May 2, 2019 / 10:32 AM / 20 days ago

Pharmacy benefits profitability concerns send Cigna shares lower

(Reuters) - Investor concerns that Cigna Corp’s pharmacy benefits business would not generate the profits expected from its $52 billion acquisition of Express Scripts sent the health insurer’s shares down more than 5 percent on Thursday.

On a conference call to discuss the company’s first-quarter results, Cigna Chief Executive David Cordani said performance at its health services unit, which includes the pharmacy benefits management (PBM) business, was in line with expectations.

But analysts wanted to know how PBM profits would hold up under the increased transparency that the Trump administration and U.S. legislators have been pushing for, including calls to pass along rebates from drugmakers to consumers.

Investors are likely worried that margins in the pharmacy benefits business could be affected by a more competitive environment, and that Cigna may have to cut prices in order to grow, Bernstein analyst Lance Wilkes said of Thursday’s stock decline.

“When you look at just the number of questions (Cigna was asked) on PBMs and PBM margins, that was probably an indication that it was catching the market by surprise,” Wilkes said.

“They beat earnings but this probably tarnished the beat a little bit,” he added.

PBM profits typically come from drug discounts and administrative fees, and are partly tied to drug prices. Any decline in discounts on prescription medicines would likely eat into profits.

Cigna said it continued to expect earnings of $20 to $21 per share in 2021, and that it was making “very good progress” integrating Express Scripts into its business.

The acquisition put Cigna in direct competition with CVS Health Corp, which acquired health insurer Aetna to go with its PBM and retail pharmacy businesses, as well as UnitedHealth Group Inc and its PBM unit, Optum.

Cigna said it expects to retain 96 percent to 98 percent of pharmacy services customers in 2020. CVS on Wednesday said it expected a retention rate in the mid-90’s.

Excluding items, Cigna earned $3.90 per share in the quarter, beating the average analyst estimate by 17 cents, according to IBES data from Refinitiv.

Cigna raised both ends of its 2019 adjusted revenue forecast range by $1 billion and now expects between $132.5 billion and $134.5 billion.

The health insurer also raised its full-year forecast for adjusted income from operations to between $16.25 and $16.65 per share from $16 to $16.50.

Sales at the company’s integrated medical unit that sells commercial and government health plans rose nearly 13 percent to $9.2 billion in the quarter.

Net income rose 49.5 percent to $1.37 billion, while adjusted revenue of $33.43 billion and topped Wall Street estimates of $33.11 billion.

Cigna shares were down $8.41, or 5.2 percent, at $153.59.

Reporting by Tamara Mathias in Bengaluru and Caroline Humer in New York; Editing by Arun Koyyur, James Emmanuel and Bill Berkrot

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