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UHG invests $12B to create giant drug manager

America's largest insurer is looking for all the scale it can get in the war for affordable medicines.

UnitedHealth Group is spending $12.8 billion to acquire Catamaran, the country's fourth-largest pharmacy benefits manager. The Schaumburg, Illinois-based Catamaran will be merged with OptumRx, the drug management division of UHG's highly profitable services and IT subsidiary Optum.

The $12.8 billion deal is expected to close by the end of the year. UHG is paying $61.50 per share, a 27 percent premium on Catamaran's stock price.

"We believe the combination of the two companies will create a unique offering in the industry unparalleled by current participants," said Optum CEO Larry Renfro. "Optum's longstanding business relationship with Catamaran as a technology partner means we operate on the same adjudication platform, simplifying integration and giving us confidence our combined organizations will quickly become an innovative force moving the pharmacy care services marketplace forward."

UnitedHealth Group helped create the modern PBM business in the 1980s by integrating benefit design with retail pharmacy networks and mail-order services. In 1994, United sold its Diversified Pharmaceutical Services subsidiary, which later became part of Express Scripts, but more recently has been using Optum as a PBM of some scale its it own right--with 25 million customers and 600 annual prescriptions.

OptumRx and Catamaran will now have a combined customer population of around 50 million people and 1 billion annual prescriptions, and will be able to compete against Express Scripts, the nation's largest PBM, and CVS Caremark. It will also have more leverage with pharmaceutical companies selling expensive specialty therapies like Sovaldi and new cancer drugs.

"The creation of a differentiated, channel-agnostic delivery model will provide payers and individuals a broader portfolio of services and a deeper product offering while aggressively focusing on managing costs," said said Mark Thierer, chairman and CEO of Catamaran.  

Catamaran was founded in 1993 as Systems Xcellence in Toronto, and spent its early years doing business in Canada, such as providing software and services for the Newfoundland and Labrador pharmacy networks. In 2006, the company went public, relocated its headquarters to suburban Chicago and kept growing. After buying Catalyst Health Solutions in 2012 for $4 billion, the company was renamed to Catamaran, and last year had $21 billion in revenue and net income of $317.3 million.

Catamaran and OptumRx have complementing and overlapping portfolios that will give OptumRx pretty huge scale, and some unique approaches, Renfro argues.

OptumRx, with revenue of $32 billion last year, uses "clinical synchronization" to connect pharmacy and care management systems to pursue "more consistent and compliant patient outcomes and savings for individuals and plan sponsors," such as large employers. That approach is particularly important, Renfro argued, "given the growth in U.S. spending on specialty pharmaceuticals," a part of a wave of drug spending that could top $500 billion by 2020.

"The acquisition makes tremendous strategic sense as the PBM business is a scale business and drives Optum's revenue mix," said Sterne Agee managed care analyst Brian Wright. The pairing also works because United and 30 percent of the PBM industry use Catamaran's technology platform.

Among some potential downsides of the deal, though, is the fact that such as huge acquisition could limit United's ability to make other acquisitions--including of health plans--in the near future, Wright said.

Catamaran also has a 10-year contract with Cigna, signed in 2013, that contributed almost a third of its revenue last year. The PBM service is "channel-agnostic," as Catamaran CEO Thierer said, and a range of Optum's products and services are designed to be "payer agnostic." But it's still possible Cigna could have qualms about the subsidiary of a rival insurer managing its drug business, and pull out of the contract.

Regardless of whether the payer agnosticism trend allows other insurers to rely on a UHG-owned PBM, the goal of the acquisition is to build the "most modern, effective and consumer-focused PBM in the history of the industry," said Thierer, who will be CEO of OptumRx.

OptumRx will be the third-largest PBM behind CVS Caremark and Express Scripts. The acquisition  is the second PBM deal this year following Rite Aid's $2 billion takeover of EnvisionRx.

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