By Anna Wilde Mathews and Joseph Walker
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.
Pharmacy-benefit managers, or PBMs, typically work for employers
and health plans, managing pharmacy benefits and seeking to
negotiate favorable prices with pharmaceutical companies and
drugstores.
The two companies are betting that their combined size will
generate increased negotiating heft and economies of scale, as they
compete with Express Scripts Holding Co., the biggest PBM in the
industry, and CVS Health Corp., the No. 2.
"You have to have scale," said Mark Thierer, the chief executive
of Catamaran who will be CEO of the new combined company. "This
makes the business more competitive overall."
Prescription-drug spending rose more than 12% last year in the
U.S., the biggest annual increase in more than a decade, according
to a report by Express Scripts. Specialty medicines are projected
to account for half of total drug spending by 2018, compared with
about 20% today, Mr. Thierer said on a February conference
call.
The deal, if completed, will further consolidate an industry
that has experienced a wave of mergers in recent years. The top
three PBMs would represent about 75% of all pharmacy claims
processed last year, according to J.P. Morgan.
In February, Rite Aid Corp. agreed to acquireEnvision
Pharmaceutical Services for about $2 billion in cash and stock.
Catamaran was known as SXC Health Solutions Corp. until 2012, when
it completed a merger with Catalyst Health Solutions Inc.
A UnitedHealth spokesman said the combined entity would be "a
competitive force in the PBM industry," which may help regulators
be comfortable with the transaction.
"We would not anticipate anti-trust issues or a competitive bid
from another potential acquirer," Bret Jones, an analyst with
Oppenheimer & Co., said in a research note. The U.S. Federal
Trade Commission cleared the merger of two much larger companies,
Express Scripts and Medco Health Solutions, in a 2012 deal valued
at $29.1 billion.
If completed, the new deal could carry integration risks for
OptumRx. Express Scripts, based in St. Louis, struggled after its
acquisition of Medco to retain some customers amid stumbles in
combining the companies' back-office, technology and
account-management teams.
Craig Oberg, a pharmacy-benefits consultant with the Burchfield
Group in St. Paul, Minn., said he had heard from an OptumRx
customer on Monday who inquired about whether the deal would have
negative consequences, such as layoffs, that would affect the
customer's health-plan members.
Catamaran's Mr. Thierer said OptumRx has long used software from
Catamaran, and "this will lead to a seamless transition" for
customers.
Shares of Express Scripts rose 3.7% through the close of regular
trading Monday, a sign that investors think the company could be
acquired by a large insurer or retail pharmacy chain, Brian
Tanquilut, an analyst with Jefferies & Co., said in an
interview. There is also a view that Express Scripts could win
clients from Catamaran during its integration with OptumRx, Mr.
Tanquilut said.
Catamaran had $21.58 billion in revenue last year, while OptumRx
had $31.98 billion. OptumRx expanded sharply when it took over
pharmacy benefits for UnitedHealth's insurance unit,
UnitedHealthcare, in 2013. Both companies have been growing
recently, though Catamaran in February announced the loss of two
health-plan clients, putting pressure on its shares despite
fourth-quarter earnings that beat analysts' expectations.
Drug spending had been relatively stable in recent years as
blockbuster treatments lost patent protection and went generic. But
the recent rise of new, so-called specialty medicines for diseases
like hepatitis C has put increased pressure on PBMs to help
employers rein in costs.
But expensive drugs also benefit PBMs, which keep a portion of
the discounts they obtain from pharmaceutical companies. J.P.
Morgan, in a February research note, estimated that PBMs keep as
much as 15% of the negotiated rebates they obtain from
pharmaceutical companies. PBMs say the vast majority of savings are
passed along to customers.
Insurers and employers are bracing for the cost of expected new
treatments for cancer and other conditions such as elevated
cholesterol.
If the OptumRx deal with Catamaran is completed, each of the
top-three PBM players would offer a different setup. Express
Scripts has the largest volume in the industry. CVS has its own
network of pharmacies.
The new OptumRx would pitch the benefits of analysis and data,
including the broad array of health information that Optum's other
businesses glean and crunch. "These capabilities can all be
combined with the pharmacy side," said Larry C. Renfro, the chief
executive of Optum and vice chairman of UnitedHealth Group.
The companies said they hoped to improve patients' adherence to
their drug regimens, and executives pointed to deals like one
recently reached by Catamaran, which tied payment for hepatitis C
drugs to patients' results.
Executives from Catamaran and UnitedHealth said their customer
groups should mesh well. But Catamaran currently has clients that
are rivals of UnitedHealthcare. For instance, in 2013 Catamaran
struck a 10-year deal to help handle pharmacy-related matters for
Cigna Corp. "We expect no impact on service or operations that meet
our customers' needs," a Cigna spokesman said.
Mr. Thierer said he expected Catamaran's health-plan clients
would see benefits in the merger.
UnitedHealth was advised by J.P. Morgan, Bank of America, and
Morgan Stanley. Catamaran was advised by Blackstone Group LP.
Write to Anna Mathews at anna.mathews@wsj.com and Joseph Walker
at joseph.walker@wsj.com
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