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Why Naysayers Are Wrong About the Cigna-Express Scripts Merger

We are reiterating our positive outlook for the combined company.

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Despite the concerns of certain pharmacy market participants and investors, we see the merger of  Cigna (CI) and  Express Scripts (ESRX) as holding several strategic positives. The market concerns were recently highlighted in a Wall Street Journal report that a well-known activist investor has accumulated a “sizable” equity stake (described as less than 5% of outstanding equity) of Cigna stock and plans to vote against the deal based on concerns related to increased competition from Amazon (AMZN), the potential for increased government intervention related to drug pricing, and the weight these issues may have on Express Scripts. We believe these specific and general market concerns are off base, and we reiterate our positive outlook for the combined company.

We believe the new entity will be a formidable force in healthcare that will be able to wield significant pricing power and leverage major scale advantages. We expect Cigna will be able to build a more powerful business through the merger and improve upon its current no-moat rating, while Express Scripts will gain a strong foundation from which to expand its services, cross-sales, and wide economic moat. Given the discount at which Express Scripts trades to our $89 stand-alone fair value estimate and Cigna’s approximate $92 offer price, we believe investors have an opportunity to acquire shares of a strong wide-moat healthcare services player at a material discount. Additionally, we are reiterating our $160 fair value estimate for Cigna.

Vishnu Lekraj does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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