- About 90% of Cigna shareholders voted to approve the payer's acquisition of Express Scripts on Friday morning, according to preliminary results. The $67 billion deal includes about $15 billion in Express Scripts debt.
- The buyout is still subject to a number of regulatory approvals before it can close by Cigna's timeline of the end of the year. Last spring, The Department of Justice asked Cigna and Express Scripts for more information on the pending agreement.
- About 78% of Express Scripts shareholders voted to approve the acquisition on Friday, as well. The deal still requires antitrust clearance from the DOJ, expected to happen later this year.
The overwhelming rate of approval by Cigna shareholders isn't particularly surprising after activist investor Carl Icahn dropped his opposition to the deal when he found other investors didn't support his strongly-worded objections.
In addition to remaining headquartered in St. Louis under its own name, Express Scripts will have four of its board members placed on the combined company's 13-person board. CEO Tim Wentworth will serve as president of the Express Scripts division and will report to the CEO of the combined company. In a statement made earlier this year, Wentworth said "the two companies will, together, be uniquely positioned to do even more to improve healthcare, expand choice and lower costs."
On its first quarter earnings call with investors earlier this year, Cigna executives said they expect the deal to result in earnings per share increasing from $18 to $20-21 by 2021 and a long-term annual growth rate of 6% to 8%. Cigna shareholders will own about 64% of the combined company and Express Scripts shareholders will own about 36%.
In a press release announcing the shareholder decision, Cigna President David Cordani touted the potential value and reach of the combined company. "Our combined company will enhance Cigna's differentiated service-based model, fueled by actionable insights and analytics, to drive innovation and meaningful growth in a highly dynamic market environment," Cordani said.
The approval of the deal throws more fuel on the healthcare M&A fire, which began in full after several horizontal mergers in the industry were nixed.
One of those horizontal M&As, Cigna's effort to merge with Anthem, fell through following a challenge from DOJ. Anthem had been one of Express Scripts' biggest clients, but last fall the payer said it would not renew its contract with the PBM and will instead launch its own, called IngenioRx, in 2020. Both Anthem and its new PBM and the combined Cigna-Express Scripts company will compete with CVS Health-Aetna, a still pending major M&A that won shareholder approval earlier this year and will apparently go unchallenged by DOJ, despite concerns from Congress.
CVS-Aetna has also been challenged by industry stakeholders. Earlier this month, the American Medical Association released a report saying the merger would reduce competition across markets and ultimately hurt patients. California Insurance Commissioner Dave Jones recommended the DOJ block the CVS-Aetna merger on similar grounds. "A merger of this size and type, according to experts on health insurer and healthcare mergers, will likely lead to increased prices and decreased quality," Jones said.
Cigna-Express Scripts might expect similar backlash from the industry. Cigna already faced off with Icahn, who, in a late-game attempt to stymie the merger, warned fellow shareholders in an early-August open letter that the deal was among the "worst acquisitions in corporate history."
Jefferies analysts correctly predicted that Icahn's attempt was "an interesting wrinkle" in the development of the merger, but "too little too late." Icahn backed down last week after major shareholder advisory firms Institutional Shareholder Services Inc. and Glass Lewis & Co. came out in support of the deal.
But that doesn't mean Icahn's concerns — HHS' PBM crackdown and Amazon's market entrance chief among them — are unfounded. While PBMs argue they play a vital role in helping mediate drug costs by haggling with pharmaceutical companies on price, others in the industry see them as unnecessary middlemen who jack up drug prices and pocket the excess cash. The Trump administration has shown interest in stifling the rebates PBMs extract from the industry and overhauling the safe harbor protections that protect PBMs from anti-kickback lawsuits.
A recent Moody's report opined that mergers between health insurers like Cigna and PBMs like Express Scripts are credit negative in the short-term because of increased debt and risk associated with integration. However, in the long run, Moody's said, these deals may ultimately lower costs.
As of now, neither Cigna nor Express Scripts have seen their bottom lines impacted by the potential threat posed by market influences or policy implications. Express Scripts reported consolidated net income of $877.3 million in the second quarter of 2018, a 9.4% increase year over year. Cigna reported $11.5 billion in total revenue in the second quarter of 2018, a year-over-year increase of 10%.
According to a recent PwC report, healthcare M&A activity should continue roiling, with more vertical megadeals like Cigna-Express Scripts and CVS-Aetna to be expected.