Cigna announced the sale of their Medicare Advantage business, with a planned close in 2025.
The pending sale represents the complete exit by Cigna from government payor retiree healthcare programs. At a potential all-in price of $3.7 billion, the profit to be foregone, estimated to be just in the range of $200 million annually, would be more than offset by a simple repurchase plan of shares at the current price, using a little more than 60% of the potential proceeds, leading to a potential increase in EPS on a go-forward basis should the entire proceeds be employed on share retirement. Initial MA reimbursement price increases floated by the government agencies in charge of paying for Medicare Advantage (and similar programs) in 2025, according to a filing from Humana (a competitor with a very significant Medicare Advantage business) has been put forth at a net rate of decline of -0.16% for 2025, once again, below the rate of inflation. The proposed reduction in compensation for 2025 implies that any health insurer in the MA space will be required to improve efficiencies just to hold the line, but with labor and pharmaceutical cost inflation, that seems a bridge too far. This 2025 reimbursement proposal bodes ill for any health care insurer operating with a Medicare Advantage book and the exit by Cigna is timely. It removes a stubborn consumer of corporate cash by Cigna; shedding the lowest profit business in the corporate stable should result in margin improvements.
Post sale, Cigna will continue to provide the PBM services for the Medicare Advantage division; this maintains revenue momentum at the Evernorth PBM. It may even lead to further PBM contract wins in the future; the buyer of the Cigna MA division operates a number of Blue Cross Health insurance business lines and would benefit from the PBM scale discounts available from Cigna on a broader basis. The sale, in my view, is as much a strategic opportunity to garner new business, as it is the removal of a problematic asset.
https://apnews.com/article/cigna-medicare-advantage-sale-2ba1f4ccf244312e1edebb462539d305
In the meantime, Cigna’s Pharmacy Benefit Manager (PBM) division, Evernorth, continues to drive revenues and earnings higher.
Evernorth operates the Express Scrips PBM business of Cigna and earns most of its profit by obtaining volume discounts on prescription drugs. They rebate the bulk of the volume discounts onto its commercial membership base, which benefits the employer sponsored plans and represents a competitive advantage in the commercial sector. This cost advantage has produced faster membership growth for Cigna than the industry as a whole. Importantly, the volume discounts are such that Cigna also keeps a smallish share of the savings themselves, resulting in virtually risk-free, capital light, earnings growth. In Q4, 2023, Evernorth produced pre-tax adjusted earnings of $1.9 billion (90% of adjusted pre-tax earnings) and accounted for 81% of gross corporate revenues. Taking into account the accelerating earnings and revenue heading into 2024 from contract wins, there is every possibility that Evernorth alone may, rather easily, break through $7 billion in pre-tax adjusted earnings in 2024. This business, rather than the commercial health care insurance division, represents the dominant driver of revenue and earnings at Cigna. Assuming that Cigna retires shares per guidance in 2024, ending up with an average of 284 million shares, the Evernorth division would be poised to generate about $24.65 in gross pre-tax earnings for 2024.
https://www.msn.com/en-us/money/companies/cigna-stock-is-up-the-company-beat-earnings-estimates-and-isn-t-exposed-to-medicare-advantage/ar-BB1hFYbT
For the balance of 2024, with US private payrolls continuing to surprise economists to the upside, with a major PBM contract (Centene) turning from expense to revenue, and finally, with the prospect of an end to the Medicare Advantage era for Cigna, the company looks considerably leaner and focused.
All in all, recent management missteps aside (written about extensively in this blog), I consider Cigna to be the best positioned health insurer in the United States. That is a strong statement for some to read and certainly is provocative for those who hold investments in competing players. It is fine by me; there are larger companies in the industry, to be sure, but there are few that are truly, exclusively, operating as a commercial, employer sponsored, health insurance firm. With further announced corporate defections by large companies, from the CVS health insurance umbrella in 2023-2024, the market share gap between the #1 and the #2 PBM divisions of CVS and Cigna narrows further. I am of the opinion that Cigna may eventually wrest the top spot, down the road, from CVS, and will generate better earnings growth as a result.
Some time back, I noted that Cigna was about the only health insurance company poised to benefit from the explosion in demand for GLP-1 weight loss and diabetic drugs.
This would be due, entirely, to the massive external customer base of the Evernorth PBM division, a size difference that serves to fully insulate Cigna’s own commercial division from the cost escalation of GLP-1. In effect, Cigna represents an indirect play on the growth of GLP-1, with most of the value of Cigna being assigned to the pharmacy benefit manager buried in the Evernorth Division and just a nominal valuation presently assigned to the nicely profitable commercial health asset. A PBM is just a distributor of pharmaceuticals even if they don’t physically touch or ship a product; they earn an arbitrage spread through permitting a commercial health member to access the product under insurance and earn a spread for that access; a “pay to play” arrangement.
Given the size of the Express Scrips business in the United States, potentially more than 1/4 of total US GLP-1 scrips will flow directly through the Cigna division. Belatedly, the media seems to be tentatively picking up on that thread but have yet to model the financial implications. It is possible that GLP-1 prescriptions could be annualizing at a $40 billion US run rate by the end of 2024 and even a 20 basis point profit, on volume flows through Evernorth, represents more than $.70 per share in potential earnings accretion for Cigna. While that doesn’t sound like an earth shaking amount in a single year, it is largely free money to be had for access. More importantly, as GLP-1 volumes should have legs for years to come, potentially ramping up towards a $100 billion run rate through the end of the decade, this is repeatable profit, with Eli Lilly and Novo Nordisk both fighting to secure preferential nods in the PBM formulary. Whether or not the investment industry opts to deem Cigna as a proxy investment, serving as a counterweight for those negatively impacted by the cost of the GLP-1 category of drugs, that remains to be seen.
https://www.msn.com/en-ca/health/other/cigna-leans-on-commercial-business-pharmacy-benefits-after-medicare-sale/ar-BB1hG9uK
https://www.sec.gov/Archives/edgar/data/1739940/000095015924000033/ex99-1.htm
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