2 Analysts Discuss Why Express Scripts Could Lose From A Humana Takeover

Shares of Humana Inc HUM soared higher on Friday after reports surfaced that the company hired bankers to evaluate a sale of itself. Analysts at Stifel suggested a $230 to $240 per share price tag on any deal.

On Monday, analysts at both Cowen and Raymond James discussed why a possible sale of Humana possess potential issues for Express Scripts Holding Company ESRX.

Cowen: Greater Urgency For Express To Deal With Anthem Contract

Charles Rhyee commented in a note that news reports of Humana exploring sale creates "greater urgency" for Express Scripts in dealing with Anthem Inc ANTM.

According to Rhyee, Anthem could emerge as a potential bidder for Humana and if it were to successfully acquire the company, the likelihood of Anthem allowing its contract with Express Scripts to expire at the end of 2019 becomes "more probable," if not sooner.

"At the very least, the potential for Anthem to acquire Humana could create some urgency for Express Scripts to seek an extension with Anthem as we get closer to the end of the 10-yr term," Rhyee wrote. "That said, based on discussions with Cowen's Managed Care team, we believe it is likely that Anthem will exercise the market check provision in its contract and that following such a check it appears that pricing could re-base immediately having a more immediate impact to Express Scripts earnings than we previously had thought."

Related Link: Humana Story Adds $10 Billion In Market Value To Managed Healthcare Space

The analyst continued that Anthem could take its commercial book of business in-house as Humana's carved-in PBM would provide the company with the necessary infrastructure.

If Anthem would terminate its contract with Express Scripts in 2016, the analyst estimated this would result in a valuation of $75 per share for Express Scripts. A loss of the contract at the end of 2019 would result in a valuation of $77 per share.

Raymond James: Downgraded Express Scripts On News Reports

Michael Baker downgraded shares of Express Scripts to Market Perform from Outperform while removing a prior $92 price target following news reports of Humana's potential sale.

According to Baker, Anthem is likely to acquire Humana which will "add to the existing headwinds" of Express Scripts. If Anthem is successful in acquiring Humana, it would not only strengthen its Medicare book but more importantly enhance its negotiating leverage against Express Scripts.

Baker estimated that Anthem represents approximately 14 percent of revenues and 11 percent to 12 percent of profits for Express Scripts. He also estimated the annualized headwind of the renewal at $0.40 to $0.55 per share.