In an effort to beef up its pharmacy benefits business, OptumRx– unit ofUnitedHealth Group Inc. UNH – has entered into an agreement to acquire pharmacy benefits manager (PBM) Catamaran Corp.
Optum Rx is UnitedHealth’s pharmacy care service business. The unit provides PBM services to the majority of UnitedHealthcare (a unit of UnitedHealth Group) members. Additionally, OptumRx manages specialty pharmacy benefits across nearly all of UnitedHealthcare’s businesses, with services including patient support and clinical programs that ensure quality and deliver value. This is crucial in managing overall spending on drugs, as biologics and other specialty medications are the fastest rising pharmacy expenditures.
The news sent up the shares of UnitedHealth to a new 52-week high of $123.76, with 5.2 million share exchanging hands. The shares have gained 20.5% year to date.
Pharmacy benefit managers work primarily for insurers and employers and seek to negotiate prices for drugs with pharmaceutical companies and drugstores to reduce drug prices for consumers. This in turn lowers the medical cost for insurers.
This acquisition of the country’s fourth-largest PBM (by volume of prescriptions) will help UnitedHealth to brace up for its fight against rising prescription drug costs. We expect the deal to reduce UnitedHealth’s rising medical costs which directly hit its bottom line.
UnitedHealth has lately been jittery over escalating medical costs. Last year, prescription-drug spending rose more than 12% in the U.S., the biggest annual increase in more than a decade, according to a report by Express Scripts.
The agreement, estimated at $12.8 billion, calls for the acquisition of Catamaran’s outstanding common stock for $61.50 per share in cash. The purchase is expected to close by the fourth quarter of 2015. Mark Thierer, Catamaran’s chairman and chief executive officer, will become CEO of OptumRx, and Timothy Wicks, the current CEO, will become president.
The combination of Catamaran’s industry-leading technology platform with the data and analytics capabilities of UnitedHealth's OptumRx will provide them scale and operating efficiency and place them at the third position in the PBM industry. The first and the second positionsare held by Express Scripts Holding Co. ESRX and CVS Health Corp. CVS, respectively.
The acquisition will bloat the revenues from OptumRx, which posted revenues of $8.5 billion in the fourth quarter of 2014, up 23.9% y/y on a 23% increase in script volume. OptumRx is continuing to see robust organic growth as well as conversion from in-sourcing activities with nearly 600 million adjusted scripts now being processed annually.
The transaction will accrue to UnitedHealth’s 2016 earnings by approximately 30 cents per share. The company will fund the acquisition from its existing cash resources and new debt. UnitedHealth also said that it continues to expect earnings of $6.00 to $6.25 per share, after taking the merger cost and capital deployment in share buyback and dividend payments.
The PBM industry is on a consolidation mode and has seen several mergers in recent years. Last month too, Rite Aid Corp. RAD agreed to buy EnvisionRX for $2 billion.
Of course, UnitedHealth has moved a step ahead of its peers by agreeing to buy a PBM company and emerge as a leading PBM player. Nonetheless, other companies in the health insurance space also have contracts with PBM players. Aetna, for example,has contracts with CVS Health Corporation and Express Scripts for its PBM services while Cigna Corp. CI has an agreement with Catamaran.
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