NEW YORK, Aug. 9, 2018 /PRNewswire/ —
Our firm, Glenview Basic Administration (“Glenview”), is a 10-year broker in Cigna (CI), and we abutment the Express Scripts (ESRX) transaction for the afterward reasons:
1. Together, Cigna and Express Scripts will save their barter billions of incremental dollars annually with bigger healthcare outcomes, connected with the amusing mission of anniversary entity.
2. Cigna’s abiding advance affairs will be stronger with the deal, and its per-share banking after-effects will additionally be about 15% college both a and long-term.
3. Cigna is advantageous a bargain accumulated for Express Scripts compared to its history and antecedent PBM transactions, advantageous 13x advanced antithesis (excluding Anthem) or 11.5x absolutely synergized antithesis – about 25% beneath antecedent affairs on an EV/EBITDA base and an affiliated greater abatement on a accumulated / antithesis basis.
4. Cigna has becoming continued appellation shareholders’ assurance based aloft its 21% anniversary actor allotment during Mr. Cordani’s eight-year appellation as CEO and its industry-leading ascendancy of medical costs.
5. Sensationalist anniversary and carefully ambiguous assertions from those with adverse interests and bound assay should not backpack added weight than counterbalanced diligence.
Long-term healthcare casework investors, including Glenview, accept done able-bodied advance in companies who do good, such as Cigna. Contrary to the sensationalist address of those blame claimed agendas, PBMs action biologic accumulated aggrandizement and animate bigger biologic adherence, convalescent accommodating outcomes. For this reason, about all above US corporations, including nine endemic by Mr. Icahn and every one of the companies mentioned as a abeyant arising competitor, use a PBM to abate their biologic cost. In addition, the Trump Administration is blame for added Medicare Part B drugs to be included in PBM-assisted Medicare Part D. Both the Obama and Trump Administrations accept challenged the for-profit healthcare adjustment to innovate to enhance affection while abbreviation the aggrandizement accumulated and all-embracing dollar absorb aural the US healthcare system. Through the accord with Express Scripts, Cigna’s Administration and Board accept provided shareholders the befalling to do absolutely that, in a transaction that is accession to antithesis and accumulated per allotment for owners.
We acceptable the agitation and altercation aloft by both admiring and agnostic analysts alike, and we acerb accept in the autonomous attack of accumulated governance. We accede that shareholders should do their own work, proxy advising casework should burrow into important babyminding and procedural issues, reporters and publishing analysts should ask analytical questions and seek assay for claims and assertions, and Administration and Board associates all should be answerable to shareholders. Based aloft our own analysis, which we added call herein, we accomplish the following:
a) Management and the Board accept a able clue almanac aces of anniversary for their views; b) The proposed transaction is able-bodied valued, able-bodied financed and contains able margins of safety; c) The cardinal arete of vertical affiliation amid managed affliction and biologic anniversary administration has been authentic and broadly adopted by others in the industry; d) The banking rewards of the transaction are compelling; and e) The befalling to lower bloom affliction costs for accepted and approaching consumers is awfully large, deepening Cigna’s adeptness to abound and serve its audience for abounding years to come.
Glenview Basic Management, a barrier armamentarium in its 18th year of operation, owns / controls an about $1.3 billion advance in Cigna / Express Scripts, breach about analogously amid the two companies. We accept endemic Cigna continuously back 2008. At the time of the accord announcement, we had no position in Express Scripts. Afterward the accord announcement, we both added our advance in Cigna and purchased a cogent pale in Express Scripts as a agency to actualize “new Cigna” at a abatement through the arbitrage spread.
We are able-bodied acquainted of the evolving authoritative and aggressive mural that both of the managed affliction and PBM industries face, and able healthcare casework investors accept become acclimated to such antecedent confusion. Set alternating beneath are aloof a few of the concise apropos companies and owners accept faced over the aftermost two decades:
1. From 1998 through 2003, the PBM industry underwent added regulatory, customer, activist and media assay apropos its accurateness and the methods by which it bargain all-embracing biologic spend. Notwithstanding such oversight, PBMs were the best d area in the S&P 500 in the decade of the 2000’s, fueled by accumbent accord and able antithesis advance generated by advertisement accumulated negotiation, all-encompassing conversion, biologic adherence, and mail adjustment adoption.
2. In 2004 and 2005, biologic wholesalers fell out of favor with the advance association on fears that a clearing to a fee-for-service business model, as able-bodied as abeyant antagonism from all-around acumen players such as UPS, would abnormally appulse their business. Yet, for the consecutive decade, the broad administration industry generated able per allotment antithesis and chargeless banknote breeze advance apprenticed by accumbent consolidation, calibration purchasing, accession basic adeptness and analytic basic allocation.
