Leerink Increases Likelihood of Anthem (ANTM)/Cigna (CI) Deal Closing to 70%

Leerink Partners analyst, Ana Gupte, performed an analysis of likely divestitures with a proprietary Managed Market Surveyor database; leading to increased conviction in a Anthem, Inc. (NASDAQ: ANTM)-Cigna (NYSE: CI) deal close. No changes to ratings or PTs.

She raised her expectation of ANTM-CI deal close from 60% to 70% while reiterating the Outperform rating on CI (PT $175) and Outperform on ANTM (PT $190).

In the base case scenario, 2017 pre-tax income could be hit of as much as $300 MM ($1.15 in EPS on a pro-forma EPS estimate of $13.48) which is likely already factored into the guided synergies of $2 B in 2018.

At a 35% combined market share threshold she estimates:

A) divestitures of 2.75 MM lives in Commercial Self Insured (SI) ($140 MM in pretax earnings and 55c in EPS)

B) 110K Commercial Fully Insured (FI) lives ($30 MM in pre-tax earnings and 10c in EPS)

C) the associated downside to network discounts on the broader book of business of $125 MM and 50c in EPS.

This analysis compares favorably to the modestly bear case scenario presented by the American Hospital Association (AHA) with divestitures of 3.25 MM Commercial SI lives which seems harsh given the higher market share legacy advantage enjoyed by the Blue Cross Blue Shields.

Her assessment points to potential divestitures of 2.75 MM Self Insured and 110 K Fully Insured lives at a combined 35% market threshold, with a combined pre-tax earnings impact of ~300 MM in 2017 in direct exposure earnings across SI ( $140 MM), FI ($30 MM) and through less attractive provider discounts of ~$125 MM which is likely already contemplated in $2 B of guided synergies in 2018.

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