More Changes to the Pharmacy Industry Coming as DOJ Approves Cigna-Express Scripts Deal
In March, U.S. insurer CIGNA Corporation announced it was acquiring pharmacy benefits manager Express Scripts for approximately $52 billion. On Monday, the Department of Justice (DOJ) approved the merger.
The New York Times reports, “These combinations of powerful health insurance companies with the country’s dominant pharmacy benefit managers are occurring as established players in the health care sector are frantically searching for ways to fend off potential interlopers like Amazon, whose tentative forays into the pharmacy business have already shaken up the industry.”
Insurer Aetna is also in the process of merging with CVS Health, a $69 billion deal announced in December 2017. The DOJ is still reviewing that deal, although it is expected to be approved. CVS has 9,700 retail pharmacies and 1,100 walk-in clinics, but the significance of the deal is its pharmacy benefits manager enterprise. In 2016, it generated net revenue of $177.5 billion.
Cigna is offering $48.75 in cash and 0.24334 shares of stock of the combined company for each share of Express Scripts. This totals $96.03 per share, a premium of about 31 percent on top of Express Scripts’ closing price at the March announcement. The total transaction has a value of $67 billion, including $15 billion in Express Scripts’ debt.
Once the deal is finalized, Cigna shareholders will have about 64 percent of the combined company, with Express Scripts shareholders in control of the remaining 36 percent. Once the deal closes, the combined company is expected to have about $41.1 billion in debt. Cigna plans to fund the cash part of the deal with a combination of its own cash, Express Scripts debt and new debt issuance. It has debt financing from Morgan Stanley Senior Funding and The Bank of Tokyo-Mitsubishi UFJ.
Mergers in this area being blocked is not unprecedented. In early 2017, courts blocked a proposed merger between Cigna and Anthem, valued at $48 billion. And another judge blocked a deal between Aetna and Humana worth $37 billion.
Express Scripts is the largest PBM in the U.S., handling drug plans for more than 80 million people, including the U.S. Department of Defense.
Many are interpreting the deal as a realization by these established companies that their business models need to change as customers and the government demand better drug price controls. Insurers and pharmacy benefit managers are middlemen for employers and governments, and, The New York Times notes, “the proposed mergers are an attempt to convince their customers that they are working to reduce costs.”
Not only has the possible entry of Amazon into the pharmacy business worried the industry, but Berkshire Hathaway’s Warren Buffet, Amazon’s Jeff Bezos and JP Morgan Chase’s Jamie Dimon created a joint venture to cut healthcare costs and improve services. Atul Gawande is the chief executive officer of the joint venture. The three companies have 840,000 to 1.2 million employees worldwide and many industry-watchers believe that whatever the unnamed company comes up with may have a ripple effect throughout the industry.
The New York Times notes that the approval of this new deal signals “an acceptance of so-called vertical mergers in which companies, although in the same broad line of business, do not directly compete…. Federal officials emphasized that they did not believe the merger would damp competition in the pharmacy business.”
“Quality health care and competitive pricing for health care services and pharmaceutical drugs is critical to U.S. consumers,” stated an assistant attorney general, Makan Delrahim, in a statement on Monday.