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Morningstar | Department of Justice Approves Cigna-Express Deal; Merger Will Create a Powerful New Entity

Despite significant efforts by some pharmacy market participants and investors to scuttle the deal, the U.S. Department of Justice recently approved Cigna's merger with Express Scripts with very little pushback. This development falls in line with our expectations, as we have factored in a 100% chance of DOJ approval for the deal into our analysis for both firms. Thus, we are maintaining our $160 and $92 fair value estimates for Cigna and Express, respectively. Additionally, we are maintaining our no-moat and wide moat ratings for both the managed-care organization and pharmacy benefit manager, respectively. However, we plan to update our fair value and moat rating for Cigna after we fully incorporate our outlook for the combined entity. We expect the deal to officially close by the end of the year, with a full integration in 2019.

From our perspective, the new firm will be one of the strongest in the U.S. healthcare market, as the combination of Cigna’s sizable MCO and Express’ wide-moat PBM will form a powerful business. Operationally, the new entity will be a formidable force that will be able to wield significant pricing power and leverage top-tier scale advantages. We believe Cigna now has an opportunity to build a more powerful business by integrating Express’ wide-moat PBM operations with its solid MCO business. From our perspective, the new combined firm will possess a strong foundation that will expand the services, increase cross-sales, and ultimately enhance the competitive positioning for both firms. The more holistic insurance options the new healthcare-services company will be able to offer its clients will give it more flexibility when selling to prospects and we anticipate will help in winning new business. Additionally, the new conglomerate will also be able to leverage both businesses into better input pricing for pharmaceuticals and medical services--allowing it solid plan pricing and a lower overall cost structure per member.