The nation’s largest health insurer, Minnetonka’s UnitedHealth Group Inc., will have more clout to push back against high drug prices with a $12.8 billion merger announced Monday.
UnitedHealth is acquiring Schaumberg, Ill.-based Catamaran Corp. in a move to gain control over how more than 1 billion prescriptions per year are dispensed. UnitedHealth’s OptumRx unit was already the third-largest player in the nearly $300 billion business of managing prescription-drug benefits for Americans.
“It’s a good thing for the consumer,” said Leerink Partners health care analyst Ana Gupte. “We’ve had a lot of [drug] price issues, even beyond the wave of specialty drugs. Even within the existing brandeds and generics, the unit-price increases have been fairly significant.”
Analysts and investors cheered the merger news because drug costs are a large and growing share of overall health care spending. Huge pharmacy-benefit management companies have fought against sky-high drug prices, and that battle is likely to become much more intense with the launch of a new generation of cancer drugs carrying six-figure price tags.
Pharmacy benefit managers, known in the industry as PBMs, are in the business of managing the pharmaceutical side of an insurance plan, including deciding which drugs are covered and what pharmacies or mail-order services beneficiaries use to get them. The companies can also be a potent force to negotiate bulk discounts on drugs, as was evident last year with pressure to lower costs for a $90,000 hepatitis C medication.
The PBM industry has risen rapidly since the creation of Medicare’s prescription drug benefit in 2003, and now handles the management of about 4.4 billion prescriptions annually. But the industry has seen rapid corporate consolidation, especially following passage of the Affordable Care Act.
“We view the transaction as a positive for [UnitedHealth] as it cements Optum’s position as a top player” in the PBM industry, Wells Fargo senior analyst Peter Costa wrote in a note to investors Monday.
By adding No. 4 player Catamaran, UnitedHealth’s OptumRx will control 23 percent of the market, up from 14 percent. That puts it on par with the industry’s biggest player, Express Scripts, which controls 30 percent of the market, and CVS/caremark’s 25 percent share, according to Deutsche Bank analysts. The next-biggest company has 8 percent.
IBISWorld, which studies the industry, estimates that the $287 billion PBM market is on pace for 4.3 percent annual growth through 2020. “Growth prospects for PBMs are strong,” the firm’s report on the industry earlier this month said. “The 2010 Patient Protection and Affordable Care Act will expand prescription drug coverage over the next five years, which will help bolster prescription drug use and industry revenue as a result.”
UnitedHealth on Monday agreed to pay Catamaran shareholders $61.50 per share, a 27 percent premium over Friday’s closing price. The deal is expected to add 30 cents per share to UnitedHealth’s earnings in 2016, following an expected closing at the end of 2015, pending shareholder and regulatory approvals.
Investors applauded the deal, sending shares of both companies higher. Catamaran stock jumped 24 percent on the news, and UnitedHealth Group gained 2.5 percent, closing at $121.
OptumRx had revenue of about $32 billion last year, while Catamaran had revenue of $21.6 billion.
UnitedHealth executives declined an interview request, but Optum’s chief executive Larry Renfro said in a statement that the combination of the two companies would create “a unique offering in the industry unparalleled by current participants.”
UnitedHealth Group is principally known for being the nation’s largest health insurer, and its OptumRx business differentiates itself in the market by being able to inform its decisionmaking by analyzing claims on 114 million commercial and Medicare-covered beneficiaries. Catamaran, meanwhile, is known for its advanced technology platforms.
The combination is expected to allow company analysts to study patients’ demographic, lab, pharmaceutical, behavioral and medical treatment data in new ways to improve medical decisionmaking and let patients better follow doctors’ orders, the companies said in a statement.
Stock analysts said the deal gives OptumRx a welcome ability to broaden its base beyond UnitedHealth Group customers. But it wasn’t clear whether a good-sized chunk of Catamaran’s business would flee with the deal. Health insurer Cigna is one of Catamaran’s larger customers, but its managed-care business competes with UnitedHealth.
Costa’s analysis noted that Cigna may try to pull out of its Catamaran deal, although Leerink’s Gupta had a different take after talking with Cigna officials.
“They don’t seem to show any concern or any interest in cleaving from Catamaran as a result of this,” she said. “As long as they can share in some of the better economics from scale, they would be happy to stay with them.”
Mark Thierer, Catamaran’s chairman and chief executive, will become CEO of the combined OptumRx and Catamaran. Timothy Wicks, the current chief executive of OptumRx, will become president.
UnitedHealth Group is the state’s largest publicly traded corporation by revenue. It reported revenue of $130.5 billion in 2014. In 2013, its revenue exceeded that of Target and Best Buy combined, according to the most recent Star Tribune 100 analysis of the state’s top companies.