The largest medical insurer in the U.S., UnitedHealth Group (UNH, Financial) has been catching a lot of analysts’ attention for the past few days after the management declared its plans to merge the fourth-largest pharmacy benefit manager, Catamaran Corporation (CTRX, Financial) into it, amid rising concerns among health insurers on increasing costs of life-saving drugs. News sources such as Wall Street have confirmed that this merger deal would be between Catamaran and the health services arm of UnitedHealth Group better known as OptumRx. Let’s find out the major highlights on the deal which would be a total cash deal, and how it could benefit the merging companies in the long run.
The transactional details
In order to control the rising costs of prescription drugs, UnitedHealth Group has agreed to spend about $12.8 billion in a cash-deal to buy the Illinois based pharmacy benefits management (PBM) firm, Catamaran. As per sources, UnitedHealth would be paying $61.50 per share of Catamaran, a 27% premium over the closing price on March 27 which stood at $48.32.
As soon as the announcement was made from the company headquarters, shares of Catamaran rose 23.8% to $59.83 through the close of regular trading on March 30. Similarly, UnitedHealth shares rallied 2.5% to $121 on the same day.
The merger synergies are apparent
Brooks O’Neil, a healthcare analyst at Dougherty & Co., shared his positive sentiments around the merger plan and quoted that the combination of the two companies could aid in cutting the costs in two ways – it would aid in eliminating redundancy in jobs as well as improve price negotiation power for cutting-edge medicines in the long run. He further commented, “We think putting United together with Catamaran brings a sophistication and expertise to United, plus you have the benefit now of significant scale…”
Since the cost of pharmacy drugs has been rising over the past 10-15 years in the U.S., such a unique combination could possibly make pharmacy drugs more affordable for consumers.
In fact, this unique merger combination could even weaken the competition from the top PBM companies such as Express Scripts Holding Co. (ESRX, Financial) and CVS Health Corp. (CVS, Financial). UnitedHealth deems that the combined entity would “create a dynamic competitor” in the PBM market, and it has further suggested that, if everything including approval from the Federal Trade Commission falls in place, the deal should be closed by the final three months of 2015. In fact, these two companies are betting that their combined size would aid in generating economies of scale, hence making the competition with Express Scripts and CVS Health Corp. even more prominent in the days ahead.
The CEO of UnitedHealth’s OptumRx division, Larry Renfro, looks optimistic on this move and stated that customers could expect to be heavily benefited through this deal. He further commented, “We believe this combination will create significant value for health plan, government, third-party administrator and employer customers and, most importantly, the individual consumers who depend on us for accurate, affordable and convenient pharmacy benefit products and services…”
Management from both the companies is hoping that the deal goes through well in the upcoming days, and that their customers should be able to mesh well. However, Catamaran presently holds customers like Cigna Corp. (CI, Financial) who are rivals for UnitedHealthcare.
Final word
If the U.S. regulators finally offer a green signal to this deal, it would inadvertently create a competitive force in the pharmacy benefits management industry. Though it’s not still clear whether this deal would see the light of the day, both the companies’ top brass look upbeat on the merger probabilities in the upcoming future. So, let’s stay tuned and keep an eye on the prospective merger on the cards.
