing incentives … ultimately leading to higher costs and potentially poorer coverage and care for consumers,” said George Slover, senior policy counsel for Consumers Union, the advocacy arm of Consumer Reports.
Most national companies with more than 20,000 employees use different companies to provide prescription drug benefits and medical coverage. Express Scripts CEO Tim Wentworth said during a conference call with analysts that he does not expect to lose other health insurers who use Express Scripts as their PBM because of the deal.
The Offer
Cigna’s offer consists of $48.75 in cash and 0.2434 in shares of the combined company for each Express Scripts share, amounting to $96.03 per share. That represents a premium of nearly 31 percent to Express Scripts’ Wednesday closing price.
Cigna will also assume about $15 billion in Express Scripts’ debt, the company said.
The combined company will be led by current Cigna CEO Cordani. Wentworth will stay on as president of the company’s Express Scripts unit.
After the deal closes, expected by the end of the year, Cigna shareholders will own about 64 percent of the combined company and Express Scripts shareholders the rest.
Cigna intends to fund the cash portion of the deal through a combination of cash on hand, Express Scripts debt and new debt issuance. The combined company is expected to have debt of about $41.1 billion.
The insurer said it obtained fully committed debt financing from Morgan Stanley Senior Funding and The Bank of Tokyo-Mitsubishi UFJ Ltd for the deal.
Morgan Stanley was the financial adviser to Cigna. Centerview Partners and Lazard were financial advisers to Express Scripts.
(Additional reporting by Diane Bartz in Washington and Abinaya Vijayaraghavan, Philip George and Akshay Lodaya in Bengaluru; writing by Michael Erman and Michele Gershberg; editing by Saumyadeb Chakrabarty and Nick Zieminski)
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