March 08, 2018
By Ankur Banerjee
(Reuters) - U.S. health insurer Cigna Corp said on Thursday it would buy pharmacy benefits manager Express Scripts Holding Co for about $54 billion, a tie-up that reflects pressure on healthcare companies to grow bigger to cut costs.
The move follows the $69-billion merger of insurer Aetna Inc and one of Express Scripts' biggest rivals, CVS Health Corp, announced last December.
The companies said the combination will save $600 million due to administrative efficiencies. They can cut costs as they better coordinate pharmacy and medical claims. It could also increase their leverage in price negotiations with drugmakers.
Cigna's offer consists of $48.75 in cash and 0.2434 shares of stock 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.
Express Scripts shares were up 18.6 percent at $87.10, while Cigna shares were down 4.25 percent at $186.
The transaction is valued at $67 billion, including about $15 billion in Express Scripts' debt, the company said.
Pharmacy benefit managers administer prescription drug programs for health insurers, self-insured companies and government agencies, negotiating deals with drug manufacturers, working with pharmacies and processing claims.
Investors had expected Cigna to do a deal after its proposed acquisition by Anthem Inc was blocked by antitrust regulators two years ago. Analysts said shares in Humana - which had been seen as a possible target for Cigna - could fall on Thursday.
The ExpressScripts combination would put the Cigna model closer to that of UnitedHealth Group Inc, the industry's biggest health insurer. Cigna currently uses UnitedHealth's Optum division to manage its pharmacy benefit, and will likely lose that business, Evercore ISI analysts said in a research note.
The CVS-Aetna deal was seen pressuring rival insurers, drugmakers, PBMs and retail pharmacies to consider mergers or switching partners to try to keep up with the potential healthcare cost savings or increase in profit margins.
The wave of consolidation in the sector also comes against the backdrop of a shifting landscape, including changes in the U.S. Affordable Care Act, rising drug prices and the threat of competition from Amazon.com Inc.
Leerink Partners analyst Ana Gupte said the deal may surprise investors since Cigna has said that it is satisfied with their PBM arrangement with UnitedHealth's Optum unit.
"It is possible that the threat of an Amazon entry into the healthcare and possibly the drug supply-chain landscape, with the latest news of the Amazon/Berkshire Hathaway/JPMorgan employer coalition, has spurred Cigna and Express Scripts to tie the knot."
Amazon, Berkshire Hathaway Inc and JPMorgan Chase & Co said in January they would form a company to cut health costs for hundreds of thousands of their employees.
After the deal closes, 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 company is expected to have debt of about $41.1 billion after the deal closes.
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.
The combined company will be led by current Cigna Chief Executive Officer David Cordani.
Morgan Stanley was the financial adviser to Cigna and Wachtell, Lipton, Rosen & Katz was the legal adviser. Paul, Weiss, Rifkind, Wharton & Garrison LLP is providing regulatory counsel.
Centerview Partners and Lazard Frères were financial advisers to Express Scripts, with Skadden, Arps, Slate, Meagher & Flom LLP serving as legal counsel and Holland & Knight LLP as regulatory counsel.
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