A federal judge has blocked Anthem's (ANTM) proposed merger with Cigna (CI), which has a $1.85B breakup fee, deeming it as anticompetitive. Commenting on the news, JPMorgan analyst Gary Taylor said he does not expect the decision to have a big impact on both companies' shares given the already low perceived probability of approval, an opinion shared by his peer at Citi who believes that the standalone stories for both of the companies remain attractive.

BLOCKED MERGER: Yesterday, a federal judge ruled against Anthem's proposed $54B merger with Cigna, a deal that would have created the largest U.S. health insurer by membership. Judge Amy Berman Jackson said the merger would have worsened an already concentrated market and would likely raise prices. Back in July, the U.S. Justice Department had sued to stop Anthem's purchase and Aetna's (AET) planned acquisition of Humana (HUM). In response to the judge's decision, Cigna said it intends to carefully review the opinion and evaluate its options in accordance with the merger agreement. Meanwhile, Anthem announced that it promptly intends to file a notice of appeal and request an expedited hearing of its appeal to reverse the court's decision.

LOW DEAL PROBABILITY: In a research note to investors, JPMorgan's Taylor noted that he does not expect material movement in both Anthem and Cigna's stocks given the low perceived probability of a merger approval. Furthermore, he argued that he sees "little plausible grounds" for the companies to appeal the court's decision. Given Anthem and Cigna's pursuit of Humana back in 2015, the analyst said he believes new potential combinations could emerge. While the merger agreement states that Anthem owes Cigna a $1.85B taxable breakup fee upon a regulatory block, it also requires the latter's "best efforts" to complete said merger, with the judge's comments likely supporting a possible Anthem decision to allege breach of contract by Cigna, Taylor contended.

STANDALONE STORIES ATTRACTIVE: This morning, Citi analyst Ralph Giacobbe told investors in a research note of his own that the decision to block the Anthem/Cigna deal had been anticipated by the market, with the only real related question at this point likely around the break-up fee. Moreover, the analyst pointed out that he views the removal of the deal overhang favorably, seeing both standalone stories as attractive. Giacobbe told investors that he expects potential upside to Anthem's 2017 estimates given its higher exposure to commercial risk relative to peers, while he believes the decision to block the deal will allow investors to focus on Cigna's market positioning, underlying fundamentals, and excessive capital deployment optionality at the company's disposal. Additionally, the analyst pointed out that he sees Anthem "more aggressively" targeting a buyback, as Cigna takes a more measured approach near-term as it assesses market opportunities. He also noted that Anthem remains his top pick and on Citi's Focus List.

HUMANA, AETNA DEAL BLOCKED: Late last month, a federal judge had also blocked the merger of Aetna and Humana, saying that the deal between the two health insurance giants would hurt competition and raise prices for consumers.

WHAT'S NOTABLE: Leerink analyst Ana Gupte raised her price target for WellCare (WCG) to $170 from $160 following the company's "strong" earning per share beat in the fourth quarter, while noting that she sees a takeout of the company as likely. The analyst told investors that she views Aetna as the most likely buyer, followed by Cigna or Anthem.

PRICE ACTION: In morning trading, shares of Cigna have dropped almost 1% to $146.76, while Anthem's stock has gained about 1.5% to $160.90 and WellCare is up 1.5% to $143.72.