Integrating medical care and pharmacy benefits under one roof, Express Scripts Holding Company (ESRX – Free Report) recently announced that it is getting acquired by Cigna Corporation (CI – Free Report) , a global health insurance company. The acquisition is expected to be completed by Dec 31, 2018. Post the acquisition, the combined company will invest $200 million in its charitable foundation to support the communities in which it operates.
Per the definitive agreement, Cigna will take over Express Scripts in a cash and stock transaction worth $67 billion. Notably, this includes Cigna’s assumption of approximately $15 billion debt of Express Scripts. Express Scripts is the largest pharmacy benefits manager.
Express Scripts sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. Express Scripts’ stock has outperformed the industry in the past year. Specifically, the company’s shares have gained 19.7% compared with the industry’s rally of 13.8%.
Under the terms of the deal, Cigna will pay $48.75 in cash and 0.2434 shares of stock of the newly combined company. Upon closure, Express Scripts’ shareholders will own approximately 36% of the combined company.
The transaction will result in total cost synergies of $650 million and double-digit accretion to earnings in the first year after closure. As a result, Cigna expects the deal to increase earnings per share from $18 to $20-$21 in 2021. The latest acquisition has been undertaken solely to enhance customer base and improve ‘Patient-Provider Alignment’.
U.S. Healthcare Leads the M&A Game
Mergers and acquisitions (M&A) have been the key driver of the U.S. healthcare space, lately. Glancing through the major acquisitions of the recent past, Becton, Dickinson and Company’s (BDX – Free Report) acquisition of C. R. Bard, and JOHNSON & JOHNSON’s buyout of Actelion deserve a mention.
In fact, health insurers are trying to consolidate with pharmacy benefits managers to streamline and cut costs in the drug supply chain. Notably, the latest buyout of Express Scripts comes just three months after a drug chain and a pharmacy giant CVS Health Corp (CVS – Free Report) agreed to take over the nation’s third-largest health insurer Aetna.
Coming to the post-acquisition impacts, we believe that the latest development will pose a big threat to UnitedHealth Group Incorporated (UNH), the largest U.S. health insurer, with its own pharmacy benefits unit, and CVS Health after it completes the merger with Aetna.
The move is also expected to nullify threats from Amazon.com Inc., which is making huge expansion in the world of pharmacy business. Recently, the e-commerce giant announced a joint venture with JPMorgan Chase & Co. and Warren Buffett’s Berkshire Hathaway to curb medical costs for their employees.
What are the Moody’s Ratings for Express Scripts?
Moody’s Investors Service, the rating services arm of Moody’s Corporation, placed the Baa2 senior unsecured long-term ratings to Express Scripts. Notably, obligations rated Baa are subject to moderate-credit risk. However, the latest rating has been kept under review with a tag of ‘direction uncertain’ by Moody’s.
Moody’s has not rated Express Scripts with high-credit risk because of its solid position as a leading pharmacy benefit manager, moderate leverage and strong cash flow.
However, Moody’s is worried about Express Scripts’ high customer concentration and pricing pressure. Further, the company’s ongoing dispute with Anthem, Inc — its largest customer — is a concern.
Per Moody’s, Express Scripts experienced declining script volume and higher-than-typical customer losses. Other challenges include fewer generic drug introductions, softening mail order growth trends, client focus on cost savings and transparency.
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March 12, 2018