Cigna's Cure Risks Dangerous Side Effects

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Major deals ( in the health-caresupply chain may be better news for sellers than for buyers.

Health-insurance giant Cigna(CI) announced Thursday morning that it plans to buy the pharmacy-benefit manager ExpressScripts(ESRX.NaE) Holding for about $54 billion in cash and stock. Cigna shares dove sharply Thursday morning, and for goodreason.

Granted, Cigna's options were limited. Nearly all of its major competitors--Anthem, Aetna(AET) and UnitedHealthGroup(UNH)--soon will have their own prescription-drug middlemen in-house. The possible threat of new competitiveentrants like Amazon means that companies like Cigna face an urgency to bulk up. Cigna says the transaction will resultin significant earnings-per-share growth in the first full year after the deal closes.

Including $15 billion in assumed debt, Cigna is paying about nine times trailing earnings before interest, taxes,depreciation and amortization for the company, a fairly sober price given the frenzied deal environment. Still, Cigna'spurchase comes with plenty of baggage. For one thing, the announcement comes less than 24 hours after Food and DrugAdministration commissioner Scott Gottlieb criticized excessive consolidation ( in the prescription-drug supply chain in a speech before a health-insurancetrade group.

"Too often, we see situations where consolidated firms--the PBMs, the distributors and the drugstores--team up withpayors. They use their individual market power to effectively split some of the monopoly rents with large manufacturersand other intermediaries rather than passing on the savings garnered from competition to patients and employers," Dr.Gottlieb said.

The fundamental premise of Express Scripts'(ESRX.NaE) business--that they save the health-care system money by leveraging buyingpower to keep drug prices low--is questionable. Anthem, Express Scripts'(ESRX.NaE) largest client, sued the PBM in 2016, allegingthat it overcharged the insurer for prescription drugs. Anthem won't be renewing its contract when it expires at the endof next year. Since much of the industry operates on long-term contracts, the fallout from the spat with Anthem couldresult in additional lost clients over time. Tying up with Cigna, a competing insurer, may exacerbate that risk.

As such, it is likely that the PBM business has already seen its best days. In that scenario, Cigna has increased itsvulnerability to industry changes rather than reduced it.

Write to Charley Grant at ( )

-Charley Grant; 415-439-6400;