Carl Icahn files proxy and writes an open letter urging shareholders to vote against the Cigna Corp. (NYSE: CI)/Express Scripts (NASDAQ: ESRX) merger.

Below is a summary of his arguments:

• Cigna is dramatically overpaying for a highly challenged Express Scripts that is facing existential risks on several fronts
• Regulatory risk due to opposition to the highly flawed rebate system will likely lower Express Scripts’ profitability dramatically. As a long-time trustee at Mount Sinai Medical Center and a major supporter of the Icahn School of Medicine at Mount Sinai, I have seen first-hand the significant problem of prescription drug pricing in America today. This is a critical issue that must be addressed and eliminating conflicting reward systems and over-earning middlemen is the logical first step.
  • Alex Azar, United States Secretary of Health and Human Services (and former Big Pharma company executive), said on June 12th: “We may need to move toward a system without rebates, where PBMs and drug companies just negotiate fixed-price contracts…Such a system’s incentives, detached from these artificial list prices would likely serve patients far better, as would a system where PBMs receive no compensation from the very pharma companies they’re supposed to be negotiating against”.
  • Pfizer CEO Ian Reed recently stated on July 31st: “On the rebates I do believe that the intention of the administration is to remove the safe harbor for rebates. Today, I would believe we’re going to go to the marketplace where we don’t have rebates. I don’t know the speed of that, but I do believe the administration has been focused on that because that will reduce pharmaceutical prices at the point-of-sale and very positively by removing the 40% subsidy goes to the rest of the healthcare system and putting it back on reducing pharmaceutical prices at the point-of-sale”.
• Competitive risk from Amazon, arguably the strongest competitor in the world, will be an existential threat to PBMs like Express Scripts, possibly challenging their very existence.
• Express Scripts could lose more customers like Anthem as it ceases to be independent and certain large MCOs and affiliated plans do not wish to deal with a company which is owned by one of their competitors.
• With Cigna’s likely standalone value today of $215 and Express Scripts’ likely standalone value less than $60, it’s a travesty to complete this deal. Paying an over 50% premium to a company whose very existence may be challenged is a potentially massive destruction of Cigna shareholder value. The only shareholders we believe would vote for this very risky acquisition are those who also own Express Scripts and are desperate to save it even at the expense of losing a great deal of value in their Cigna investment. We hope and believe that many of these “crossover” shareholders have used this great opportunity to sell their Express Scripts shares and vote “against” this transaction.
• As an alternative, we believe Cigna should pursue a multi-year partnership with an existing PBM provider, potentially Express Scripts, while the industry resolves the structural challenges mentioned here. During this time, management can further develop or acquire their own PBM capabilities optimized for the rapidly changing regulatory and competitive environment. However, it should be noted that Cigna has done very well on its own and there may well not be a need for PBM capabilities once the landscape changes and/or Amazon and other competitors materialize. Additionally, we would like to see Cigna use the cash portion of the Express Scripts consideration and free cash flow to aggressively repurchase its own shares. We believe this could result in a Cigna target price of over $250 in a reasonable time frame.
• A major argument for believing that Express Scripts is worth the ridiculous valuation of $60 billion is that it has a large customer base and it is hard to break into the ecosystem and compete. Nothing could be farther from the truth. Express Scripts is not like Apple or other companies with brand loyalty. It is just the opposite. Its customers may be offended by the portion of the rebates it keeps. I am a good example in that we have 9 owned or controlled companies that use Express Scripts and are troubled by the money they make on rebates. We believe, as Pfizer has stated, that capital belongs to the consumer not the middleman. Like many others we have spoken to, we would welcome a change. Another argument is that Express Scripts reduces pricing because it forces pharma companies to compete against each other. We however, believe just the opposite because there is a perverse logic that as the drug company charges more, the rebate to Express Scripts is higher as well. When Amazon starts to compete as we believe they will, with their 100 million Prime users and scale distribution system, they will have no trouble breaking into the so called “ecosystem.” With lower prices, the beneficiary will be American consumer, not the owners of Express Scripts.
• If ever there was a time for shareholders to assert their rights to hold boards and management accountable, it is this month at the upcoming vote to determine whether to ratify the purchase of Express Scripts for $60 billion.

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