- Activist investor Carl Icahn on Tuesday urged Cigna shareholders to reject the insurer's $67 billion proposed deal to acquire Express Scripts, which he said "may well rival the worst acquisitions in corporate history." His letter states it would be "a travesty to complete this deal," which is "dramatically overpaying for a highly challenged Express Scripts that is facing existential risks on several fronts."
- The investor, who owns 0.56%, or approximately $256 million in share value, of Cigna, says that competition from Amazon and the threat of the elimination of the existing pharmacy benefit manager rebate system "is a potentially massive destruction of Cigna shareholder value."
- Cigna CEO David Cordani said on a call with investors last week he is confident shareholders will approve the deal during the company's Aug. 24 shareholder vote. He pointed to the transaction's "very strong accretion profile, the exceptional free cash flow generation, and the significant strategic and financial flexibility" as reasons to support the deal.
Icahn argued that instead of acquiring Express Scripts, Cigna should engage in a multi-year partnership with the company or another PBM while regulatory and competitive risks to the PBM industry are worked out.
"Cigna has done very well on its own and there may well not be a need for PBM capabilities once the landscape changes and/or Amazon and other competitors materialize. Additionally, we would like to see Cigna use the cash portion of the Express Scripts consideration and free cash flow to aggressively repurchase its own shares. We believe this could result in a Cigna target price of over $250 in a reasonable time frame," Icahn wrote.
HHS Secretary Alex Azar has targeted PBMs this year, including potential elimination of the safe harbor for rebates and moving to a system where drug companies and PBMs negotiate fixed-price contracts.
"Such a system’s incentives, detached from these artificial list prices would likely serve patients far better, as would a system where PBMs receive no compensation from the very pharma companies they’re supposed to be negotiating against," Azar testified to the Senate HELP Committee last month.
Amazon, which recently acquired online pharmacy PillPack, is "arguably the strongest competitor in the world," and will not have trouble breaking into the drug distribution ecosystem, according to Icahn. "Express Scripts is not like Apple or other companies with brand loyalty. It is just the opposite," he said. "With lower prices, the beneficiary will be American consumer, not the owners of Express Scripts."
Icahn also argues that the loss of Express Scripts' Anthem business foreshadows future customer retention challenges. "If Express Scripts is part of Cigna, a number of customers that Express Scripts now has might well not be willing to deal with a company that is owned by one of their competitors," the investor said.
But Express Scripts touted its strong client retention during the release of its second quarter earnings on Aug. 1, boosting its expected 2019 client retention rate for the 2018 selling season from a range of 96% to 98% to a range of 97.5% to 98.5%.
In a research note Friday, Jefferies analysts suggested that Icahn's opposition to the deal "adds an interesting wrinkle, but likely too little too late." That is not stopping the investor from trying, however.
"Both the pharmaceutical rebate and mail order pharmacy businesses are facing regulatory and competitive challenges that could change both forever. Despite this, Cigna management is offering to pay an all-time high price for a company that, as a result of secular changes, is currently standing on very dangerous ground," Icahn said.