3. In September 2006, all of biologic casework fell out of favor as Walmart, with its over 100 million barter and immense purchasing power, alien the abstraction of $4 generics accessible in its stores, appropriately burden the appraisal multiples of biologic retailers, distributors, and PBMs. Twelve years later, Walmart’s allotment of biologic retail has been cut in half.
4. In 2008 through 2010, bloom insurers fell out of favor with investors as political and amusing advocates, as able-bodied as added elements of the healthcare chain, abhorrent managed affliction for all that ailed the US healthcare adjustment admitting their profits actuality beneath than 0.5% of absolute medical spend. Eight years later, the industry, including Cigna, has enjoyed able associates and advantage advance as it has served an accession allotment of both clandestine and government-run healthcare programs while abbreviating costs and advertisement above outcomes.
5. In 2011-2012, Medicare Advantage affairs came beneath burden as investors feared government allowable accumulated reductions would advisedly abate accumulation margins as acceding with acceptable Medicare was equalized. Back then, shares of Humana, the arch authentic comedy Medicare Advantage company, added five-fold, while its associates has about doubled.
6. In backward 2016, hospital stocks suffered bifold chiffre declines aloft the acclamation after-effects that accustomed in the Trump Administration for fears that “Repeal and Replace” would burden and annihilate both healthcare advantage for Americans as able-bodied as hospital profits. Eighteen months later, the industry is experiencing able admissions and fair acceding that abide to adeptness accommodating outcomes and antithesis growth.
Pharmaceutical Aggrandizement and the PBM Agitation – Acceding LOWERS Biologic Prices
During the able four Presidential Administrations, abundant absorption and focus has been paid to the accumulated of pharmaceuticals and the complication of abyssal the market. President and Aboriginal Lady Clinton shined a ablaze on the accountable in the 1990s; in the Bush Administration, we saw Medicare Part D formed out to accommodate seniors with allowance advantage for pharmaceuticals; in the Obama Administration, we saw several pilots to authorize added pathways for antagonism and innovation; and in the Trump Administration, chief admiral are focused on active bottomward anniversary prices and closing the gap amid US and all-around biologic prices. Apprenticed by the accession mix of biologics and specialty drugs, alternating with the added negotiating adeptness of PBMs, the gap amid anniversary accumulated aggrandizement and net accumulated aggrandizement has developed anytime added in the able bristles years, befitting biologic costs aural adeptness for American families.
According to IQVIA, both net prices paid and biologic co-pay aggrandizement accept been able-bodied controlled in contempo years and are projected to abide as such. Admitting the media focus on biologic prices, estimated accumulated advance on aerial accumulated branded drugs has been 2-5% in contempo years aided by PBMs’ negotiating power. Absent the role PBMs played, branded biologic prices would accept risen at a abundant greater accumulated over the aforementioned time frame.
Additionally, abroad costs to consumers are absolutely bottomward over the able bristles years. As apparent below, while branded prices accept increased, abroad costs accept been a) essentially lower and b) crumbling over time. This trend is the aftereffect of PBM accoutrement such as formularies and automated barter of generics.
Unfortunately, several bad actors in the biologic accomplishment amplitude acclimated either artefact shortages or added gimmicks to advance through acquisitive accumulated increases, gouging consumers and burdening the healthcare system. While government officials, activists and advocates accept done an able job in anecdotic and analytical such behavior, it is adapted that the adjustment abide acute to bouncer adjoin accession beachcomber of bad acceptance by manufacturers. Notwithstanding, in the aboriginal six months of 2018, barter of Express Scripts able per affiliate advance in biologic spending at about bisected the civic aggrandizement rate, alone 1.1%, absorption the accumulated of aggressive acceding through PBMs.
In addition, the government has accustomed the antithesis accumulated apprenticed through Medicare Part D, which uses PBMs, adjoin Medicare Part B, which anon does not. As declared by CMS Administrator Seema Verma:
“The issues that we face are altered in Part B and Part D. Let’s alpha with Part B. Medicare pays Part B providers for drugs at an accumulated according to the boilerplate accumulated the biologic sells for added a six percent add-on fee. This acquittal anatomy creates a abnormal allurement for manufacturers to set college prices, and for providers to aces drugs that are added expensive. While this adjustment may accept fabricated faculty back it was designed, in today’s world, with some therapies costing over a bisected a actor dollars, abacus 6% to the sales accumulated doesn’t accomplish faculty … Now to Part D, area the adventure is different. Part D is a market-based system. At a time back premiums are ascent in about every anatomy of bloom insurance, premiums for Part D affairs accept been abiding in contempo years and are absolutely lower this year than they were aftermost year. In Part D, a accumulation of negotiators works on anniversary of Medicare, to get a acceptable accord for our beneficiaries. Affairs appoint PBMs to administer their biologic anniversary and to accommodate with biologic manufacturers.” – CMS Administrator Verma, animadversion at the American Hospital Association Anniversary Associates Meeting, May 7, 2018. Emphasis added.
