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Why Bernstein is Skeptical Of Cigna's Move to Buy Express Scripts

Shanthi Rexaline

Health insurer CIGNA Corporation (NYSE: CI) announced a deal March 8 to buy Express Scripts Holding Company (NASDAQ: ESRX) for $67 billion.

The Analyst

Bernstein analyst Lance Wilkes initiated coverage of Cigna with a Market Perform rating and $194 price target, suggesting 13-percent upside from current levels.

The Thesis

The Express Scripts deal is a bet that change comes more slowly to health care and that financial returns from the deal will fund future M&A for Cigna, Wilkes said in a Monday note.

"We believe disruption is coming more quickly (in PBM/pharmacy and in the shift to value) and are skeptical of this move by CI," the analyst said.

Bernstein Cigna's earnings growth to slow due to its employer focus, lack of scale and margins that are already best-in-class. The Bloomfield, Connecticut-based company derives a significant portion of its earnings from its pharmacy benefit manager segment, which presents a risk due to slowing growth, Wilkes said. 

Express Script's outlook isn't rosy either due to its shrinking addressable market and gross margin pressure, the analyst said.

Berstein expects the PBM's gross margins to decline due to the loss of the high-margin Anthem Inc (NYSE: ANTM) business, managed care organizations PBMs cross-selling to high-margin middle-market employers and client pricing pressure.

The combined company will be 50 percent PBM and 50 percent MCO on an earnings basis, Wilkes said, projecting that the company will re-rate to a lower multiple.

The Price Action

Cigna shares were up about 28 percent over the past year up until the day before the announcement of the Express Scripts deal.

Since the deal announcement, the stock has shed about 14 percent.

Cigna shares were down 1.53 percent at the time of publication Tuesday. 

Related Links:

CVS: An Interesting Trade On The Cigna-Express Scripts Deal

A CURE For The Typical Healthcare Trade

Latest Ratings for CI

Date Firm Action From To
Mar 2018 Bernstein Initiates Coverage On Market Perform
Mar 2018 Credit Suisse Maintains Outperform Outperform
Mar 2018 Barclays Initiates Coverage On Overweight

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