Express Scripts Acquired in Blockbuster Deal
Cigna's purchase of the pharmacy benefit manager underscores the value and critical nature of the PBM business model to the healthcare market.
On March 8, Express Scripts (ESRX) and Cigna announced that the managed-care organization will acquire the pharmacy benefit manager for approximately $52 billion in equity, or approximately $92 per share, with Cigna assuming $15 billion in debt from Express. This compares favorably with our $89 fair value estimate for Express and underscores the value and critical nature of the PBM business model to the healthcare market, in our view. 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. As the largest PBM, Express has the scale and expertise to manage drug benefit plans more efficiently than most health plan sponsors. Thus, we believe Cigna will acquire a strong wide-moat asset at a fair price. This should add significantly to the MCO’s competitive advantages over the coming years without any major dilution to its valuation. Express shareholders will also benefit greatly, since they are receiving a per-share price that is modestly above our fair value estimate and represents close to a 25% premium to the March 7 closing price.
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. Because we expect the deal to close, we are increasing our $89 fair value estimate for Express to the $92 purchase price. We may increase our $123 fair value estimate for Cigna, given that the MCO will ultimately be able to leverage the wide-moat nature of the PBM model without major dilution. We are leaving our wide moat rating for Express and no-moat rating for Cigna unchanged for now, but we plan to take a fresh look at the competitive positioning for a new Cigna-Express entity after factoring all variables into our overall analysis.
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Vishnu Lekraj does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.