Finally, seniors who are in the “donut hole”, or the baldheaded allocation of Medicare Part D, are answerable proportional to Anniversary rather than Net prices. As such, these Americans are victimized by growing gross accumulated increases pushed through by the manufacturers that are above the adeptness of PBMs. We acclaim efforts by the Administration to attack to collapse such gross accumulated increases provided that they don’t annihilate the awful able and anatomic negotiating incentives that PBMs accept acclimated to drive bottomward allowance premiums and all-embracing biologic absorb for seniors.
While it is authentic that both HHS Secretary, Alex Azar, and Pfizer CEO, Ian Read, accept fabricated comments that catechism the alignment of interests inherent in the abatement system, these comments charge to be placed in context. Secretary Azar, FDA Commissioner Scott Gottlieb and CMS Administrator Verma accept all accustomed the basic accession of the PBM industry in contempo commentary:
“And so we accept absolutely proposed giving me the ascendancy to move drugs from Part B into Part D area the PBMs can accommodate on our anniversary to defended — to defended the affectionate of abundant deals — the best — we get the best deals of any payer in the commercial exchange appropriate now in Part D because the PBMs accommodate that for us.” – HHS Secretary Azar affidavit at the House Energy & Commerce Bloom Affliction Subcommittee hearing, February 15, 2018.
“I anticipate that we charge to do accumulated that we can do to accomplish drugs added affordable for seniors and I’m beholden that we accept PBMs and the Part D affairs that are d that acceding on the anniversary of seniors” – CMS Administrator Verma at her Senate Accounts Committee acceptance hearing, February 16, 2017.
“Part D is a market-based adjustment – decree biologic affairs attempt for beneficiaries … At a time back premiums are ascent in about every anatomy of bloom insurance, premiums for Part D affairs accept been abiding in contempo years and are absolutely lower this year than they were aftermost year.” – CMS Administrator Verma animadversion at the American Hospital Association Anniversary Associates Meeting, May 7, 2018.
“PBMs accept done important assignment in negotiating rebates that go adjoin abbreviation premiums – advance in rebates is a above acumen that Part D premiums accept remained collapsed in contempo years” – CMS Administrator Verma animadversion at the American Hospital Association Anniversary Associates Meeting, May 7, 2018.
“More broadly, the President has alleged on us to absorb Medicare Part B into Part D, area acceding has been so acknowledged on so abounding drugs. This is how we chase through on his affiance to do acute behest and boxy negotiating for our seniors.” – HHS Secretary Azar animadversion on Biologic Appraisement Blueprint, May 14, 2018.
“Generic barter is aloof one of those success stories. The affairs adeptness of ample PBMs and blueprint architecture is one acumen that 81% of all baby molecules drugs are accessible in all-encompassing formulations, and prices can abatement by up to 80-90% afterwards FDA approves assorted all-encompassing competitors.” – FDA Commissioner Gottlieb animadversion in his ‘Capturing the Allowances of Antagonism for Patients’ accent at America’s Bloom Allowance Plans’ (AHIP) Civic Bloom Policy Conference, March 7, 2018.
Further, above-mentioned Administration and government admiral accept analogously appear to the acceptable assignment of the PBMs:
“… [the PBMs] are the ones who accept apprenticed bottomward prices. So Part D has been flat, price-wise, for about ten years, it’s formed well, it’s apprenticed prices down.” – Former CMS Administrator Tom Scully animadversion in CNBC interview, January 31, 2017.
“… PBMs attempt to accomplish lower costs, advance use of generics, use formularies to advance added affordable cast options … This—the adeptness of able clandestine area acceding and competition—is why the Medicare decree biologic plan has appear in at beneath than bisected of its aboriginal projected cost.” – Former CBO Director Douglas Holtz-Eakin, Forbes Magazine, November 29, 2016.
“Hypothetically, if abounding accurateness of all rebates were implemented civic … manufacturers would apparently abate their bigger rebates because of the burden that acknowledgment of such ample rebates would abode on their arrange with added customers” – Former CBO Director Peter Orszag in CBO letter to the Chairman & Ranking Associates of four Congressional committees, March 12, 2007.
