Cigna weighs sale or outsourcing of pharmacy-benefits unit

Posted 3/5/12

GREENSBORO, N.C. - Cigna Corp. is considering selling or outsourcing its pharmacy-benefits division, a business that might fetch $1.5 billion for the U.S. health insurer in an acquisition, according to one analyst.

Cigna is evaluating “structural solutions” for the unit now that its $3.8 billion purchase of Healthspring Inc. has expanded the pharmacy business, Matthew Asensio, a company spokesman, said in a telephone interview. The move follows decisions by insurers WellPoint Inc. and Aetna Inc. to sell and outsource their pharmacy units, respectively.

The Healthspring deal, completed last month, added 650,000 members to a pharmacy unit that served 6.91 million last year, Bloomfield, Conn.-based Cigna said on Feb. 2. While managing those benefits is “significant” to customers, “there’s different ways you could do that,” Chief Financial Officer Ralph Nicoletti said at a conference last week.

“Everything is on the table,” for the pharmacy-benefits division, Asensio said. “Nothing has been ruled out.”

Healthspring increased the prescriptions Cigna handles by as much as 50 percent, boosting the value of the unit to as much as $1.5 billion, said Ana Gupte, a Sanford C. Bernstein & Co. analyst, in New York. Cigna could use the proceeds from a sale or outsourcing to cut debt or pay down its pension liabilities, she said.

Cigna had $1.45 billion in mail-order pharmacy sales last year, it said in its Feb. 2 statement. Healthspring, a health- maintenance organization that focuses on elderly Medicare patients, generated $730 million from drug plans in the first nine months of 2011, according to the last earnings report it filed.

‘Bigger Footprint’

Healthspring “gives us a much bigger footprint in that space,” Nicoletti said on Feb. 29 at the Citi 2012 Health Care Conference. “The acquisition has given us some reason to pause and try to re-evaluate it as a combined entity.”

The business may draw bids from pharmacy-benefits companies including CVS Caremark of Woonsocket; Express Scripts Inc. of St. Louis; or SXC Health Solutions Corp. of Lisle, Ill., Gupte said. SXC manages Healthspring’s prescription plans.

Cigna, the fifth-largest insurer by membership, rose less than 1 percent to $44.55 at 9:32 a.m. The shares had gained less than 1 percent in the 12 months before today.

WellPoint sold its pharmacy unit to Express Scripts for $4.7 billion in 2009. The following year, Aetna, in a bid to lower drug costs, announced a contract to let CVS Caremark administer $9.5 billion in annual prescription benefits.

Sale Considered

Cigna also considered selling the pharmacy unit in 2009 and might have followed through if it had found a better deal, Carl McDonald, a Citigroup analyst in New York, said during the company’s presentation at the Feb. 29 conference.

“My sense is that there’s still an interest,” he said.

“It is important for Cigna to continue to have pharmacy benefit capabilities as an integrated part of our offering to customers and clients,” said Asensio, the Cigna spokesman. “We are considering a variety of structural solutions to best and most efficiently deliver that value going forward.”

UnitedHealth Group Inc. of Minnetonka, Minnesota, is the biggest U.S. health plan by sales, followed by Indianapolis- based WellPoint and Aetna, of Hartford, Connecticut.

Brian Henry, an Express Scripts spokesman, and Tony Perkins, an SXC spokesman, declined to comment in telephone interviews. Carolyn Castel, a CVS spokeswoman, didn’t immediately return an email seeking a response.

SXC Revenue

Healthspring is SXC’s largest customer, accounting for 40 percent of the benefits manager’s $5 billion in revenue last year, SXC said in a regulatory filing Feb. 24. That was expected to grow by $1 billion this year due to acquisitions by Healthspring, SXC said. A loss or “substantial changes” to that business “could have a material adverse effect,” the company said.

The Healthspring contract took effect Jan. 1, 2011, the filing said. It has an initial three-year term, during which neither company has the right to terminate absent a “material breach,” according to SXC.

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