Why Cigna’s $50 Billion Offer for Express Scripts Is a Bad Deal

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Health insurer Cigna Corp. (NYSE: CI) announced Thursday morning that it has reached an agreement with Express Scripts Inc. (NASDAQ: ESRX) to acquire the pharmacy benefits management (PBM) firm for about $52 billion in cash and stock in the combined company. Express Scripts is the remaining giant stand-alone PBM company in the United States.

At the end of 2016, the company was tied with Caremark, a division of CVS Health Corp. (NYSE: CVS) as the market share leader among PBMs with a 24% share. OptumRx, a division of UnitedHealth Group Inc. (NYSE: UNH) ranked second with a 22% share. No other PBM firm had more than a 7% share.

That fact alone painted Express Scripts as an acquisition target. When CVS recently announced a $69 billion offer for Aetna Inc. (NYSE: AET), Cigna had to do something if it wanted to play with the two big boys, CVS and UnitedHealth.

Cigna also has agreed to assume about $15 billion in Express Scripts debt, bringing the total value of the deal to around $67 billion. The purchase price represents a 31% premium to the closing price of Express Scripts shares on Wednesday.

Further consolidation in the health care sector is not a good deal for consumers, drug companies, or health care providers. Here are comments on consolidation from a speech Wednesday by U.S. Food and Drug Administration Commissioner Scott Gottlieb, MD:

The top three PBMs control more than two-thirds of the market; the top three wholesalers more than 80%; and the top five pharmacies more than 50%.  Market concentration may prevent optimal competition. And so the saving may not always be passed along to employers or consumers.

Too often, we see situations where consolidated firms — the PBMs, the distributors, and the drug stores — team up with payors. They use their individual market power to effectively split some of the monopoly rents with large manufacturers and other intermediaries rather than passing on the saving garnered from competition to patients and employers.

The consolidation and market concentration make the rebating and contracting schemes all that more pernicious.

And the very complexity and opacity of these schemes help to conceal their corrosion on our system – and their impact on patients.

In the long run, the interests of patients, providers, and manufacturers are not well served by these arrangements, precisely because these practices encourage large list price increases to fuel the pricing schemes.

In the current regulatory climate, there is virtually no chance that the deal between Cigna and Express Scripts will be successfully challenged on antitrust grounds. Ultimately, UnitedHealth, CVS and Cigna will effectively control somewhere between two-thirds and three-quarters of health care services in the country. Their market power will be enormous, and the rest of us will pay because we have no choice.

Express Scripts stock traded up about 18.5% Thursday morning to $87.00, above the 52-week range of $55.80 to $83.49. The 12-month consensus price target on the stock is $84.37.

Cigna’s stock traded down about 4.5%, at $185.50 in a 52-week range of $143.85 to $227.13. Its consensus price target is $237.33.