UnitedHealth's Catamaran deal is about more than just getting bigger

Any company announcing a big acquisition almost always sees its stock price slip on the news. Investors know from experience to suspect that too much is being paid or some big risk isn't really understood.

Yet when UnitedHealth Group said early last week that it's buying the pharmacy benefit manager Catamaran Corp. for $12.8 billion, its stock opened the day up nearly 4 percent.

It clearly helped that investors could read right in the news release that once the deal closes near the end of this year it should add about 30 cents to UnitedHealth's earnings-per-share in 2016.

The deal also is in the business niche that's been consolidating like crazy. Size really matters when it comes to getting lower drug costs for clients, and now UnitedHealth's OptumRx unit will be a lot bigger.

The thing is, in a conversation with OptumRx CEO Tim Wicks, getting greater clout with pharmaceutical companies and pharmacy chains barely came up at all. And what the company is up to with this deal — part of the strategy to have OptumRx become what Wicks called a pharmacy care services provider — is far more intriguing than what the Wall Street crowd thinks is going on.

What people understand when hearing about a pharmacy benefit manager like OptumRx, Wicks said, is a business that fulfills prescriptions as cheaply as possible. A so-called PBM will try to beat up drug companies, pharmacy chains and health systems for better prices. That way a client, a health insurer or employer, saves some money.

And you can see why size matters. Pfizer or Walgreens vs. a mom-and-pop isn't a fair fight. Against OptumRx, which expects to fulfill about 600 million prescriptions per year, it sure is. And when the deal closes with Catamaran, the total number of prescriptions fulfilled will go to more than 1 billion per year.

OptumRx is already a big company, part of the fast-growing Optum collection of health care services businesses of UnitedHealth. It had about $32 billion in 2014 revenue, in what turned out to be a great year of 33 percent growth.

That wasn't enough to make OptumRx a top player in its business. Catamaran had been growing quickly, too, reaching more than $21 billion in revenue last year. But both of them still looked up at two far bigger players, CVS Health and Express Scripts. Those two together had about half the market in 2014, according to analysts at Barclays.

After combining, Catamaran and OptumRx will have about a fifth of the market. Wicks said, of course, that he and his new colleagues from Catamaran intend to wield whatever clout they have to squeeze drug costs. It's just not the reason to do this deal.

Wicks begins his rationale for buying Catamaran by talking about its technology, the RxClaim system developed by Catamaran and, as it turned out, also used by OptumRx. Other pharmacy benefit managers use it, too. Together it's nearly 1.5 billion prescriptions to be fulfilled this year on Catamaran's system.

"So when I tell you that they have class-leading technology, it's not hot air," Wicks said. "You can look at the numbers."

Because use of those drugs creates such a painful cost problem for insurance companies and perhaps consumers through their copays and deductibles, finding a way to keep the cost down is a big opportunity for the likes of OptumRx.

Wicks described how Catamaran staffers connect with patients on Skype or FaceTime, perhaps to show them how to do an injection of new drug. Making sure drugs are properly used so the patient gets healthier is one of the ways to keep costs down.

Another strategy is to help the patient reach a point where they need fewer medications. And that, Wicks said, is what OptumRx really knows how to do.

An example he uses is a person with diabetes, who may call up OptumRx to talk about a new prescription. The patient will end up in a far broader conversation than just when to swallow the pill and whether to ever do it on empty stomach. Is there anything that can be changed in your diet? How about exercise? Would our new wellness program be of any interest?

"When we can introduce [consumers] to those programs, what we have found is that consumers being introduced by way of a call to their pharmacy provider are 60 percent more likely" to sign up for them, Wicks said.

When the transaction closes, Wicks will become the president, and Catamaran Chief Executive Mark Thierer will become CEO. Because the two companies knew each other so well — and OptumRx already uses Catamaran's technology system — UnitedHealth has said the integration of two operations should go smoothly.

In Catamaran's talking points prepared for managers to talk to customers, made public as part of a securities filing, it stopped short of saying that there would be no jobs eliminated.

But it made the point, much like Wicks has, that the deal is not about taking out costs. The idea here is to "grow the combined businesses beyond what either company could accomplish on its own."

Sometimes in mergers and acquisitions, one plus one really does equal more than two.