Humana, WellCare Dip After Cigna Agrees To Buy Express Scripts

Shares of Humana (HUM) and WellCare (WCG) are under pressure today after Cigna (CI) announced that it has agreed to acquire Express Scripts (ESRX) in a cash and stock transaction valued at about $67B. Commenting on the news, Piper Jaffray argued that the deal makes it less likely in the near-term that Cigna would buy a Medicaid or Medicare Advantage plan.

EXPRESS SCRIPTS ACQUISITION: Cigna and Express Scripts announced that they have entered into a definitive agreement whereby Cigna will acquire Express Scripts in a cash and stock transaction valued at approximately $67B, including Cigna’s assumption of approximately $15B in Express Scripts debt. The merger consideration will consist of $48.75 in cash and 0.2434 shares of stock of the combined company per Express Scripts share. Upon closing of the transaction, Cigna shareholders will own approximately 64% of the combined company and Express Scripts shareholders will own approximately 36%. Upon closing, the combined company will be led by David Cordani as President and CEO. Tim Wentworth will assume the role of President, Express Scripts.

MEDICAID, MA DEAL LESS LIKELY: Commenting on the announcement, Piper Jaffray analyst Sarah James told investors that she does not foresee any issues with approval, even though a Cigna/Express Scripts combination would increase annual script volume to 848M, making it the third-largest pharmacy benefit manager. However, the analyst noted that she does not expect Cigna’s script volume to transition over to a combined company until 2023 when its contract with UnitedHealth’s (UNH) OptumRx ends. Nonetheless, James argued the deal makes it less likely that Cigna will buy a Medicaid or Medicare Advantage plan near-term, consistent with management’s softened language around using M&A to win long-term services and supports, or LTSS, contracts. Two names that have been seen as potential targets in the sector are Humana and WellCare.

WHAT’S NOTABLE: Some Wall Street analysts had previously seen Cigna as a potential takeover target for Amazon (AMZN) as they speculated what the next step would be for the e-commerce giant, especially following its health care venture with Berkshire Hathaway (BRK-A., BRK-B) and JPMorgan (JPM).