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Cigna Joins the Consolidation Parade With Bid to Buy Express Scripts

In this segment of the Motley Fool Money podcast, host Chris Hill is joined by Million Dollar Portfolio's Jason Moser and Matt Argersinger, and Total Income's Ron Gross, to discuss the latest big news in the healthcare business -- major insurer and managed healthcare player Cigna (NYSE: CI) has reached an agreement to acquire the largest U.S. pharmacy benefits manager, Express Scripts (NASDAQ: ESRX). The market may have some hesitation about the deal, but it certainly fits within the larger pattern of consolidation in the industry.

A full transcript follows the video.

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This video was recorded on March 9, 2017.

Chris Hill: Another big deal in the healthcare industry. Insurance giant Cigna is buying Express Scripts in a deal worth more than $50 billion. Express Scripts is the largest pharmacy benefits manager in the United States. Cigna shares down more than 10%, Ron. Do you look at that and think that makes sense given the size of this deal? Or do you think that's an overreaction and maybe a buying opportunity with Cigna?

Ron Gross: Certainly not surprised to see the stock down. That typically happens. The acquirer stock usually sees a hit, and the company being acquired gets a premium and the stock goes up. Perhaps 10% is a little bit of an overreaction.

But, consolidation continues in this industry. You see insurers and PBMs teaming up. Whether it's CVS and Aetna, UnitedHealth owns Optum RX. There's really only one relatively large PBM that is independent still, and that's Prime Therapeutics, a name that does not roll off the tongue, at least in my world. But, you have to consolidate in this industry to compete. And as if it wasn't hard enough to compete, you have the A-word, you have Amazon, Berkshire, and JPMorgan sticking their thumb in your eye every two seconds because they want to get in this game pretty bad as well.

Hill: Whenever I see a deal involving any business that is the largest in its category, and in this case it's Express Scripts being the largest PBM out there, my mind automatically goes to Uncle Sam. Is there any chance that this deal gets shot down for regulatory reasons? Or, do you think, given Cigna's size relative to other insurers out there, they're probably in for smooth sailing?

Gross: I think it will be looked at very closely. I've read a number of articles that are concerned that, as the number of independent PBMs goes down, the chance of prices being hiked on the consumer goes up, and that is the primary thing the Department of Justice wants to make sure does not happen. So, it's not a gimme here. They're going to look closely.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Amazon. Jason Moser owns shares of Berkshire Hathaway (B shares). Matthew Argersinger owns shares of Amazon and Berkshire Hathaway (B shares). Ron Gross owns shares of Amazon and Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Amazon and Berkshire Hathaway (B shares). The Motley Fool recommends CVS Health and UnitedHealth Group. The Motley Fool has a disclosure policy.


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