Summary
- The HMO industry has consolidated in recent years.
- Cigna has enjoyed annual revenue growth of 11% and compound annual earnings per share growth of 15% from 2009-18.
- Valuation is highly attractive. Cigna trades on 10x forward earnings and 9.6x free cash flow to equity.
In the first of this two-part report, we examined the potential for M4A legislation and the overhang this has created across the managed care sector as well as providing an overview of Cigna’s (CI) core business and its operating segments.
In the second and final part of this report, we will consider how the HMO industry has consolidated in recent years, Cigna’s current valuation and potential risks to the investment case from Amazon (NASDAQ:AMZN) and the Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B)-led consortium.
Industry Evolution Towards Vertical Integration
Over the last two years, the major HMOs have initiated a wave of vertical integration to radically transform the way healthcare is provided, as depicted in the table below:
| Date | Event | Deal value | Motive |
| Oct-17 | Anthem launch PBM | Vertical integration and launch of IngenioRx (internal PBM) | |
| Oct-18 | CVS acquire Aetna | $70bn | Vertical integration of managed care, pharmacy and PBM |
| Dec-18 | Cigna acquire Express Scripts | $54bn | |
| Mar-19 | Centenne bids for Wellcare | $17bn | Create government HMO behemoth; launch partnership with PBM RxAdvance |
Following these key strategic moves, Cigna and the other leading insurers (CVS Health (NYSE:CVS), UnitedHealth (NYSE:UNH), Anthem (NYSE:ANTM) and Humana (NYSE:HUM)) have carved up a significant portion of the overall market. By building share, Cigna benefits from classic economies of scale as well as network benefits. Customers gain by being part of a densely populated network of 1.5 million health care providers. As the industry moves to ‘value-based care’, those companies, such as Cigna, that have most control over the entire supply chain will have the greatest opportunity to benefit through reducing costs at the same time as improving health outcomes. Vertical integration not only helps realize cost synergies by leveraging purchasing volume to deliver discounts to customers but also increases patient interaction and contact points, providing more actionable data which the company feeds through its analytics platform to improve healthcare outcomes. As the company funnels customer data through its machine learning and artificial intelligence engines, it is able to generate superior insights and analytics, which can be used to build personalized lifestyle and behavioral programs aimed at improving quality of life. For instance, data-driven insights have allowed the company to predict customers that are most at risk of overdosing on prescription opioids. The company has over 1,000 clinical professional and support staff dedicated to such programs, which smaller rivals are unable to match.
