Anthem, Cigna Shares Fall After Reports of Infighting

Share prices of Anthem (ANTM) - Get Report  and Cigna (CI) - Get Report  are down following news that the companies are bickering while they await regulatory approval of their $48 billion merger.

Cigna's share price fell nearly 4% to $126.09 per share Monday, while Anthem declined 1.19% to $134.11 following the Wall Street Journal's report that the two have been trading blows over missed deadlines, uncertainty about executives' roles and a lawsuit by Anthem against Express Scripts, all of which could affect the companies' chances of merging.

Analyst Steve Halper of FBR & Co. said he's not too surprised by the report.

"There were cracks along the way," Halper said. "It's not easy to put two companies like this together, with or without regulatory struggles." Unlike two other big health insurers trying to merge, Humana and Aetna, Cigna and Anthem operate in many of the same markets, which could require more divestitures to pass antitrust muster. 

Halper noted that spread between Cigna's current trading price and that of the purchase price Anthem hopes to pay--$103.40 per share in cash, plus a stock consideration--is a considerable 18%.

"You'd have to argue that there's less likelihood for this to go through," Halper said. "Given the fact that the spread hasn't narrowed, it's indicative that people don't think this transaction will occur."

Analyst Frank Morgan of RBC Capital Markets agreed.

"Clearly [this news] probably adds to some of the discount you're seeing," Morgan said.

However, Morgan said the merger's failure could be a big deal, especially for Anthem.

To be sure, the fact that Anthem's shares reacted more mildly to the news echoes what happened when the deal was announced last July.

"Anthem didn't really get a lift from the Cigna acquisition," Halper said. That may seem surprising. "Anthem has some things to fix," the analyst explained. "Investors are likely to be more skeptical of Anthem on a standalone basis." 

But the Cigna deal pulled some of the focus away from the pieces of Anthem's business that aren't performing as well, Halper said. He predicts that if the deal doesn't go through, these will come back into focus and both companies' share prices could drop.

Anthem also has been in the throes of a lawsuit against its pharmacy benefit manager, Express Scripts (ESRX) since early March. Anthem filed a lawsuit against Express seeking $15 million in damages because Express was allegedly not passing savings it incurred from negotiating prices with pharmaceutical companies on to Anthem's pharmacy service.

While according to the Wall Street Journal, this legal battle is having an effect on how Cigna and Anthem interact, Halper said nothing is likely to change between Express and Anthem until the Cigna deal closed or went bust. Cigna was allegedly upset that Anthem launched the suit against Express while the two were still awaiting antitrust approval, but Anthem argued that this suit will be good for the companies, as it is supposed to result in better drug prices for Anthem.

"Anthem wouldn't really make a decision about Express Scripts until it closed the Cigna deal," Halper said. "If you think it's not going to close, Anthem is still a big company, they could renegotiate with Express, they could bring it in house, or could go with a different PBM."

From Morgan's point of view, the path of least resistance is renegotiating the contract.

"The easiest thing to do would be to renegotiate the contract and move on down the road," Morgan said.

However, as TheStreet's sister publication The Deal reported last month, other analysts believe that Express Scripts could be a target for Walgreens Boots Alliance (WBA), and could sell for as much as $60 billion.

The federal government has been stricter than ever when it comes to antitrust regulations, TheStreet reported last month. Since President Obama took office, 267 deals, or 2.8% have been stopped by federal antitrust laws, including Comcast's attempt to buy Time Warner Cable and AT&T's proposed bid for T-Mobile.

Anthem and Cigna's competitors, Aetna (AET)  and Humana (HUM) - Get Report  are also facing an antitrust challenge to their merger.

"Aetna and Humana are trying to close their deal," Halper said. "There's probably less regulatory issues there and if there are, it's probably easier to cure." 

According to Halper, this is not only because the deal is smaller--it's worth $37 billion--but also because the two companies don't have as much focus on their national accounts business. Cigna and Anthem service large companies that operate in many states, whereas Aetna and Humana operate on a more local level, which makes their plans easier to divest if faced with antitrust challenges. 

Both companies' share prices were virtually unchanged by the news.

Neither Anthem nor Cigna would comment on the news.