What The UnitedHealth-Catamaran Deal Means For CVS Health And The General Public

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Earlier this month, we wrote a piece on how the pharmacy benefit management market in the U.S. has transformed over the past few years and its effect on CVS Health (NYSE: CVS). As firms resorted to aggressive acquisition strategies to achieve scale, it resulted in the consolidation of the whole market. Another one that made the headlines yesterday (March 30th) is the acquisition of Catamaran Corporation (NASDAQ:CTRX) by UnitedHealth Group (NYSE:UNH) [1], further increasing the concentration in this market. Together, these companies will form the third largest pharmacy benefit manager with a market share of around 20%. From a total of about 100 companies in the market in 2008, it will come down to just 3 companies controlling almost three-fourths of the market, after the completion of this transaction. The acquisition will be completed by the end of fourth quarter of 2015, pending regulatory approvals.

Before this transaction, CVS, along with Express Scripts Holding Co. (NASDAQ: ESRX), controlled about 50% of the PBM market. In the recently concluded fiscal year, the company filled about 750 million prescriptions, compared to more than a billion prescriptions filled by rival, Express Scripts. With this deal, the number of prescriptions United Health will manage will increase from 570 million to a billion prescriptions.

What This Means For CVS

Like in any market, an increase in scale will result in greater negotiating power with drug manufacturers and pharmacies for UnitedHealth. As the company’s cost of acquiring prescription drugs decreases, it will be able to pass on more benefits to consumers resulting in more consumer friendly insurance plans. This is likely to translate into a higher volume of contracts from groups that pay for drugs (usually insurance companies or corporations) and hence a higher share in incremental market revenues. CVS’ share of the total prescriptions filled in the United States has increased over the past few years and has been a key driver of its top line growth. (PBM revenues doubled in the last five years.) The share increased from a little under 15% in 2007 to more than 18% in 2014, while the PBM market as a whole expanded 15% in size. So, as yet another competitor with a similar scale to  Express Scripts  joins the race, it will get more difficult for CVS to sustain the growth in its market share.
On the other hand, CVS, being a pharmacy retailer, still has an upper hand over other PBM players when it comes to forecasting its drug supply needs. As the company has access to the vast amount of prescription sales data from its pharmacy stores, it can more accurately predict variations in supply and demand (and procure drugs from manufacturers accordingly), which also play a vital role in determining a benefit manager’s profitability.

What This Means For The General Public

Healthcare expenditure in the U.S. has been increasing at a rapid pace for several years now. Government spending on health care forms about 18% of the country’s GDP currently and the share is only expected to go up with time. As prices of drugs (even generics) scale new peaks, consumers are increasingly feeling the pressure on their pockets. In 2014, U.S. prescription drug spending increased 13.1 percent, driven by Hepatitis C and compounded medications [2]. In such a situation, consolidation in the PBM market will come in as a breather to the general public. The greater negotiating power with PBMs will result in more pressure on drugmakers to lower the prices they charge. This in turn, will help reduce expenses for consumers. To an extent, this process is already underway. Lately, the PBM industry has been in the spotlight as tensions between drug companies and customers rise, over the exorbitant prices of newly launched specialty therapies. Express Scripts 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 [3].

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Notes:
  1. UnitedHealth Expands PBM Footprint With Catamaran Acquisition []
  2. Express Scripts Press Release []
  3. UnitedHealth to Buy Catamaran for $12.8 Billion []