Health insurer Cigna to buy Express Scripts for about $54bn

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NEW YORK — Cigna Corp struck a deal worth almost $53 billion to buy pharmacy benefits manager Express Scripts Holding Co on Thursday, as US health insurers look outside their traditional business for new ways to cut healthcare costs.

The United States is the world's most expensive healthcare system, and insurers are contending with rising drug costs, changes to the Affordable Care Act and possible competition from companies like Amazon.com Inc, Berkshire Hathaway Inc and JPMorgan Chase & Co.

The deal follows the proposed $69-billion tie-up between insurer Aetna Inc and one of Express Scripts' biggest rivals, CVS Health Corp, announced in December.

Analysts and antitrust experts said both deals could receive scrutiny from regulators, especially given recent attention by lawmakers to drug price increases.

Express Scripts shares were up 11.5 percent at $81.99 on Thursday morning, but they were trading more than 10 percent below the current value of the bid, suggesting that some investors believe there could be difficulties closing the deal. Cigna shares fell 10.2 percent to $174.45.

The companies said the combination will eventually save $600 million a year 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. Cigna will also assume 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. Shares in Humana — which had been seen by Wall Street analysts as a possible target for Cigna — fell 1 percent on Thursday to $270.35.

The Express Scripts 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.

Leerink Partners analyst Ana Gupte said the deal may surprise investors. "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.

While the merging companies are not direct competitors, the deal could well get a skeptical look from antitrust enforcers because it would raise the risk of coordination in the industry and raise entry barriers, said David Balto, an antitrust lawyer with expertise in the health industry.

"Having two simultaneous deals significantly raises the risk for both deals," he said, referring to a planned merger between Aetna and CVS. "I think there's a significant risk that both deals get challenged."

The combined company will be led by current Cigna Chief Executive Officer David Cordani. Express Scripts CEO Tim Wentworth will also stay on as president of the company's Express Scripts unit.

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. Morgan Stanley was the financial adviser to Cigna. Centerview Partners and Lazard were financial advisers to Express Scripts. — Reuters


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