Tuesday, March 27, 2018

Five Takeaways About Cigna's Strategy for Express Scripts

Almost three weeks ago, the health insurer Cigna announced that it would acquire the pharmacy benefit manager (PBM) Express Scripts. Click here to read my initial analysis of the deal.

Wall Street remains unimpressed. Ever since the transaction was announced, Cigna’s stock price has dropped by 16%. Meanwhile, Express Scripts’ stock is trading more than 20% below Cigna’s offer price, suggesting that many believe the deal won’t be completed.

To soothe rattled investors, Cigna last week filed an intriguing SEC Form 425. It contains 31 questions that you may or may not have been asking yourself about its acquisition of Express Scripts, along with Cigna’s answers.

Below, I highlight my five key insights from Cigna’s responses to its own questions. I support each of these five takeaways by quoting relevant material from the company’s answers to the questions it poses in the document. Riddle me this: When is it easier to interview yourself instead of dealing with skeptical investors?

THE Q&A

As always, I encourage you to read the original source material—Cigna’s SEC Form 425—for yourself. It’s well worth your time—and only 16 pages.

The Q&A addresses a range of topics, including: (1) how the deal compares with the CVS-Aetna transaction, (2) why Cigna chose to do the deal now, (3) the potential impact of Amazon, and more.

Here are our five highlights of Cigna’s go-forward strategy with Express Scripts:

1. Cigna projects significant synergies that will allow both it and Express Scripts to expand their respective businesses.

This theme persists throughout the Q&A. Here are some of the items that Cigna notes in its response to question 16:
  • "Cigna and Express Scripts have very few employer customer overlaps (approximately 30%).There is a substantial cross-selling opportunity for each of our products and services in this area.
  • Express Scripts also services health plans and government entities. Cigna's capabilities to partner effectively with health plans and other payors in a deep services strategy will be greatly expanded.
  • Cigna currently operates a well-performing Seniors business, which is highly reliant on pharmacy services. Express Scripts' leading capabilities will drive lower drug costs for this population.
  • Greenfield opportunities exist in key geographies where neither Express Scripts nor Cigna have significant health plan relationships.
  • Cigna operates most competitively in its targeted "Go Deeper" geographies. By leveraging Express Scripts' stand-alone services capabilities, Cigna will be able to quickly expand and compete outside of its "Go Deeper" geographies.
  • By leveraging Express Scripts' pharmacy management services, Cigna will be able to more deeply drive value based models with healthcare providers and pharmaceutical manufacturers, thereby creating additional value for the combined company's customers, clients and partners, and as a result, shareholders."
Also see question 4, which outlines Cigna’s plan for revenue growth of 6% to 8%, and question 30, which summarizes the $600 million in “administrative synergies” that it hopes to achieve.

Question 7 further details Cigna’s belief that Express Scripts will enhance Cigna’s Medicare Advantage and Part D plan offerings.

2. Cigna plans to use Express Scripts as the foundation for a new health care services business.

Per Question 5:
“We expect to establish an integrated health services platform that combines Express Scripts' leading pharmacy management capabilities and Cigna's suite of health services (e.g., consumer engagement support, population health management and behavioral services). This health services offering will focus on the care of the whole person in order to optimize health instead of focusing on sick care or high intervention-based treatments.

This health services offering may be sold as part of Cigna's integrated medical offering to employers or on a standalone basis to employers, health plans and government entities.”
Hmmm, sounds a lot like UnitedHealth’s Optum business unit.

3. Cigna expects Express Scripts’ health plan clients to stay.

Express Scripts has a significant health plan customer base, so the combined Cigna-ESI must retain the business of the insurers that compete with Cigna.

Cigna dismisses any concerns about customer losses with its responses to questions 8, 9 and 10. Cigna asserts that health plans will stay because of the “great value” of the combination. Here’s a portion of its response to question 8:
“We will be pleased to, and see great value in, continuing to serve and drive value for each of Express Scripts' health plan clients through an integrated services platform that will be separate, distinct and firewalled off from the medical platform. After the closing, the integrated services platform of the combined company will continue to service other health plans, including Cigna.”
In its response to question 10, Cigna writes:
“We are confident that the combined company's integrated services platform will drive differentiated value for customers, clients and health plans through enhanced affordability of solutions that are delivered in a highly personalized fashion.…We understand the initial feedback Express Scripts has received from clients has been very encouraging.”
Cigna reiterates these points in its response to question 25, adding:
“Today, Express Scripts serves regional health plans that need key services (including pharmacy, medical utilization management, behavioral, dental and population health) that the combined company will offer in the integrated services platform we are creating. Express Scripts has already shown sustained momentum in their health plan clients adopting pharmacy, specialty and eviCore services, as well as integrated services like SafeguardRx and other tools.”
4. Cigna sees sunny skies ahead for Express Scripts’ margins.

The PBM industry continues to face political and customer scrutiny over its business models. There is also the looming threat of Amazon, which may or may not disrupt the industry.

In question 11, Cigna tries to dismiss concerns about the “long-term sustainability of Express Scripts' margins,” writing in part:
“Express Scripts has a long history of maintaining and improving margins in tough competitive environments. It is clear to us that their shared savings model, focused on client alignment, enables them to outperform the market.…The combined company would welcome the opportunity to work with Amazon or other new market entrants that are interested in improving health care.”
5. Cigna does not plan to alter its relationship with OptumRx.

In Cigna-Express Scripts: Vertical Integration and PBMs’ Medical-Pharmacy Future, I highlight Cigna’s complex relationship with UnitedHealth’s OptumRx business. As far as I know, this relationship extends to 2023, though Cigna has indicated that it has “significant structural flexibility” with the relationship.

In its response to question 24, Cigna states that it has “been pleased” with its OptumRx relationship and does not anticipate any sudden changes. It writes:
“The focus of our combination with Express Scripts does not lie in swapping out Optum's defined services for those of Express Scripts.…The best interest of our customers, clients and partners, and as a result, our shareholders, will guide how we manage our relationship with Optum and ensuring that we do not create unnecessary disruption for any of them.”
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If I skipped your favorite Q&A, feel free post a comment below!

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