Thursday, September 20, 2018
Business

Cigna buying Express Scripts in major health care deal

The health insurance giant Cigna said Thursday that it had agreed to buy the pharmacy benefit manager Express Scripts for $67 billion in cash and stock, including the assumption of $15 billion in debt.

The transaction adds to a string of deals in the health care sector as insurers and others seek to control costs and stave off a possible challenge from Amazon. The online retail giant announced in January that it was teaming up with Berkshire Hathaway and JPMorgan Chase to form an independent health care venture to serve the three companies’ employees and to possibly revamp the industry.

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The news comes a little over a year after a judge blocked a proposed $48 billion merger of Cigna and Anthem, another major health insurer. Separately, a judge also blocked a $37 billion deal between health insurers Aetna and Humana last year.

"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," David Cordani, the Cigna president and chief executive, said in a news release.

Express Scripts is the largest pharmacy benefit manager in the United States, responsible for the drug plans of more than 80 million Americans, including on behalf of large employers such as the Department of Defense.

It has long pitched itself as an independent player whose main focus was lowering medical costs by striking deals with drug companies on behalf of insurers and large employers. Its major competitors are CVS Health, which owns retail pharmacies and itself recently merged with Aetna, and OptumRx, which is owned by insurance giant UnitedHealth Group.

Last year, Express Scripts acknowledged that it had parted ways with its largest customer, Anthem, after the insurance giant sued Express Scripts in 2016, claiming that the benefit manager was overcharging Anthem for drugs. The news led to speculation over how Express Scripts would replace the lost business, given that Anthem accounted for nearly a fifth of its revenue.

In recent years, the model of a pharmacy benefit manager has come under scrutiny as members of the public and politicians ? prodded by the pharmaceutical industry, which has been trying to deflect criticism on drug costs ? have questioned whether benefit managers are profiting from higher drug prices by keeping a percentage for themselves.

In February, a white paper released by the Trump administration called out such companies, saying that consolidation in the industry ? the top three players control 85 percent of the market ? was one reason for soaring drug prices. The Cigna deal could come under close scrutiny by regulators because of Express Scripts’ role as the last remaining large independent player.

On Wednesday, the commissioner of the Food and Drug Administration, Scott Gottlieb, said in a speech that the situation had created "misaligned incentives," as the discounts that manufacturers negotiate "may not always be passed along to employers or consumers."

The deal announced Thursday would not address the issue of consolidation, but analysts have said that better coordination between insurers, which manage a member’s medical costs, and pharmacy benefit managers, which are responsible for drugs, could lower costs overall.

Indeed, the companies said Thursday the news would "drive the combined company’s role as the connective tissue between individuals and their health care providers" and provide "a more coordinated approach to an individual’s health care journey."

Executives for CVS and Aetna made similar claims when that deal was announced last year. But others have expressed skepticism, questioning whether these new behemoths will be able to disrupt the industry and improve the experience of health care consumers.

The deal between Cigna and Express Scripts is the latest in a flurry of deals in the past year. Anthem said in October that it planned to start its own business to manage prescription-drug plans, partnering with CVS. Then, in December, the $69 billion CVS-Aetna deal was announced. And just last month, the supermarket operator Albertsons said it would buy the remnants of the Rite Aid drugstore chain, in a bet that increased foot traffic from in-store pharmacies would drive more consumers to its stores to shop for other items.

Rite Aid itself had tried to bulk up its operations by merging with Walgreens, but negotiations ended after antitrust authorities indicated that they were unlikely to approve the combination last year. Instead, Rite Aid agreed last year to sell nearly 2,000 stores and three distribution centers to Walgreens.

Express Scripts, based in St. Louis, reported revenue of $100.3 billion in 2016 and employed about 25,000 people. Under the terms of the deal, its shareholders would receive $48.75 in cash and 0.2434 of a share of the combined company. That represented a 31 percent premium to the closing price of Express Scripts on Wednesday. The company’s stock was up 14 percent in premarket trading Thursday.

After the transaction, Cigna shareholders will own about 64 percent of the combined company, and Express Scripts shareholders would own the rest. The transaction is expected to close by the end of the year and is subject to shareholder and regulatory approval.

The combined company would be named Cigna and would be based in Bloomfield, Connecticut, where Cigna currently has its headquarters. Express Scripts would continue to have its headquarters in St. Louis.

Cordani would serve as president and chief executive of the combined company, while Tim Wentworth, the Express Scripts chief executive, would serve as president of the Express Scripts business.

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