Citing regulatory risks and powerful new competition, activist investor Carl Icahn is publicly calling for Cigna shareholders to block the Express Scripts acquisition.
In an open letter to shareholders Tuesday, Icahn argued the company is "dramatically overpaying" for the pharmacy benefit manager, calling the deal "Cigna's $60 billion folly" and categorizing it as a "huge bailout" for Express Scripts shareholders.
The move comes weeks ahead of a shareholder vote on Aug. 24, leaving Icahn little time to rally enough support to block the deal. Icahn holds 5% of Cigna's shares.
Icahn said he opposed the initial purchase price but reasoned that "there were at least arguments that could be made by management to try to persuade us into thinking that it was not completely ridiculous." But those arguments are rendered ineffective thanks to recent developments such as Amazon's "almost certain entrance" into the pharmaceutical industry and pending changes from the federal government to restructure the pharmacy rebate system.
Department of Health and Human Services Secretary Alex Azar has, at times, questioned the role of PBMs.
Those forces will render Express Scripts "existentially challenged," exposing Cigna shareholders.
"Even if they do survive, exposing Cigna, a thriving company, to these risks by acquiring Express Scripts now is inexplicably ridiculous," Icahn wrote. "Purchasing Express Scripts may well become one of the worst blunders in corporate history."
Icahn also challenged a primary argument in support of the deal: Difficulty breaking into the PBM market and competing with entrenched players like Express Scripts. But the company's business model doesn't generate a lot of public goodwill.
"Express Scripts is not like Apple or other companies with brand loyalty," he wrote. "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 nine owned or controlled companies that use Express Scripts and are troubled by the money they make on rebates," he added.
During an earnings call last week, Cigna CEO David Cordani did not directly address media reports that Icahn was urging shareholders to vote against the acquisition, but he expressed confidence that the deal had shareholder support.
Under the terms of the contract, Cigna would be responsible for a $1.6 billion breakup fee if shareholders voted against the deal, but only if the board also changed its recommendation. It hasn't, and Icahn noted that the only way to end the transaction without paying the fee is for shareholders to vote against the purchase.