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UnitedHealth (UNH) to Buy Change Healthcare, Stock Gains

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UnitedHealth Group Inc. UNH recently announced that it will acquire Change Healthcare Inc. CHNG for $13 billion. The acquired entity will be part of its Optum Insight unit, which in turn, is a sub-segment of the health services segment named Optum.

While the stock of Change Healthcare inched up 0.82% in yesterday’s trading, UnitedHealth’s shares were up 1.6%.

The deal, which is expected to close in the second half of 2021, will accrue 50 cents  to UnitedHealth’s adjusted EPS in 2022. Change Healthcare CEO Neil de Crescenzo will be in charge of the combined company.

This strategic move reflects UnitedHealth’s efforts to diversify its operations vertically and expand its reach in the heathcare services space wherein other major insurers have limited presence. The U.S. addressable market for Optum (healthcare) services is estimated at more than $950 billion. The company expects this market to grow at a mid-single digit annual percentage rate over the next several years.

Change Healthcare will be integrated with the company’s sub-segment OptumInsight. The consolidated entity will bolster this unit’s already best-in-class capabilities, given that both companies’ abilities are highly complementary. Change Healthcare's technology and Optum's advanced data analytics will be used to look at the insights drawn from billions of claims transactions, thus minimizing administrative waste.

Also, Optum’s clinical analytical expertise and Individual Health Record coupled with Change Healthcare’s evidence-based clinical criteria will be integrated into clinician’s workflow to deliver an effective clinical decision support at the point of care.

Further, Change Healthcare’s payment capacities combined with Optum’s highly-automated payment network will simplify financial interactions among the care providers, payers and consumers, and accelerate the movement to a more modern, real-time and transparent payment system.

Notably, OptumInsight is the smallest (on the basis of revenues) sub-segment within the Optum segment (which comprises the other two segments, namely OptumRx and Optum Health). However, this unit retains its attractiveness owing to its decent operating margins, which achieved a near 25% in each of the last two reported years while the same for the other two segments remained below 10%.  Thus, expanding this segment makes a strategic sense to the company.

OptumInsight business accounted for $2.8 billion of revenues in the three months ending Sep 30, reflecting about 4% of the company’s top line. Change Healthcare reported revenues worth$756 million in the same period.
Management recently announced that OptumInsight is targeting double-digit percentage revenue growth, on average, over the next several years. The company’s current footprint, competitive positioning and a diverse skillset contribute to continued growth in its sales pipeline and revenue backlogs, indicating buoyant demand for its solutions.

UnitedHealth continues to target long-term operating margins of 16-20%, depending on its ultimate business mix. Growth in scaled healthcare specific managed services capabilities, may slightly moderate its total margin percentage over time due to the higher labor requirement of such services.

In six months’ time, the stock has risen 25.4% compared with its industry’’s growth of 24.7%.

Other stocks in the same space, such as Humana Inc. HUM and Anthem Inc. ANTM have also rallied 16% and 28.5% each over the same time frame.

UnitedHealth currently carries a Zacks Rank #3 (Hold).

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