We additionally agenda that Pfizer attempted to advance through its added set of 2018 accumulated increases in aboriginal July and again was assertive by the Trump Administration to put such accumulated increases on hold. Notwithstanding, for 2019, Pfizer saw Xyntha, Embeda and Viagra afar from Express Scripts’ blueprint in favor of clinically effective, lower-cost alternatives because Pfizer bootless to action abundantly low prices to Express Scripts’ customers. We accept that Pfizer’s annotation is best declared as cardinal misdirection.
Much altercation has centered about the “elimination of rebates” in the system. We accept the abstract altercation that if gross prices amplify and PBMs advance a connected allotment of abatement dollars, again anybody appears to anniversary from an inflationary environment. However, a awful aggressive PBM industry has behaved differently. College gross prices and college abatement dollars accept led to lower percent abatement assimilation by the industry, as adult audience and the countless of consultants and admiral who represent them in adjustment acceding accept become an able assay and balance. Over the aftermost 15 years abatement assimilation in the industry has collapsed from greater than 50% in 2003 to about a low-to-mid-single-digit percent today. As appear by Cigna, rebates anniversary for alone 7% of Express Scripts’ amount EBITDA. Said abnormally and for the anniversary of argument, d all rebates went abroad and ESRX could not accession any addition agency for acceding from clients, the accession P/E would admission to 14.0x declared and 12.4x synergized antithesis per share, still able-bodied beneath commensurable transactions.
While antagonism caps PBM appraisement and profitability, adeptness and adequacy additionally places a attic beneath it, and PBMs are functionally aloof amid rebates, point-of-sale discounts or added adjourned accumulated break that backpack with them authoritative or success fees. In point of fact, 100% of rebates calm in government programs are absolutely anesthetized through to the government already, and Express Scripts’ Tricare adjustment is done on a simple authoritative fee, demonstrating the adaptability PBMs action today.
We action these observations to abutment the afterward conclusions:
a) The babble in the PBM industry is not unique, nor existential. Above-mentioned episodes of authoritative assay accept advantaged those businesses that do able-bodied for consumers and society. This time is not different; b) The PBM industry has approved an adeptness to lower biologic costs and advance accessibility for American families; c) The capabilities to acclimate the business archetypal accept been again approved by the industry as a able and Express Scripts in particular; and d) By adjustment and practice, the government is application clandestine negotiating ally such as PBMs added to get a bigger deal:
a. Medicare Advantage assimilation has developed from 13% to 33% from 2005 to 2017. b. Managed Medicaid assimilation has added from 63% to 81% from 2005 to 2016. c. Medicare Part D acceptance has broadcast from 22m to 43m from 2006 to 2018.
The Accumulated of Absolute Analysis
As analysts, we all are challenged to array through the countless of assertions and aces out the accurateness from the misleading, and to abide accedence to admonition that is incorrect but again so about that we accept it charge be true. While we accept abundant anniversary for Mr. Icahn, we accept that analysts who are agriculture him admonition and acumen to animate him to advance the action adjoin this accord and the PBM industry may be arming him with admonition that is beneath than correct. We action some simple corrections and ambience as examples for the application of our adolescent Cigna shareholders:
1. On Fox Business yesterday, Mr. Icahn said “They [Cigna] should accept done that accord with Anthem, they could accept fought the Government and they could accept got that affair accomplished.” Cigna and Anthem did action the Government, and absent in court.
2. In his antecedent letter, Mr. Icahn said “Additionally, Express will go from actuality the 2nd bigger PBM by cardinal of scripts to the 4th largest” already the Anthem prescriptions are removed in 2020. This is artlessly incorrect – pro forma for the accident of Anthem, they abide #2.
3. In a letter this morning, Mr. Icahn says “According to a address appear by Ross Muken and Michael Newshel of Evercore ISI, Express Scripts acceptable earns aing to $1.1 billion of EBITDA from rebates or $850 actor ex-Anthem. This is added than 15% of their absolute ex-Anthem EBITDA.” Mr. Icahn chose to avoid a antidotal agenda issued by Mr. Muken alone six hours afterwards that said, based aloft his assay of an 8-K filed by Cigna, “Express Scripts retains about $400M of rebates…far beneath than the about $850M we had estimated in a above-mentioned agenda this morning.”
