Cigna’s $67 billion acquisition of ESI: The largest transformation yet in the PBM market

On March 8, 2018, Cigna—the fourth-largest U.S. commercial health insurer—announced its acquisition of Express Scripts Holding Company (ESI), the largest independent third-party pharmacy benefit manager (PBM) in the United States. Including ESI’s debt, the deal is valued at up to $67 billion. This transaction effectively signals the near disappearance of large, fully independent third-party PBMs in the U.S., confirming Latitude Health’s earlier assessment of the U.S. PBM market: “Fully independent third-party PBMs may struggle to sustain long-term growth; instead, PBMs controlled by—or partially owned by—payers will become the dominant market participants” (see Latitude Health’s December 2017 research report, “Opportunities in Ancillary Services Amid the End of the Payment Reform Dividend”). Following Aetna’s (the third-largest U.S. insurer) and CVS Health’s (the second-largest independent PBM) merger announcement in 2017, market speculation had been mounting about a potential sale of ESI. Key challenges facing the PBM industry include payers’ eroding trust in independent third-party PBMs—for instance, Anthem (the second-largest U.S. commercial insurer) chose not to renew its contract with ESI, the largest independent PBM; similarly, Aetna (the third-largest commercial insurer) explicitly stated that third-party PBM services have proven ineffective in helping it control drug costs. In 2016, thirty (now forty) major U.S. corporations formed the Health Transformation Alliance (HTA), a self-insured employer coalition. Although HTA still partners with PBMs—including CVS and OptumRx—it mandates full price and process transparency, joint formulary development, and comprehensive audit rights for every transaction, aiming to reduce their own pharmaceutical expenditures. Payer-driven shifts like these have placed immense pressure on the PBM industry, ultimately triggering profound structural change. In 2016, ESI reported total revenue of $100.2 billion, a 2% decline year-on-year. Of this, $96.5 billion came from PBM operations, with the remainder derived from other services such as research and analytics, and patient assistance programs. Within ESI’s 2016 PBM revenue, $5.14 billion—51% of total revenue—came from retail pharmacy dispensing. However, this segment has been in continuous decline since 2014: down 3% in 2015, 9% in 2016, and 5% in the first three quarters of 2017.

Data Snapshot: Hong Kong & U.S. Markets | Super Earnings Week Arrives—Which U.S. Stocks Are Most Likely to Beat Expectations?

• Historically, the stock has exceeded earnings expectations at least 80% of the time upon earnings release; • Average same-day stock price gain of at least 1% following earnings announcements. Key Highlights • Among companies reporting earnings this week, software firm ServiceNow (NOW) ranks first for highest average same-day stock price gain—3.3%. It will report earnings on October 26 (U.S. Eastern Time), having beaten earnings expectations 88% of the time historically. • Tech giant Apple (AAPL) is also on the list, reporting earnings on October 27 (U.S. Eastern Time). According to Bespoke Investment Group, Apple has exceeded earnings expectations 89% of the time, with an average same-day stock price gain of 1.2%. JPMorgan recently reiterated its “Overweight” rating on Apple shares, noting that investor attention remains sharply focused on the iPhone—even after recent reports of possible production cuts impacted its stock price. Analyst Samik Chatterjee wrote in a report last Friday: “In a year where investor sentiment shifted dramatically—from bearish (e.g., expecting revenue declines) to bullish (e.g., anticipating modest revenue growth)—every growth catalyst matters.” The bank highlighted Apple’s new smartwatch category as a key growth area: “Here, we are assessing the near- and long-term growth opportunities arising from Apple’s recent entry into the premium smartwatch segment; currently, Apple appears to have significant room for further premium pricing.” • Financial services company Mastercard (MA) is also on the list, reporting earnings on October 27. It has beaten earnings expectations 94% of the time, with an average same-day stock price gain of 2%. • Bespoke Investment Group data also shows Teledyne (TDY) has consistently beaten earnings expectations—and posted an average same-day stock price gain of 2%. It will report earnings on October 26. • Other stocks on the list include: Grand Canyon Education (LOPE), Monolithic Power Systems (MPWR), Manhattan Associates (MANH), Element Solutions (ESI), Wolfspeed (WOLF), F5 Networks (FFIV), Amphenol (APH), Costar Group (CSGP), Costamare (CMRE), Reliance Steel & Aluminum (RS), Silicon Laboratories (SLAB), S&P Global (SPGI), SPS Commerce (SPSC), Deckers Outdoor (DECK), John Bean Technologies (JBT), Valero Energy (VLO), Polaris (PII), and Booz Allen Hamilton (BAH).

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