How Cigna and Express Scripts decided to merge amid Anthem drama
Fresh from a break up with rival and former merger partner Anthem in May 2017, health insurer Cigna Corp. wasted no time searching for a rebound. It ended up pursuing the nation's No. 1 pharmacy benefit manager, Express Scripts, which was at the time concerned with its future as a stand-alone PBM after losing Anthem as its biggest client.
Bloomfield, Conn.-based Cigna and Express Scripts filed a preliminary registration statement with the Securities and Exchange Commission on Wednesday detailing the terms of their merger agreement, announced in early March. The filing shows that Cigna considered another horizontal merger with a health insurer in the government program space, but ultimately decided that Express Scripts' pharmacy management skills could bolster Cigna's value-based care initiatives.
St. Louis-based Express Scripts saw the Cigna deal as an attractive option at a time when the industry was rapidly consolidating and the pharmacy sector faced potential new disrupters.
The two companies plan to spend a lot of money to get the deal done: Cigna expects to spend $430 million in transaction-related costs and Express Scripts expects to spend $120 million, according to the filing. They already spent a combined $68 million in transaction costs during the first quarter of 2018.
Breaking up would be even costlier, as Cigna could have to pay $2.1 billion to Express Scripts if regulators block the deal. The companies hope to close the deal by the second half of 2018, but still must secure shareholder and regulatory approval. But antitrust experts have said the deal, which is described as a type of vertical integration, should have an easier time gaining approval than the Cigna-Anthem deal.
After the proposed merger between Cigna and rival insurer Anthem fell through in May 2017, Cigna officials began thinking about next steps, including other potential merger deals. The Justice Department challenged the $54 billion Cigna-Anthem deal, and a federal judge ultimately blocked it in February 2017 because the combination would eliminate competition for the administrative services business of large employers and result in higher prices.
The relationship between Cigna and Anthem had soured long before then, and Cigna eventually warned against the deal. The two are still fighting over a $1.85 billion termination fee and are scheduled to go to trial in 2019. After that deal crashed and burned, Cigna said it didn't receive any merger proposals from other interested companies.
Cigna briefly discussed a horizontal merger with another large, publicly traded healthcare company, but the talks never became serious. For one, Cigna's board of directors was concerned about combining with an insurer with a "highly regulated government program that requires significant capital to grow and that has periodically experienced margin pressure due to disruptive regulation and varying government reimbursement levels," according to the filing.
Cigna also worried that the deal would require too many divestitures.
Importantly, the CMS hit Cigna with sanctions in January 2016 after finding major problems with the insurer's Medicare Advantage plans, barring the company from enrolling members. It lifted those sanctions in June 2017. Cordani has told investors and Modern Healthcare that the company intends to grow its Advantage business organically—not through acquisitions.
Meanwhile, Express Scripts' was also dealing with Anthem-related drama. After a spat that lasted more than a year, Anthem sued its PBM, Express Scripts, for $15 billion, alleging the PBM overcharged it by $3 billion annually. Express Scripts countersued, and then in April 2017, Anthem announced it would not renew its contract for pharmacy benefit management services. The move was a blow to Express Scripts, as Anthem represented a fifth of the PBM's revenue.
The SEC documents show Express Scripts' management began considering the threats to the company's future as a stand-alone PBM amid rampant consolidation in the healthcare industry. It explored a potential deal with a large, unnamed publicly traded healthcare company in the summer of 2017 but had abandoned the idea by September. Cigna came to Express Scripts in October with another option.
The two companies initially considered a "white label commercial arrangement" between the two, but Cigna CEO David Cordani told Express Scripts the company was interested in combining. Express Scripts CEO Tim Wentworth played coy at first, saying his company wasn't for sale and that he believed the PBM could remain successful as a stand-alone company. But he left the door open for future conversations.
Cigna pursued Express Script with the idea that the two could further Cigna's goals of value-based care delivery by managing the medical, pharmacy and behavioral aspects of healthcare holistically. Its board of directors also saw the need for Cigna to rein in pharmacy spending, one of its main drivers of healthcare costs, the SEC documents show.
Express Scripts board of directors in December discussed competitor CVS Health' recently announced deal with insurer Aetna, as well as fast-changing healthcare environment and "the potential entry into the healthcare industry of significant new participants," which likely refers to rumors that e-commerce giant Amazon would enter the healthcare space.
In a later meeting with the board, Wentworth agreed the company should consider a transaction "given industry dynamics, uncertainties in the regulatory and political climate, the recent consolidation trends in the healthcare industry, the recent announcement by Anthem that it would not extend its contract with Express Scripts, (and) continuing competitive pressure on Express Scripts as a standalone PBM."
Under a non-disclosure agreement, the two companies scoured each other's business information and hammered out the potential merger's details over a number of months. Express Scripts said Cigna's initial offer was too low. Express Scripts also negotiated for a fee of $3.25 billion if the merger didn't pan out. The companies settled on a $2.1 billion breakup fee if the deal were blocked by regulators. They approved the merger agreement on March 7 and announced the deal March 8.
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