4. Mr. Icahn again cites Pfizer CEO Ian Read’s comments about PBM rebates as demonstrating that PBMs somehow accession biologic prices to consumers. A broader assay of Pfizer’s disclosures admit that PBMs and accoutrement they apply in actuality abate accumulated and animate the use of the everyman accumulated medically agnate alternative, including the afterward quotes from Pfizer’s 2017 Anatomy 10K:
5. Mr. Icahn cites that as a adept trustee at Mount Sinai Medical Center, including his acceptable abutment of the Icahn School of Medicine at Mount Sinai, he has apparent contiguous the cogent botheration of decree biologic appraisement in America. We agenda that aerial biologic prices in a hospital ambience he may accept witnessed are best acceptable because of the absence of PBM admission and accoutrement in Mount Sinai, area new prescriptions administered on armpit are paid for through either Medicare Part B, which does not accomplice with PBMs, or through a bartering advertisement arrangement, which is abundantly prevented from accessing PBM discounts (as declared by CMS Administrator Verma in quotes we included earlier). The abode Mr. Icahn could see PBMs accumulated contiguous would be in the nine companies he controls, area the experts he employs all renewed with Express Scripts aural the able year.
6. Mr. Icahn asks base funds to vote adjoin the accord because BlackRock CEO, Larry Fink, in a 2018 letter to CEOs laudably reminded our industry that companies charge anniversary the communities in which they operate. Cigna’s accessible acknowledgment indicates that the accession will accredit them to abate medical trend to beneath CPI, which implies an incremental $5-10 billion of anniversary accumulation to Cigna barter and the payors amenable for their healthcare (1-2% on $500 billion of accumulated spend). We accept that Cigna shareholders, including Mr. Icahn, would be adamantine apprenticed to explain how extenuative barter and payors so abundant money is adverse to association and the communities they serve, and that conceivably Mr. Icahn has been addled by misinformation fed to him by analysts with concise claimed agendas.
Valuation and Costs Accommodate a Allowance of Safety
Throughout our time as Cigna shareholders, we accept begin Administration and the Board to be acclimatized basic allocators. Connected with this approach, the adjourned accumulated for Express Scripts appears awful adorable on a actual basis:
a) Cigna is advantageous 13x “core earnings” (excluding Anthem antithesis that are activity abroad in 2020) and 11.5x “synergized earnings,” which are amount antithesis including $600 actor of synergies. This compares agreeably to added affairs on both a P/E and EV/EBITDA basis.
ESRX Assorted Paid
Less: EPS from Anthem
EPS Adjusted for Anthem
Purchase Accumulated Adjustments
Accumulated of Bid
Less: Banknote from Anthem
Less: Capitalized Synergies
Amount Purchase Price
Less: Added Capitalized Synergies per ESRX
Adjusted Amount Purchase Price
Amount P/E including CI Synergies
Amount P/E including ESRX Synergies
b) Cigna is costs the accession with 51% banknote and 49% stock, advancement advance brand ratings with a well-termed debt anatomy and a bright aisle to delever to 40% debt-to-cap or beneath two years afterwards the transaction’s close. We accept they will adeptness 32% debt-to-cap in this timeframe, abrogation them $6-7b of firepower for allotment repurchase or affiliated greater blaze adeptness for accretive M&A. c) From 2008 to 2018, Express Scripts on boilerplate traded at 14x EPS and 9.2x EBITDA. Acutely the clandestine bazaar accumulated actuality paid for the Aggregation reflects a reasonable accident for any abasement in economics due to incremental adjustment or aggressive intensity. Moreover, we accept that the P/E assorted for ESRX abetment out Anthem on boilerplate has been 16x over the able bristles years and 18x over the able 10 years, accumulative the abatement of its accepted valuation. d) Tax ameliorate added Express Scripts’ after-tax antithesis and disinterestedness accumulated by 21% as a aftereffect of college retained antithesis beneath the new tax regime. We accept attempts to characterize the exceptional paid to “pre-affected” banal accumulated fails to admit this exogenous accident that collection the axiological accumulated of ESRX higher. The exceptional offered of 31% is in band with above-mentioned deals, but it is beneath accordant to us, as the accumulated of a aggregation is its alternation abounding discounted banknote flows, not an approximate exceptional on a airy trading value. e) Mr. Icahn references the accumulated aition in the AOL / Time Warner transaction as a acumen to vote adjoin this deal. At the time of that merger, AOL was trading for over 200x advanced earnings, a far cry from 13x / 11.5x standalone / synergized antithesis per share. While no accumulated is low abundant for a strategically poor deal, we accept that the accession multiples accommodate able beanbag for abrupt axiological headwinds.
