Insurer Cigna will purchase pharmacy benefits manager Express Scripts, with the companies saying they can now achieve $600 million in administrative savings (AFP Photo/LOIC VENANCE) |
New York
(AFP) - The need to address runaway health care costs in the US prompted
another megamerger Thursday with insurer Cigna announcing the $67 billion
purchase of pharmacy benefits manager Express Scripts.
By
combining two players from different corners of the sprawling US health care
market, the companies said they could achieve $600 million in administrative
savings.
Cigna chief
executive David Cordani touted the benefits of taking ownership of Express Scripts
and its capacities to negotiate medicine and health services for employers,
government programs and other clients.
"Our
society needs a step function improvement in affordability that is delivered in
a highly personalized fashion, having the consumer touch points, having the
further depth in clinical engagement," Cordani said on a conference call
with analysts.
The
transaction follows on the heels of pharmacy chain CVS Health's $69 billion
takeover of insurer Aetna, another so-called "vertical" merger
because it combines two entities at separate stages of the health industry
value chain.
US
antitrust regulators in 2016 blocked proposed "horizontal"
combinations between health insurers, including a thwarted merger between Cigna
and Anthem.
With that
possibility foreclosed, insurers are looking to other options for cutting
costs.
"Merger
activity in the healthcare space is picking up as companies are aiming to find
ways to control rising health care costs through operating efficiencies and
expanded product/service offerings," said Briefing.com
The deal
also comes after a dramatic announcement in January by retail behemoth Amazon,
Warren Buffett's Berkshire Hathaway and JP Morgan Chase of the creation of a
nonprofit to address skyrocketing costs that Buffett said have become a
"hungry tapeworm on the American economy."
Express
Scripts currently manages pharmacy and medical benefits for more than 100
million in the US, said Express Scripts chief executive Tim Wentworth.
Express
Script's revenues in 2017 were just over $100 billion, while Cigna had revenues
of $41.6 billion.
"Combining
these assets with Cigna's innovative solutions and strong relationships with
providers will drive greater value, affordability and access," Wentworth
said.
Better
care?
In pitching
its takeover of Aetna, CVS Health has said it will beef up its retail operation
to include more wellness and medical testing areas and generally provide more
care at the pharmacy itself.
Cordani
touted an "open architecture" model under the proposed takeover of
Express Scripts "meaning (consumers) can choose the care and channels that
were best for them guided by choice and value."
The deal is
a means to transform today's "suicidal narrative which equates healthcare
solely with sick care rather than keeping people healthy in the first
place," Cordani said.
But shares
of Cigna slumped 10.1 percent to $174.67 in late-morning trading, while Express
Scripts surged 10.5 percent to $81.09.
The
cash-and-stock transaction will balloon Cigna's debt to $41.1 billion.
A note from
Goldman Sachs took a skeptical view of the combination, highlighting customer
attrition as a worry and saying there were still questions about how the
transaction would reduce costs.
"Strategic
merits of this transaction are not immediately apparent to us," Goldman
said. "We expect investor focus to shift toward other strategic
combinations on the back of this news."
But
Morningstar praised the logic of the transaction in light of Express Script's
competence at managing drug benefits plans.
"Given
payers' need to control their health benefit plan costs, the efficient
management of pharmaceutical expenses will be just as critical as managing
medical expenses, such as doctor’s visits and surgeries," Morningstar said
in a note.
"Operationally,
we believe the new entity will be a formidable force in healthcare, able to
wield significant pricing power and leverage top-tier scale advantages."
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