The largest public company to ever call St. Louis home is being sold to Cigna in a $67 billion deal that will further strengthen the nation’s insurance giants’ grip on the pharmaceutical benefits industry.
Express Scripts, one of the nation’s largest pharmacy benefit managers, long prided itself on remaining an independent firm, managing prescription drug benefits for more than 83 million Americans.
Since its founding in 1986, the company has transformed itself from relatively unknown to a behemoth in the health care industry with $100 billion in annual revenue.
However, the company has succumbed to various industry pressures including a potential threat from Amazon and consolidation in the industry. The deal comes on the heels of rival CVS’ bid to take over Aetna.
Express Scripts employs 4,687 people in the region and 26,600 worldwide. Its headquarters has been on the campus of the University of Missouri-St. Louis since 2007 and executives at both companies stressed a commitment to St. Louis operations.
“St. Louisans should know that we in St. Louis are going to be the epicenter … for continuing transformation in health care,” Express Scripts’ CEO Tim Wentworth told the Post-Dispatch.
The Express Scripts unit will remain based in St. Louis County but the combined company’s headquarters will be in Bloomfield, Conn. The combined company’s name will be Cigna.
The firms did not disclose a breakup fee should the deal, which includes the assumption of $15 billion in debt, unravel.
The agreement reached by the boards of both companies amounts to $48.75 in cash and 0.2434 shares of stock of the combined company per Express Scripts share. When it closes, Cigna shareholders will own about 64 percent of the combined company and Express Scripts shareholders will own 36 percent. The consideration represents an approximately 31 percent premium to Express Scripts’ closing price of $73.42 Wednesday.
Following the sale’s announcement Thursday, Express Scripts’ stock rose more than 8 percent Thursday, closing at $79.72 a share.
The companies said the combination will save $600 million due to administrative efficiencies: They can cut costs as they better coordinate pharmacy and medical claims. It could also increase their leverage in price negotiations with drugmakers. Analysts say it will eventually provide Cigna an opportunity to attract more clients by having a pharmacy benefit manager in-house.
In an interview on CNBC Thursday morning, Cigna president and CEO David Cordani said he planed to travel to St. Louis Thursday to talk to regional leaders about the deal. “We will make a significant commitment to that community,” Cordani said, adding that in other markets where Cigna made acquisitions, including Denver and Nashville, Tenn., the local workforce grew.
The acquisition is slated to finalize by the end of the year and must be approved by Cigna and Express Scripts shareholders. It will likely face regulatory scrutiny as insurers will control the majority of pharmacy claims.
“The world of what it means to be an insurer will mean more than paying for the medical benefit,” said Craig Garthwaite, a health economist and professor at Northwestern University.
“Cigna’s acquisition of Express Scripts brings together two complementary customer-centric services companies, well-positioned to drive greater quality and affordability for customers,” Cordani said in a statement.
When the deal finalizes, Cordani will lead the combined company as president and Wentworth will assume the role of president of Express Scripts.
Cigna’s board will be expanded to 13 directors, including four independent members of the Express Scripts board, according to the announcement.
The Wall Street Journal first reported the sale was imminent late Wednesday.
Pharmacy benefit managers such as Express Scripts serve as middlemen that help negotiate discounts with drugmakers. Express Scripts is the largest stand-alone PBM, competing against CVS and UnitedHealthcare’s OptumRx.
In recent years, Express Scripts has faced more scrutiny over its role in drug pricing and whether it has contributed to the rising cost of prescription drugs through the tools it uses to lower prices, mainly through rebates.
On Wednesday, one day before the deal was confirmed, Scott Gottlieb, the commissioner of the Food and Drug administration, called out those in the drug supply chain:
“Too often, we see situations where consolidated firms — the PBMs, the distributors and the drugstores — team up with payors,” Gottlieb said. “They use their individual market power to effectively split some of the monopoly rents with large manufacturers and other intermediaries rather than passing on the saving garnered from competition to patients and employers.”
This deal now raises questions about the long-term viability of the stand-alone PBM business model as more companies like Express Scripts partner with insurance companies.
Just a few months ago, drugstore giant CVS said it had agreed to buy Aetna, one of the nation’s largest health insurers, for $69 billion. In addition to its 9,700 retail locations, CVS operates as a pharmacy benefit manager.
Regulators may look closely at the deal given other recent mergers that tie up PBMs with other insurance giants, according to Tim Greaney, law professor at the University of California-Hastings and former antitrust lawyer for the Department of Justice.
“At the end of the day if both go through, you’ll have essentially three large insurance companies controlling the vast amount of PBM services,” Greaney said.
One concern is that the insurance market is already very highly concentrated, Greaney said, and this would put smaller insurance companies in a bind. “To the extent they need to provide and have access to PBM services, the only place to go to is one of their rivals and, that in turn, creates some foreclosure effects on insurance, people will turn to those who are fully integrated.”
However, Greaney said there is some evidence to show that there are some cost savings when health insurers and PBMs are under one roof.
Jason Turner, associate professor at University of Cincinnati’s College of Medicine and a former financial analyst with Cigna, said he’s not convinced the cost-saving will trickle down to clients and consumers. “The other (efficiency) has to do with the actual drug prices because you now no longer have two entities trying to take out profit margin,” Turner said.
After Anthem’s deal to take over Cigna failed, the company had said it would be on the lookout for potential acquisition targets. In 2016, the federal government sued to block the combinations of both Anthem-Cigna and Aetna-Humana. The two blockbuster deals both ended up unraveling.
One reason said to be fueling the tie-up between CVS and Aetna is a threat from Amazon and whether it will enter the pharmaceutical space. The St. Louis Post-Dispatch first reported that Amazon had gained approval from pharmaceutical boards in multiple states to become a wholesale drug distributor.
Leerink Partners analyst Ana Gupte said the deal may surprise investors given Cigna has said that it is satisfied with its PBM arrangement with UnitedHealth’s OptumRx unit.
“It is possible that the threat of an Amazon entry into the health care and possibly the drug supply chain landscape, with the latest news of the Amazon/Berkshire Hathaway/JPMorgan employer coalition, has spurred Cigna and Express Scripts to tie the knot.”
Amazon, Berkshire Hathaway Inc. and JPMorgan Chase & Co. said in January they would form a company to cut health costs for hundreds of thousands of their employees.
Cigna expects 2021 earnings of $20 to $21 per share, up from a previous target of $18 per share, due to the Express Scripts deal.