Cigna to Buy Express Scripts: Healthcare ETFs in Focus

Waves of mergers and acquisitions have been heating up the healthcare space this year that could change the landscape of healthcare business. This is especially true given that health insurers are trying to consolidate with pharmacy benefits managers to streamline and cut costs in the drug supply chain.

The latest catalyst is the health insurer Cigna CI, which has planned to acquire the largest pharmacy benefit manager Express Scripts Holding ESRX for $67 billion, including $15 billion in debt. The moves comes three months after a drug chain and a pharmacy giant CVS Health Corp CVS agreed to buy the nation's third-largest health insurer Aetna AET, for $207 per share or $69 billion (read: 4 ETFs to Gain From CVS-Aetna Deal).

Inside The Deal

Under the terms of the deal, Cigna will pay $48.75 in cash and 0.2434 shares of stock of the newly combined company. Upon closure, Cigna shareholders will own approximately 64% of the combined company.

The merged company would create a one-stop shop for customers' healthcare needs, ranging from sale of drugs to insurance cover. It would benefit consumers by bringing together the medical care and pharmacy benefits at one roof to improve treatments and lower costs.

The combined company could pose a bigger threat to UnitedHealth Group Inc. UNH, the largest U.S. health insurer having its own pharmacy benefits unit, and CVS after it completes its merger with Aetna. The move is also to stave off threats from Amazon.com Inc. AMZN, which is making huge expansion in the world of pharmacy business. The e-commerce giant recently announced a joint venture with JPMorgan Chase JPM and Warren Buffett's Berkshire Hathaway BRK.B in order to curb medical costs for their employees.

The transaction would result in total cost synergies of $650 million and double-digit accretion to earnings in the first year after it closes. As a result, Cigna expects the deal to increase earnings per share from $18 to $20-$21 in 2021. The deal is expected to close by Dec 31, 2018 and is subject to approval from shareholders of both companies and anti-trust regulatory approvals (see: all the Healthcare ETFs here).

ETF Impact

The announced merger has put the spotlight on a few healthcare ETFs that could be the best ways for investors to tap the opportunity arising from the CI-ESRX deal.

iShares U.S. Healthcare Providers ETF IHF

This ETF follows the Dow Jones U.S. Select Healthcare Providers Index with exposure to companies that provide health insurance, diagnostics and specialized treatment. In total, the fund holds 44 securities in its basket with Cigna and ESRX occupying the fourth and fifth position, accounting for over 5% share each. The fund has amassed $493.7 million in its asset base while volume is light at about 24,000 shares per day on average. It charges 44 bps in annual fees and has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook (read: Trump's 2019 Budget Blueprint: ETF Winners & Losers).

SPDR S&P Health Care Services ETF XHS

The fund uses an equal-weight methodology to each security by tracking the S&P Health Care Services Select Industry Index. Holding 49 stocks in its basket, CI and ESRX account for 2% share each. The fund has accumulated $91.5 million in its asset base and trades in a paltry volume of around 6,000 shares a day. Expense ratio comes in at 0.35%. The ETF has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: 4 Sector ETFs & Stocks Set to Explode Higher on Tax Cuts).

First Trust Health Care AlphaDEX Fund (FXH)

This fund follows an AlphaDEX methodology and ranks stocks in the space on various growth and value factors, eliminating the bottom-ranked 25% of the stocks. This approach results in a basket of 73 stocks with ESRX and CI taking 2.4% and 1.4% share, respectively. Health care providers & services is the top sector with 38.4% allocation, followed by healthcare equipment (23.5%), and biotech (18.9%). This fund has AUM of $974.5 million in its asset base and trades in volume of around 85,000 shares. Expense ratio comes in at 0.62% annually. The fund has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

Health Care Select Sector SPDR Fund XLV

The most popular healthcare ETF, XLV follows the Health Care Select Sector Index. This fund manages nearly $15.8 billion in its asset base and trades in heavy volume of around 8.1 million shares. Expense ratio comes in at 0.13% annually. In total, the fund holds 61 securities in its basket with CI and ESRX accounting for over 1% of the assets. Pharma takes the largest share at 31.7% from a sector look while healthcare providers and services, biotech, and healthcare equipment and supplies make up for a double-digit exposure each. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

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JPMorgan Chase & Co. (JPM) : Free Stock Analysis Report
 
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SPDR-HLTH CR (XLV): ETF Research Reports
 
ISHARS-US H C P (IHF): ETF Research Reports
 
SPDR-SP HLTH CR (XHS): ETF Research Reports
 
Cigna Corporation (CI) : Free Stock Analysis Report
 
Berkshire Hathaway Inc. (BRK.B) : Free Stock Analysis Report
 
Aetna Inc. (AET) : Free Stock Analysis Report
 
UnitedHealth Group Incorporated (UNH) : Free Stock Analysis Report
 
CVS Health Corporation (CVS) : Free Stock Analysis Report
 
Express Scripts Holding Company (ESRX) : Free Stock Analysis Report
 
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