Cigna analysts stated that Cigna could possibly be seeking to promote its Medicare Advantage enterprise to grease the tracks for a bigger acquisition within the authorities providers area.
Earlier this week, Reuters reported that Cigna was contemplating a sale of its MA enterprise to a different firm or non-public fairness agency at a time when the federal government was starting to tighten reimbursements to insurers. Reuters added that talks with attainable patrons had been within the early levels and that the insurer may determine towards promoting the enterprise.
Cigna presently has a roughly 2% stake of the Medicare Advantage market, with round 600K members in 30 states. The enterprise is predicted to generate round $8.7B in income this yr. In 2022, Cigna stated that it thought of authorities enterprise a big development driver, with a focused annual development charge of 10% to fifteen%, in accordance with a current Goldman Sachs observe.
Goldman famous, nevertheless, that the scale of Cigna’s MA enterprise was “well below” its friends, and that it had recognized authorities enterprise as an space the place it may develop by way of M&A.
“We note that Cigna is faced with further investment needed to scale this asset over the next several years and could look for alternative exposure to the government space,” including that the corporate had been reportedly mulling a serious M&A deal within the space.
Goldman stated that per Cigna administration, an M&A deal would must be “accretive in Year 1, strategically aligned, generate an attractive ROIC, and have a high probability of closing in the current regulatory environment.”
Goldman famous that the worth per member for MA offers caught between 2004 and 2017 ranged from $800 to $15,600, with a median worth of $6,100.
BofA, in a current observe, stated that Cigna’s MA enterprise could possibly be valued between $3B to $5B, including that it “couldn’t judge” the sale with out realizing what Cigna plans to do with the proceeds.
Using the proceeds to spend money on “fast-growing” healthcare belongings or utilizing the deal to “create a clean slate” for an even bigger government-focused deal “would help give investors a clearer sense of a growth story within Cigna,” it added.
BofA additionally stated that it believes that Cigna wouldn’t think about a sale it if noticed a “clear path” in the direction of gaining market share and getting again to its goal margins. It famous that Cigna “acquired its way” into the MA market by means of its takeover of HealthSpring in 2012 and has since seen its market share slide from 4% to 2%. In comparability, rivals United Health (UNH) and Humana (HUM) have seen their mixed market share climb from 37% to 47%.
Wells Fargo, in the meantime, stated that it was “somewhat surprised” to listen to that Cigna was concerned about promoting its MA enterprise “given the growth profile” versus its US industrial enterprise, however that “future M&A may be a consideration.”
The funding financial institution stated that whereas Cigna’s MA enterprise contributed 21% of its premium income in 2022, it’s been working under the corporate’s goal margins of 4% to five% and is predicted to proceed to take action in 2024.
“While Cigna’s MA business does not have material market share, the sale could potentially position the company to opportunistically evaluate large-scale M&A in the future, particularly under a different administration, given it would have no MA or Medicaid overlap to consider,” Wells Fargo wrote.