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March 8, 2018

Our take: Cigna plans to buy Express Scripts for $67B

Daily Briefing

    Read Advisory Board's take on this story.

    Cigna on Thursday announced it intends to buy Express Scripts, the largest pharmacy benefit manager (PBM) in the country, in a deal valued at $67 billion in cash and stocks.

    The transaction value includes the assumption of $15 billion in Express Scripts' debt, the New York Times' "DealBook" reports. The boards of both companies have approved the deal, which is scheduled to close later this year pending shareholder and regulatory approval.

    Deal details

    If the deal goes through, the combined company would be called Cigna, and it would be based in Bloomfield, Connecticut—where Cigna has its headquarters. Express Scripts would keep its St. Louis headquarters. Cigna CEO David Cordani would lead the combined company as president and CEO, while Express Scripts CEO Tim Wentworth would be president of the Express Scripts business. The combined company would have a board of 13 directors, four of whom would be "independent members of the Express Scripts board," according to the announcement.

    Under the agreement, Express Scripts shareholders would receive $48.75 in cash and 0.2434 shares in the combined company for each of their Express Scripts shares, a consideration that represents about $96.03 for each share of Express Scripts—a 31% premium over the company's closing price of $73.42 on Wednesday. According to CNBC/Reuters, Cigna plans to pay the cash portion of the agreement via "a combination of cash on hand, Express Scripts debt, and new debt issuance."

    Overall, Cigna shareholders would own about 64% of the combined company, while Express Scripts shareholders would own about 36%. Cigna expects to have about $41.4 billion in debt if and when the deal closes, CNBC/Reuters reports.

    Deal aims to curb costs, further Cigna's reach and offerings

    According to Cordani, Cigna began seriously considering a deal with Express Scripts toward the end of 2017, spurred by an effort to expand Cigna's reach and service offerings. The deal aims to curb health care costs by coordinating pharmacy and medical claims under one organization while giving the combined company more leverage when negotiating prices with drugmakers, CNBC/Reuters reports. 

    Cordani in a statement said, "This combination accelerates Cigna's enterprise mission of improving the health, well-being, and sense of security of those we serve, and in turn, expanding the breadth of services for our customers, partners, clients, health plans, and communities." The companies added that the deal would "drive the combined company's role as the connective tissue between individuals and their health care providers," providing "a more coordinated approach to an individual's health care journey."

    According to the Wall Street Journal, Cigna is known for its focus on administering coverage for large employers and its growing international presence. Some of Express Scripts' biggest-name clients include the Department of Defense and Walmart

    Agreement follows string of health care industry deals

    According to Forbes, the deal between an insurer and a PMB "would make sense," as Express Scripts and its standalone business model are facing pressure as competitors to form deals with insurers. For instance, UnitedHealth Group offers pharmacy benefits through OptumRx, while CVS Health operates Caremark PBM and is moving forward with buying Aetna, the third-largest insurer in the country.

    In addition, Anthem, Express Scripts' biggest customer, last year announced it was not planning to renew its 10-year contract with Express Scripts, which expires at the end of 2019, and would instead launch its own PBM, Forbes reports. According to "DealBook," Anthem's announcement came after a federal judge blocked a proposed merger between it and Cigna (Bray/Thomas, "DealBook," New York Times, 3/8; Mattioli/Cimilluca, Wall Street Journal, 3/8; Reuters/CNBC, 3/8; Japsen, Forbes, 3/7).

    Advisory Board's take

    Russell DavisRachel Sokol

    Russell Davis, Executive Director, and Rachel Sokol, Practice Manager, Health Plan Advisory Council

    Cigna's proposed acquisition of Express Scripts illustrates the latest crumbling of the walls propping up traditional industry silos. Health plans, device makers, and others realize that as long as they remain trapped in zero-sum transactions, they can generate only incremental gains. Major improvements and innovations will require these stakeholders to collaborate (and in some instances, to combine) across historical industry segments.

    The first iterations of health plan joint ventures focused on provider partnerships, but now plans are looking to pharmacy organizations (retail clinics and/or PBMs) to drive results and exert greater influence over total cost of care. In recent months, we have seen health plans and others extend into retail clinics (i.e., CVS/Aetna), physician groups and ambulatory care (i.e., Optum/DaVita), and home health and community care (i.e., Humana/Kindred Healthcare). In a world where regulators have rejected "mergers of equals," organizations will continue to integrate vertically to create new efficiencies.

    As we noted when the CVS-Aetna news broke, payer-pharma partnerships offer three potential advantages:

    1. Support for medication adherence. An aging population and more medical (as opposed to surgical) treatment focus efforts on care plan adherence.
    2. Access to better real-time data. Health plans need to know how their members are doing to intervene if something seems awry. Pharmacy data present some of the most accurate information on how members are adhering to a care plan.
    3. Instant availability for care. Retail pharmacies present an opportunity to provide care after traditional provider hours to hopefully prevent the need for a higher acuity setting such as the ED.

    While Amazon's plans to enter health care may be on the minds of industry leaders, they are not the driving force behind this partnership trend. We are witnessing the reconstruction of the health care market, brick by brick.

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