Cigna, Express Script Deal To Continue Healthcare Reshuffle

Cigna Corp. (NYSE:CI) has announced that it will buy Express Scripts Holding Co., (NASDAQ:ESRX) a pharmacy benefits provider and other medical servcies.

The deal, valued $67 billion, will be financed by a mix of cash and debt. It will be one of the biggest deals for Cigna.

What’s in the Offing for Cigna?

The deal is expected to be mutually beneficial, given that it would lead to a solid combination of Cigna’s strong position and expertise in the health benefits space with Express Scripts’ leading position in the pharmacy benefits market (PBM).

This combined entity would create a mammoth healthcare set-up with wide-ranging operations from sale of drugs to insurance cover.

The deal will add to Cigna’s scale and size and equip it to negotiate with drug manufacturers and pharmacies better. This would lower the cost of acquiring prescription drugs, enabling the company to share the savings in with its consumers by way of more customer-friendly insurance plans like enhanced frills or lower premium, thus ultimately leading to market-share gains.

Odds of the deals getting a clearance from regulators seem high, as it will be a vertical integration. Last year, Cigna’s merger with Anthem Inc. (NYSE:ANTM) was blocked by regulators last year, on concerns that the combination would stifle competition in the healthcare industry since both companies had overlapping businesses.

In a year’s time shares of the company have gained 28% compared with the industry’s growth of 8.2%.

Growing Trend of Health Insures Catching up with PBM

With this deal, Cigna will be catching up with the growing bandwagon of health insurers tying up with pharmacy benefits mangers. The acquisition of Aetna Inc. (NYSE:AET) , one of the nation’s leading health insurers, by pharmacy benefit major CVS Health Corp (NYSE:CVS). is already underway. Another deal in the same vein was the takeover of Catamaran by health insurer leader UnitedHealth Group Inc (NYSE:UNH)., in 2015.

Pharmacy benefit managers work primarily for insurers and employers and seek to negotiate drug prices with pharmaceutical companies and drugstores to reduce the pocket-pinch for consumers. This in turn lowers the medical cost for insurers.

Moreover, insurers seek an attractive business opportunity in the PBM market, which largely benefits from an aging population, which depends largely on drugs and pharmacy benefit plans. Per a report by Technavio, nearly 14.4% of the U.S. population is aged 65 years and above, which buoys optimism.

Many analysts believe that rising expenditure on prescription drugs and growing demand for specialty drugs have also been strengthening the PBM market. The Centers for Medicare and Medicaid Services report published by Advisory Board predicts the continuation of this trend. Per the report, prescription drug spending is projected to grow roughly 7% between 2018 and 2019.

Consolidation in Healthcare

Most economists believe this coming together of two different industries in the healthcare sector will add a new dimension and might help in checking soaring costs.

Moreover, necessitated by the need of the players to gain in scale and size to weather the changes taking place within the industry, mergers and acquisitions (both horizontal and vertical) are common. No matter whether a company wishes to grow horizontally (expand in the existing business) or vertically (expand into new business), the most sought-after way is to acquire the best fit.

Cigna carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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