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The Dose

Welcome to The Dose, which tackles the business and economics inside the turbulent world of health care and life sciences in Indiana. Your host is John Russell. To contact me call 317-472-5383.

Analysts squirm in trying to predict the Anthem-Cigna deal

July 25, 2016

So, what's next?

That’s the question health-care analysts around the country are asking now that the Justice Department's antitrust division has sued to block Indianapolis-based Anthem Inc.’s proposed $48 billion acquisition of rival Cigna Corp.

And they aren't just whispering the questions to themselves, hoping to come up with an answer.

It seems some really don’t know. A few are putting the question right on the tops of their reports to clients.

Check out the note that UBS analyst A.J. Rice sent to clients on Thursday, shortly after the feds announced they would try to stop the deal.

Rice’s note was titled: “DOJ moves to block [Anthem-Cigna] transaction, What Next?”

The question was clear. The answer was less so. That’s because there are now so many possible scenarios.

First, what are the odds the Justice Department can actually scuttle the Anthem-Cigna deal? To provide some context, Rice dug up these statistics:

— The DOJ has challenged 22 transactions since 1998.

— Of those, 36 percent of the deals were abandoned, 36 percent were settled and completed, 9 percent were litigated and completed, and 18 percent were litigated and terminated.

— That means that 45 percent of the deals challenged by the Justice Department were still completed.

Rice never comes out and says whether he thinks Anthem and Cigna will survive the federal challenge. But he launches quickly into an analysis with the subhead “Thoughts on [Anthem] Stand-Alone.”

Those thoughts include this nugget: Anthem could have $4 billion on hand to pursue smaller deals or to buy back stock—minus any breakup fees owed to Cigna, which could reach $1.85 billion.

Then he crunches a new valuation of Anthem stock, based on no Cigna deal. He now gives a price target for Anthem of $162 a share for the next 12 months, down from his previous target of $180. (Anthem shares closed at $142.94 on Friday.)

So, without coming right out and saying he thinks the deal is dead, Rice lets his numbers do the talking.

Another analyst, Chris Rigg at Susquehanna Financial Group, is also keeping his predictions to himself about the Anthem-Cigna deal (and the related Aetna-Humana deal, which the feds are also trying to block).

“We’re reserving judgement about the merits of the DOJ’s cases,” he wrote. “It’s virtually impossible at this moment to know whether Aetna and Anthem can successfully win in court.”

Over at RBC Capital Markets, analyst Frank Morgan ran a lengthy analysis, trying to handicap the likelihood of deals succeeding or failing.

His takeaway: “Based on our conversations with investors, the consensus seems to be that with the authorities bringing litigation, the deals will be abandoned,” Morgan wrote.

Well, does Morgan share that consensus opinion? He doesn’t say. However, he, too, sketched out several scenarios, including the deal being successfully blocked, which would lower his price target from $182 a share to a range of $136 to $140.

Over at Sanford C. Bernstein & Co., analyst Lance Wilkes outlined four separate scenarios for Anthem in a note Thursday to clients. They involve a complex assortment of metrics, such as size of membership and growth in per-member per-month (PMPM) costs.

The bottom line: “We are lowering our price target by $2 to $205 to exclude the [Cigna] deal, due to a reduced probability, and further delays if it were to be ultimately closed.” Yet, he continues to rate Anthem a buy, and calls it his “top pick” with a 47 percent upside.

Is that helpful?

Companies don’t like uncertainty. Neither do investors or analysts. For every uncertainty, they have to map out a new scenario and hedge their bets.

These are the times that try analysts’ souls. And their advice to clients.
 

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