UnitedHealth Expands PBM Footprint With Catamaran Acquisition

In a move that will further consolidate the pharmacy benefits management (PBM) industry in the U.S., UnitedHealth Group (NYSE:UNH) announced the acquisition of Catamaran Corporation on Monday. The acquisition, which will be completed by the end of fourth quarter 2015, pending regulatory approvals, is valued at $12.8 billion, which is about 27% higher than Catamaran’s closing price on Friday. ^[1] To finance the deal, UnitedHealth will use its existing cash resources and also raise new debt. According to UnitedHealth, the acquisition will boost its earnings by about $0.30 per share in 2016. The merger is unlikely to affect the company’s earlier guidance of $6 to $6.25 earnings per share for 2015.  In this note we take a look at how UnitedHealth will benefit from this deal.

The announcement sent UnitedHealth’s stock up by nearly 3% on Monday. We have a price estimate of $105 for UnitedHealth’s stock, which is slightly below the current market price.

See Full Analysis For UnitedHealth Group Here

Merging Two Fast Growing Businesses

UnitedHealth’s OptumRx business offers PBM services to more than 30 million customers nationwide, processing about 570 million retail drug prescriptions annually, which is about a 14% share in the U.S. retail prescription market. OptumRx was the fastest growing business in the entire Optum division in 2014. OptumRx revenues have almost doubled since 2010, and there was improvement in the bottom line as well. This is exhibited by the fact that EBITDA margins improved from under 3% in 2011 to 4.4% in 2014. ^[2] At present, Catamaran serves about 35 million customers in the U.S. with 400 million scripts expected in 2015. Catamaran earned close to $21 billion in revenues in 2014, a 46% year-over-year increase. Revenues in 2012 were about $10 billion. ^[3] The combination of the two entities will take the total annual prescriptions filled to nearly 1 billion and make it the third largest player in the industry with a market share of around 20%. In comparison, CVS Health (NYSE:CVS) and Express Scripts Holding Co. (NASDAQ: ESRX), which together control more than 50% of the PBM market, filled around 1 billion prescriptions each in 2014, respectively. ^{[4] [5]}

According to UnitedHealth, Catamaran’s technology platform will complement UnitedHealth’s data and analytics capabilities to create more value. We believe that achieving large scale, which is instrumental for maintaining good margins in the PBM industry, will benefit UnitedHealth’s OptumRx division tremendously by giving it greater bargaining power with drug manufacturers, pharmacies, and wholesalers. This will also help reduce prescription costs for clients. The combined entity will also stand to benefit from rising specialty drug spending in the U.S. through enhancing its existing services for complete patient healthcare. ^[1]

Retail PBM Market Is Expanding

Pharmacy benefit management is a rapidly growing market in the U.S. In 2013 over 4 billion retail prescriptions were filled in the U.S. and this is expected to cross 4.7 billion by the end of our forecast period. ^[6] Also, prescription-drug spending in the U.S. has been climbing, rising by about 12% in 2014. This has been largely on the back of rising drug prices in the U.S. This has led to consolidation in a competitive PBM industry. In February, Rite Aid (NYSE:RAD) entered into an agreement to buy Envision Pharmaceuticals Services for approximately $2 billion.((Rite Aid to Buy Pharmacy Benefit Manager EnvisionRx, NYT))

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1. Catamaran and OptumRx to Combine, UnitedHealth Press Release [↩] [↩]
2. SEC 10-K Filing [↩]
3. Catamaran Corporation Announces Record Financial Results for 2014, Catamaran Corporation Press Release [↩]
4. Annual Report 2014, CVS [↩]
5. 2014 Annual Report, Express Srcripts [↩]
6. Use of Medicines in the U.S. report 2013, IMS Health [↩]