This morning, Cigna CI announced that it will acquire the equity of Prescription Benefits Manager (PBM) Express Scripts ESRX for $52 billion – $54 billion in a combined cash and stock deal and will retire Express Scripts’ $15 billion of debt, bringing the all-in transaction value to $67 – $69 billion (press release, Bloomberg coverage).
We suspect that if the transaction goes through, Cigna will be destroying a good deal of shareholder value and if the deal does not go through, that Express Scripts will become the best bearish idea around.
Unsurprisingly, Cigna and Express Scripts’ stock prices moved in opposite directions this morning.
Figure 1. Source, YCharts
Framework has published a good bit on Express Scripts (which may be found on the Articles page). The company also came up in one of our Office Hour interviews with registered investment advisor, Sheila Chesney, after she came back from the Grant’s Investment Conference.
At the conference, famed short-seller Jim Chanos, founder of Kynikos Associates, talked about Express Scripts as his favorite short investment at the time. While it is almost certain that if Chanos has a dog that it is getting kicked right now, we did not disagree with Chanos’ valuation of the firm.
Express Scripts is losing its biggest client, Anthem, and to add insult to injury, Anthem is poisoning Express Scripts’ well by suing its soon-to-be-former supplier for overcharging for drugs. In addition, Walgreens Boots Alliance WBA made the decision to battle its largest US drug retailer rival CVS Corporation CVS — which also operates a PBM business — not by buying Express Scripts, but by buying a smaller competitor.
With a good chunk of its business defecting and facing the prospect of not being able to find a chair when the music stopped, Express Scripts’ stock also took a hit when Amazon, Berkshire Hathaway, and JP Morgan Chase announced they would form a joint venture to provide healthcare to their employees — making an end run around traditional suppliers and insurers.
Considering that Cigna’s original offer represented a 30% premium on Express Scripts’ share price, but that Express Scripts’ share price is up by only around 10% today, we believe the market has significant doubts whether the deal will go through due to regulatory concerns.
In December 2017, CVS announced (NY Times coverage) it would acquire the health insurer Aetna, also for $69 billion. That transaction is still under anti-trust review. If it is allowed, another large merger might not be; if it is disallowed, another large merger would almost certainly be as well.
If the Cigna / Express Scripts merger goes through, Cigna is almost certainly destroying value in its purchase. If the deal falls through, Express Scripts is, in our opinion, a dead man walking.
We will put Cigna on our list to do a valuation and provide more commentary and, if appropriate, an investment strategy, as the situation progresses.