Summary
- After a solid earnings beat, Cigna still found itself returning to 52-week averages as negative sentiment puts pressure on the healthcare industry.
- Express Scripts effects were better than expected but some critics (including Carl Icahn) think Cigna could run into Amazon's attempt to get into healthcare.
- Despite negative sentiment, Cigna's cost efficiency is one of the best in the industry, and its policy revenue growth has accelerated and stabilized back over 2%.
About a month ago, Cigna Corporation (CI) reported its earnings after the stock traded lower in the first half of 2019. Shares were over $220 a share at the end of 2018 but fell quickly amidst conversations of “Medicare for All” conversations on the political stage, specifically the Democratic debates. Shares touched lows twice in mid-April and late-May at just around $142. A rally looked to be on as the company approached earnings at the beginning of August and even saw a large gap of about 9 percent after a positive news surprise. However, the reversal seemed to lose steam after that with earnings failing to buffer a return towards the 52-week low. However, CI has solid fundamentals which should be enough to ward off uncertainties that are still immaterial.
CI’s recent earnings reports have been more than solid. The past two quarters were boosted by the addition of Express Scripts, a health services company meant to bolster CI’s interactions with its customers. Wall Street estimates of EPS and revenue after the acquisition were sharply off the reported values with a large $0.56 beat over the consensus EPS estimate of $3.74 and a $1.1 billion beat over the consensus revenue estimate of $33.2 billion in Q2. The impressive earnings was capped off with a more positive full year guidance increasing CI full year revenue forecast from $132.5 - 134.5 billion to $136 - 137 billion and full year net income forecast from $6.24 - 6.4 billion to $6.34 - 6.46 billion.
CI has now officially moved through two quarters with the Express Scripts acquisition completed, and it looks to have been a success so far. The company decided to buy the pharmacy benefit manager (PBM) in order to “improve the bottom line and bring quicker treatments to more Americans” according to Forbes. CI also made the move to chase some of the larger healthcare firms that have their own pharmacy operations (Forbes mentions UnitedHealth Group with Optum Rx and CVS Health with Caremark).
The deal saw one major opponent in Carl Icahn who published an open letter to CI suggesting the company was overpaying for Express Scripts and leaving it vulnerable to “competitive risk from Amazon.” CI paid $90 a share for Express Scripts which Icahn believes is a 50 percent premium over its true value especially since the financial icon believes that it’s existence will soon be challenged by Amazon who he thinks will be able to gain a solid foothold in the healthcare market because of the loyalty it has built through its Prime service.
Political uncertainties are also starting to brew for healthcare behemoth’s like CI, one of which is noted by Icahn. The HHS’s “American Patients First” proposal introduces initiatives to increase transparency in the pricing of drugs from the manufacturer to the PBMs by taking “measures to restrict the use of rebates.” Milliman’s analysis suggest the reduction will reduce the prices of drugs “to a post-rebate level” which will probably reduce the amount health insurers can charge for copays and put pressure on margins. This will also reduce the benefit of having a PBM in-house which is typically in charge of negotiating those rebates.
