Cigna pulls out of Humana deal: WSJ

Dive Brief:

  • Cigna will no longer pursue a merger with rival health insurer Humana, after the two companies couldn’t come to an agreement on financial terms, according to The Wall Street Journal.
  • The WSJ, which cited sources familiar, reported that Cigna was also spooked by investors’ cool reaction to a potential tie-up. Cigna’s stock dropped almost 10% after news of the merger talks broke late last month.
  • Cigna will instead focus on smaller acquisitions in the near-term. The Connecticut-based insurer is also planning $10 billion in stock buybacks to boost the value of its shares, bringing its planned repurchases to $11.3 billion.

Dive Insight:

Cigna and Humana are eschewing talks for a potential multibillion-dollar merger less than two weeks after the companies saw the market reaction to a deal, which could have been struck before the end of the year.

Cigna has elected to pursue bolt-on acquisitions to grow its business, and will continue to consider strategic divestitures, according to a statement from Cigna CEO David Cordani.

Cigna announced its share buyback plans on Sunday, the same day the WSJ broke the news of the abandoned Humana deal.

Investors reacted positively to the updates. Cigna’s stock jumped more than 13% in pre-market trade this morning.

If Cigna and Humana had elected to combine, their merger would have created a healthcare giant with roughly $300 billion in annual revenue and scale to rival behemoths UnitedHealth and CVS.

Experts said a merger was a smart long-term play. It would create a large diversified managed care organization out of two companies with more narrow focuses today: Humana in Medicare Advantage and Cigna in employer-sponsored plans. Along with gaining significant scale in MA, Cigna’s pharmacy benefit manager could bring in Humana’s covered lives, increasing its purchasing power for drugs.

“We understood the longer-term merits of the proposed transaction,” J.P Morgan analyst Lisa Gill wrote in a note following Sunday’s news. Yet, “with the deal in the rear view, we are very positive on the near-term outlook for [Cigna].”

A merger would have faced a tough antitrust review from the Biden administration, but would likely have eventually been finalized, experts said. The companies are shedding businesses with horizontal overlap that would have been pounced on by regulators: Humana in employer-sponsored insurance and Cigna in Medicare Advantage.

Cigna is still exploring a divestiture of its MA business despite the Humana deal falling through, according to the WSJ. However, Gill said Cigna is likely to retain its MA book now that a merger is off the table. Selling its MA business would fully exit the insurer from the lucrative and popular program, where the government pays private payers top dollar to manage the care of Medicare seniors.

Cigna and Humana previously explored a merger in 2015, but the deal was scuttled. Two years later, Humana pursued a merger with Aetna that was blocked over antitrust concerns. Aetna was later acquired by CVS for $78 billion.