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Less wheeling, fewer dealings

30 March 2015 By Robert Cyran

A $12.8 billion prescription may clear up pharmacy benefit managers’ chronic M&A. UnitedHealth Group is paying a 27 percent premium for drug middleman Catamaran and should generate more than enough savings to cover it. That might sound like a concoction others might want to try. But the buyer is playing catch-up. And its target is usually a buyer. Catamaran’s capitulation indicates benefit managers no longer need a dose of dealmaking.

Pharmacy benefit managers try to negotiate savings for companies and health plans by squeezing drugmakers and keeping a chunk of the discount. For example, new hepatitis C treatments carry a list price of close to $100,000 per patient. The largest benefit manager, Express Scripts, set off a price war late last year by negotiating a sharp discount from the drug’s developer, AbbVie. Discounts of greater than 40 percent to list price are now common.

Scale is an advantage for a benefit manager. The more patients it represents, the less a drugmaker can afford to be left off its list of preferred medications. That would mean a lot of forgone revenue. The result has been a wave of industry consolidation. Catamaran itself is the product of multiple smaller deals.

Past deals suggest UnitedHealth should be able to find savings of at least 1 percent of combined revenue. The two firms should have sales of almost $60 billion this year. The $600 million of savings, taxed and put on a multiple of 10, could be worth over $4 billion today. That’s significantly greater than the $2.7 billion premium UnitedHealth has agreed to pay for Catamaran.

The fact Catamaran chose to sell may signify the sector’s prolific M&A days are behind it. The company, after all, has specialized in finding value by taking over rivals. That its executives are now eschewing such potential opportunities by becoming a seller implies there are fewer opportunities worth pursuing.

On top of that, the combined company will be the third-biggest benefit manager, behind Express Scripts and CVS Health. These three will control, depending upon the statistic measured, between two-thirds to three-quarters of the market. Regulators scrutinized Express Scripts’ and CVS’ transactions, and UnitedHealth can expect similar treatment. The prospect of even tougher oversight for any future deals may be an M&A cure-all.


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