Coverage: UnitedHealth buying pharmacy-benefit company

UnitedHealth Group Inc. is betting that the next wave in health coverage is going to be pharmacy related. It is spending more than $12 billion to buy Catamaran in a move to counter rising drug costs.

The Wall Street Journal story by Anna Wilde Mathews and Joseph Walker had these details about the sale:

UnitedHealth Group Inc.’s deal to acquire Catamaran Corp. for about $12.8 billion in cash will bulk up its pharmacy-benefit business amid growing concern from employers and insurers about the rising costs of cutting-edge drugs.

Catamaran, the fourth-largest pharmacy-benefit manager in the U.S. by volume of prescriptions processed, will be merged into UnitedHealth Group’s OptumRx unit, the industry’s third-largest and part of the company’s Optum health-services arm.

UnitedHealth will pay $61.50 per share of Catamaran, a 27% premium over Friday’s closing price of $48.32. The companies said they expect the deal to close in the fourth quarter.

Shares of Catamaran rose 23.8% to $59.83 through the close of regular trading on Monday. UnitedHealth shares rose 2.5% to $121.

Zachary Tracer wrote for Bloomberg that the move would likely put pressure on drug companies to lower their prices because of the number of people the company covers:

Benefits managers like Catamaran help administer the drug coverage in health plans, working with employers and insurers to negotiate with drug companies and pharmacies. They also often oversee patients’ drug use, maintaining lists of covered drugs and handling mail orders or complex treatments.

The deal will put more pressure on drugmakers and the prices they charge. The pharmacy benefits industry has become the focal point of tensions between drug companies and customers over the cost of new treatments. Express Scripts Holding Co., the biggest in the industry, successfully led a campaign last year to push for discounts on $1,000-a-day treatments for hepatitis C from drugmakers Gilead Sciences Inc. and AbbVie Inc.

The Catamaran deal lets UnitedHealth bet more on growth in drug benefits as the initial surge of new health-insurance customers from Obamacare begins to slow. The biggest U.S. health insurer will combine Catamaran with its drug-benefit unit, called OptumRX, giving it a broader base of customers.

Optum “has largely been servicing United’s captive business,” said Ana Gupte, an analyst at Leerink Partners. “They have aspirations to broaden that.”

Sneha Banerjee’s story for Reuters pointed out that the deal would increase UnitedHealth’s market share to 20 percent:

U.S. drug prices rose 12 percent in 2014 due to a new treatment for hepatitis C that cost more than $80,000 but cured almost all recipients with few side effects. Another new class of drugs, to treat high cholesterol, is expected to hit the market in 2015 and has insurers worried about drug costs this year as well.

The purchase of Catamaran will increase UnitedHealth’s market share to 15 percent to 20 percent of the people who receive their drug benefits through pharmacy benefit managers, BMO Capital Markets analyst Jennifer Lynch said in a research note.

With a combined 1 billion scripts annually, UnitedHealth will be about the same size as current industry number two, CVS Health Corp (CVS.N), she added.

Catamaran was formed after SXC Health Solutions and PBM Catalyst Health Solutions merged in 2012.

The New York Times story by David Gelles pointed out that the industry continues to expand:

UnitedHealth said the deal would add 30 cents a share to its net earnings in 2016. UnitedHealth plans to finance the acquisition from existing cash resources and new debt.

The deal is subject to approval by Catamaran’s shareholders and regulators, who may take a close look at an increasingly concentrated industry.

But even as it consolidates, the business is growing, too. Managing pharmacy benefits is expected to quadruple to a $400 billion market in 2020, up from $100 billion last year.

Mark Thierer, Catamaran’s chairman and chief executive, will become chief executive of OptumRx, while Timothy Wicks, the current chief executive of OptumRx, will become president.

“Our board of directors carefully considered a variety of strategic options and unanimously concluded that this combination is clearly in the best interests of our shareholders,” Mr. Thierer said. “Together, we believe we will have the talent, scale, technology resources and innovative spirit.”

Stuart Pfeifer wrote for the Los Angeles Times that some question the acquisition and if it will pass regulatory scrutiny:

Whether the acquisition will benefit consumers may be an issue in the months ahead. Some experts suggest that the deal may weaken competition and prompt opposition from the Federal Trade Commission.

Pharmacy benefit managers help negotiate with drug companies the prices of prescription drugs on behalf of employers, insurers and government agencies. The largest players in the industry include Express Scripts and CVS/Caremark.

The companies are seen as key players in the battle to reduce the costs of specialty drugs, complex medications that can provide life-saving treatment for diseases such as HIV, cancer and hepatitis C — but often with high price tags.

As more people age, access to expensive medications to treat a variety of illnesses will become an even larger issue. Anything that might lower the cost for a majority of people should be welcome news. But that only widens the gap between those who have insurance and those who don’t.