Bye-bye, solo Express Scripts: What does the Cigna buyout mean for pharma?

Healthcare consolidation took another major step Thursday with Cigna's move to scoop up the last large independent pharmacy benefits manager Express Scripts in a $54 billion deal. And that could spell more pricing resistance ahead for drugmakers.

For each of their shares, Express Scripts investors get $48.75 in cash plus 0.2434 shares in the combined company, or a 31% premium to the company's closing price on Wednesday, the companies said. Cigna will also assume about $15 billion in Express Scripts' debt.

The megamerger is the latest in a series of deals that stand to reshape the way drugs are paid for and distributed. Though Express Scripts management has long praised the standalone PBM model, execs said they'd be open to an insurer tie-up after CVS Health decided to buy Aetna last year. And as the pharma supply chain consolidates, some industry watchers say pharma companies could see more pricing pressure.

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When CVS, which operates its own PBM, and Aetna disclosed their $69 billion deal, Moody's analysts wrote that the combination "would result in pricing and utilization pressure for branded drug companies." Teva, a top generic drugmaker that has already suffered from intense pricing pressure, disclosed in a recent SEC filing that the drug distribution system is "undergoing disruption as a result of the entry or potential entry of new competitors and significant mergers."

The market disruption—which also includes a recent partnership between Amazon, Berkshire Hathaway and JPMorgan, the company noted—could trigger "further price erosion" and, in turn, more suffering for Teva, according to the filing.

In an interview, Paula Wade, a principal analyst at Decision Resources Group, said the Cigna move is "part of a realignment of the whole industry in response to the frustration" over drug pricing.  

She said the deal will give Cigna a PBM partner that can offer self-insured employer groups price transparency and help with formulary exclusions. It'll also help Cigna incorporate value-based pricing, she added, a concept many pharma executives have praised but one that's still in early stages.  

In all, Cigna will be more able to "demand better purchasing, better prices and better rebates," she said.

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Though the Thursday deal sent shockwaves around healthcare, it shouldn't have been a huge surprise. On a conference call last year, Aetna CEO Mark Bertolini called the standalone PBM model a "troubled relationship," citing growing scrutiny on drug prices, according to Forbes.

"As we look at the noise around drug pricing and where are the discounts and where are not the discounts, it is still our view that drug pricing transparency’s incredibly important for all consumers," he told analysts on the call, as quoted by the publication. 

PBMs, contracted by insurers to get the best price possible on drugs, don't disclose what they pay after those negotiations. The middlemen pass along many rebates they receive to clients, but not always all of them. The opaque setup has come under fire from many in the pharma industry and some in Congress.

For their part, PBMs argue their negotiations save the healthcare system billions of dollars each year in drug spending.

Aetna and CVS are hoping to close their deal soon, but it has yet to win antitrust approval. UnitedHealth, another top insurer, owns the PBM OptumRx. As Forbes' Matthew Herper noted today, the top three PBMs by market share will now be part of insurers, whereas one year ago only one was.

Meanwhile, pharma watchers continue to speculate about Amazon's intentions in the drug business. The tech and online retail giant recently partnered with Perrigo to sell some over-the-counter meds, and its partnership with J.P. Morgan and Berkshire Hathaway could include some pharmacy component, though little is yet known about the group's intentions.

In another major shift this week, UnitedHealthcare said it would start passing drug manufacturer rebates directly through to some customers, addressing a top complaint from pharma in a yearslong debate over drug prices.

Express Scripts and its chief medical officer, Steve Miller, M.D., have been active for years in their efforts to fight rising drug costs, notably by pitting companies against each other for better pricing when Gilead Sciences rolled out blockbusters Sovaldi and Harvoni in 2014 and 2015.

Editor's note: This story was updated with comments from Decision Resources Group principal analyst Paula Wade.