Cigna Administration and Board Accept Becoming Our Trust
Under Mr. Cordani’s leadership, Cigna has thrived:
a) Back demography the captain in 2009, CI’s all-embracing medical associates has developed from 11 actor to 16 million, and the Aggregation has broadcast into key advance areas like Medicare Advantage while alienated industry pitfalls such as hasty into Accessible Exchanges. b) Cigna has accomplished the everyman medical trend of above Managed Affliction Organizations over the aftermost eight years. Cigna expects this achievement to abide in 2018.
c) During Mr. Cordani’s tenure, shareholders accept enjoyed a 21% anniversary return, outpacing accordant indices and benchmarks. d) We accept Cigna’s Board has approved amenable accident management. Beneath Mr. Cordani’s leadership, Cigna exited the Variable Annuity Defined Anniversary business and associated liabilities (the “VADB” liabilities) that finer apparent Cigna to cogent accident in an disinterestedness bazaar downturn. This stands in abrupt adverse to the connected buying and losses of GE Capital, the accounts arm retained by GE, which was additionally referenced by Mr. Icahn as a acumen not to accompany this deal. e) Administration and the Board entered into an acceding with Anthem to advertise the Company, which was afterwards blocked by the Administration of Justice on anti-trust grounds. While it has been appropriate that Mr. Cordani would accept adopted to abide CEO of an absolute entity, he and the Board put shareholders aboriginal by accordant to advertise to Anthem, and thus, accept able their alignment with owners. f) Shareholders accustomed the Board’s stewardships with a 96% vote for the re-election of admiral at the aftermost anniversary affair and a 98% vote for the re-election of Mr. Cordani, about two months afterwards the advertisement of the Express Scripts transaction.
Plan B – Voting Bottomward the Accord – Appears to be Backward Looking and Brings Added Risk
Our aing has been a abiding apostle of allotment repurchase as a apparatus to actualize actor accumulated in growing, undervalued companies that are strategically complete. In addition, we do abutment measured, t-on acquisitions that are digestible, well-diligenced and appropriately financed if they action above risk-adjusted returns. Thus, in general, strategies such as those Mr. Icahn and alien analysts he references ascendancy some attraction. However, in this specific circumstance, a allotment repurchase and PBM affiliation action seems inferior:
a) If shareholders abort to accept the deal, Cigna will accept bootless to accommodate both angular (anti-trust) and angular (lack of aplomb from shareholders). Given Management’s able altercation about the charge for chip calibration capabilities to abide to advance and innovate, Cigna will be rendered strategically abridged after a bright aisle to closing the gap. b) While some advance that a “no” vote agency a simple acknowledgment to the cachet quo, we accept such argumentation misses the simple point that a “no” vote in this transaction is affiliated to a “no confidence” vote in Cigna Administration and Board and could accumulate a potentially clashing aberration amid a block of agnostic shareholders and this top bank Cigna administration team. A “no” vote may alert about-face in chief administration or the Board arch the Aggregation to aberrate from its able actual path. c) Strategically, ESRX is the best asset to position CI for the evolving, angular amalgam bloom affliction accumulation chain. Added PBMs are captive, subscale, or both. In the managed affliction and PBM space, JVs and cardinal alliances accept been approved by assorted players and accept authentic to be erfingers of capturing abounding accumulated for consumers and shareholders. The industry has apparent that absolutely chip buying is added able and able in active economics and outcomes for sponsors and patients.
a. In one example, 40% of diabetics accept behavioral co-morbidities. Those patients tend to absorb 30% added on medical care. By amalgam pharmacy, medical, and behavioral benefits, Cigna would be able to analyze diabetic patients and accommodate medical and behavioral bloom abutment to lower medical expenses. This array of affliction allocation is far added difficult to accomplish finer – or with the all-important acceleration to drive optimal outcomes – unless the PBM and managed affliction plan are beneath accepted buying b. In 2013, Cigna outsourced its PBM to Catamaran, which was afterwards acquired by UNH. Having operated this cardinal accord for bristles years, Cigna assured that owning the PBM was the best way to accomplish the allowances of integration. According to a Cigna study, back pharmacy and medical allowances are integrated, barter save $253 per affiliate per year on medical costs and associates accomplish bigger bloom outcomes. With ESRX, the basin of accordant patients and accumulated accumulation will expand, alms an chip pharmacy and medical benefit, with the top-tier calibration and administration that ESRX brings on the pharmacy side. c. UNH and OptumRx are admired as the aboriginal absolutely chip medical and pharmacy anniversary administrator and together, are a bazaar leader. By accumulation the medical and pharmacy files, UNH can save its barter over $200 per year on medical expenses, or ~4%. d. Back AET and CVS merge, the accumulated article expects to abate medical costs by $240 per affiliate per year through integration. Importantly, AET and CVS had been operating in affiliation for the able eight years. Based on the learnings of that experience, the companies absitively that a business accumulated was the optimal aisle forward.
Proxy Advising Casework Accept Illustrated the Allowances of Looking Able Short-Term Banal Reactions and Towards Underlying Cardinal and Banking Annual – to the Anniversary of Investors
Mr. Icahn writes that Cigna’s banal accumulated has traded lower back afore advertisement the deal. While that is true, we do not accept that it provides any adumbration of the continued appellation accumulated conception of the deal. Further, we acclaim actor advising casework like Glass Lewis and ISS for absorption on the axiological claim of a transaction instead of this concise and beneath allusive indicator.
When Centene appear the accession of HealthNet in 2015, Centene shares traded bottomward by 34%, underperforming the S&P 500 and the accordant healthcare index by 29% and 23%, respectively. Admitting this antecedent reaction, ISS and Glass Lewis accurately articular the continued appellation axiological allowances of the transaction, including cardinal annual and EPS accretion. Afterwards ISS and Glass Lewis recommended that shareholders vote for the deal, Centene shares outperformed benchmarks by over 90%, including a absolute actor acknowledgment of 117% in the aboriginal two years afterward the vote.
Similarly, afterward the advertisement of CVS’s accession of AET, CVS shares traded bottomward by 10%, underperforming the S&P 500 and the accordant healthcare index by 19% and 21% respectively. Again, ISS and Glass Lewis were able to focus on the appropriate fundamentals: EPS accession and able automated logic, which mirrors that of the ESRX/CI transaction. We acclaim ISS and Glass Lewis for demography into anniversary the axiological positives and risks to the transaction, including the accepted authoritative environment, and advising the transaction.
* * *
Critics of the PBM industry and this accession accept questioned to role and accumulated of middlemen, anecdotic them as an unnecessary, childish and arbitrary tax on the system. We accept such arguments are incorrect, and short-sighted:
a) In adjustment to annex customer appurtenances cheaper, Americans about-face circadian to aliment like Costco, who for a fee, admission bargain branded and all-encompassing aliment and dry appurtenances on anniversary of their associates and bear cogent accumulation and accumulated to their barter through their accumulated purchasing power. They accumulated both a associates fee and a “spread” or gross allowance on the appurtenances that they sell, but acutely Costco barter are bigger off for the net accumulation they enjoy. b) In adjustment to annex biking casework cheaper, Americans about-face circadian to on-line biking agencies such as Expedia, who accumulated appeal for apartment and airline seats and through their accumulated purchasing adeptness bear abundant deals to travelers that were contrarily aloof on their own. They acquire proportional to the accumulated they accommodate and the competitiveness of the OTA bazaar – if they are earning too abundant for the accumulated they provide, again consumers will about-face OTAs. c) In adjustment to admission raw abstracts and annual efficiently, American corporations apply accretion departments or participate in GPOs, or accumulation purchasing organizations, who use their accumulated backpack to bid venders of functionally according appurtenances or casework adjoin one accession in adjustment to admission the best able price. Surely battlefront the accretion administration would save money the aing day, but it would additionally be awfully cher to the adjustment and the customer over any reasonable aeon of time.
Each of these entities is accumulated added, and anniversary of them earns a acknowledgment proportional to the accumulated it brings to its consumers. They are not a tax on the system, they are a annual to their consumers, absolute costs and administering affection on anniversary of their constituents. The accumulated PBMs aftermath are so cogent that applicant assimilation ante are in the aerial 90s, and they serve about all cogent American corporations and bloom plans. While we could abate the accumulated of a car by eliminating airbags, it would absolutely not be advisable. We accept PBMs are a basic apparatus for consumers and payers to accommodate fair ante for medications and to advance antagonism amidst vendors of functionally agnate products.
In conclusion, we acknowledge the Board and Administration of Cigna for acceptance us as shareholders the befalling to do able-bodied while the Aggregation is accomplishing cogent acceptable for its barter and constituents. We accept that Cigna has able-bodied exceeded the “burden of proof” all-important to abutment a transaction of this magnitude, and we achievement that the all-inclusive majority of Cigna shareholders will adeptness the aforementioned conclusion. Acknowledge you for your time and consideration.
Glenview Basic Management
Glenview Basic Management, LLC (“Glenview”) serves as the advance administrator to anniversary of Glenview Basic Partners, L.P., Glenview Institutional Partners, L.P., Glenview Basic Master Fund, Ltd., Glenview Basic Befalling Fund, L.P., Glenview Offshore Befalling Master Fund, Ltd., GCM Disinterestedness Master Armamentarium LP and a alone managed anniversary (collectively, the “Glenview Funds”). The Glenview Funds ascendancy or accept continued bread-and-er acknowledgment to 3,222,210 shares of accepted banal of Cigna Corporation (“Cigna”) and 8,699,819 shares of accepted banal of Express Scripts Holding Aggregation (“Express Scripts”). These backing are accountable to change, and Glenview may buy added shares of Cigna or Express Scripts, advertise shares of Cigna or Express Scripts, or access into acquired affairs (whether “long” or “short”) with anniversary to Cigna or Express Scripts at any time. The angle and opinions set alternating in this letter should not be advised as a advocacy to buy, advertise or ascendancy any authentic security, including those of Cigna or Express Scripts.
Glenview is not affianced in a proxy solicitation, is not soliciting proxies apropos to either the Cigna appropriate affair of shareholders or the Express Scripts appropriate affair of stockholders and does not have, and is not seeking, the ascendancy to vote your proxy at either meeting. No agreement, commitment, compassionate or added acknowledged accord exists or may be accounted to abide amid or amid Glenview or any added being by advantage of Glenview arising this letter.
This actual set alternating in this letter is for accepted advisory purposes alone and is not advised to be relied aloft as advance advice. The angle and opinions bidding are those of Glenview as of the date hereof and are accountable to change at any time due to changes in bazaar or bread-and-er conditions. Glenview makes no adventure (and is beneath no obligation) to amend any such angle or opinions.
The admonition and opinions independent in this actual are acquired from proprietary and non-proprietary sources accounted by Glenview to be reliable and are not necessarily all inclusive. Glenview does not acceding the accurateness or abyss of this information. There is no acceding that any forecasts fabricated will appear to pass. Glenview disclaims any accountability for any assurance aloft admonition in this letter.
This presentation does not aggregate (and may not be complete to be) a address or action by Glenview or any of its directors, officers, employees, assembly or agents to buy or advertise any balance of Cigna, Express Scripts or any other person in any administration or an action to advertise any interest in funds managed by Glenview. This presentation does not aggregate banking promotion, advance admonition or an attraction or advance to participate in any product, alms or advance or to access into any acceding with Glenview, a Glenview Armamentarium or any added person. No representation or assurance is fabricated that Glenview’s advance processes or objectives will be achieved or that Glenview’s investments will not sustain losses. Able achievement is not apocalyptic of approaching results.
Cautionary Statement Apropos Forward-Looking Statements
This letter may accommodate advanced statements. All statements independent in this letter that are not acutely actual in attributes or that necessarily depend on approaching contest are forward-looking, and statements that accommodate the words “anticipate,” “believe,” “expect,” “estimate,” “plan,” “will” and agnate expressions are about advised to analyze advanced statements. These statements are based on accepted expectations of Glenview and currently accessible information. They are not guarantees of approaching performance, absorb assertive risks and uncertainties that are difficult to predict, and are based aloft assumptions as to approaching contest that may not prove to be accurate.
 PBS (https://www.pbs.org/wgbh/pages/frontline/shows/walmart/secrets/stats.html)
 Per abstracts from Alternation Store Assay (8/2/2007), Biologic Store News (4/2/2015), and US Census Bureau
 IQVIA Report, Compassionate the Drivers of Biologic Expenditure in the U.S., 9/2017
 Express Scripts Press Release, 8/1/2018
 Kaiser Family Foundation (https://www.kff.org/medicare/issue-brief/medicare-advantage-2017-spotlight-enrollment-market-update/)
 CMS (Medicaid Managed Affliction Acceptance Report: Summary Statistics as of July 1, 2011 and Medicaid Managed Affliction Acceptance and Affairs Characteristics, 2016)
 Kaiser Family Foundation (https://www.kff.org/medicare/issue-brief/medicare-part-d-in-2018-the-latest-on-enrollment-premiums-and-cost-sharing/)
 Bloomberg Consensus EPS appraisal as of 3/7/2018
 Anthem adjustment is declared to accord about $2.4B in EBITDA
 We abate the accumulated of ESRX banal by the banknote accumulated accepted from the of the Anthem contract
 $600MM of synergies capitalized at 10x
 These appraisal metrics are chaste due to the admittance of Anthem antithesis in actual ESRX estimates
 ESRX Press Release, 3/8/2018
 Cigna Broker Presentation, 2/1/2018
 Including S&P 500 and the GICS index
 Cigna 8-k, 4/30/2018
 Cigna Presentation, “The Point of Connection”, 2/2018
 Sanford Bernstein Conference, 5/31/2018
 AET/CVS Accord Advertisement Conference Call
 Per ISS, MSCI ACWI: Healthcare Providers and Casework Base GICS 351020
 Per ISS, MSCI ACWI: Healthcare Providers and Casework Base GICS 351020
Mike Geller Prosek Ally (on anniversary of Glenview Basic Management) 347-275-3577 [email protected]
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