We’re Going to Need a Bigger Boat: How UnitedHealth’s $12.8B Acquisition of Catamaran Creates a Unique Force in the Ongoing PBM Battle Against Rising Specialty Drug Costs

On March 30th, UnitedHealth Group announced it would acquire Catamaran Corporation and integrate its pharmacy services into OptumRx, UnitedHealth’s standalone pharmacy services unit. This merger is the latest in a trend that has consolidated the majority of the USA’s pharmacy benefit managers (PBMs), and gives UnitedHealth the scale to better compete with market leaders Express Scripts and CVS Health. Catamaran (formerly SXC Health Solutions) was originally a software company that served PBM clients, and moved into pharmacy services in 2008 by acquiring 6 of the 35 companies that used their software platform. It grew rapidly through further acquisitions in subsequent years and (following the acquisition of Medco by Express Scripts) formed Catamaran in 2012 through the $4B acquisition of Catalyst Health Solutions. The combined business of OptumRx and Catamaran will cover approximately 65 million beneficiaries, meaning that the top 3 PBMs will now administer three-quarters of the pharmacy benefit market.

In the USA’s fragmented payer market, achieving scale is critical for successfully negotiating with both manufacturers and providers. One of the primary functions of PBMs is to consolidate the customer bases of managed care organizations (MCOs) and negotiate discounts with pharmaceutical manufacturers. PBMs drive revenue through this practice by keeping a portion of these negotiated rebates (with this portion estimated by JPMorgan to be up to 15%). This practice has proved to be very fruitful for the PBM industry, particularly during the period of small molecule blockbusters. Alternatively, the rise of biologic and specialty therapies has brought about an increased need for the USA managed care market to exert pricing pressure on manufacturers, but has proven to be a more complex environment for PBMs.

Most notably, in the HCV market, Express Scripts opted to prefer AbbVie’s second-to-market VIEKIRA PAK over Gilead’s blockbuster SOVALDI / HARVONI franchise in part to make a statement against Gilead’s pricing strategy. Given the 90 million lives administered by Express Scripts, this at first glance seems like a significant coup for both Express Scripts and AbbVie. However, that does not tell the whole story. Express Script’s largest customer, Anthem, opted instead to contract with Gilead for its 30 million beneficiaries, citing both financial and clinical factors as drivers of this decision. This is illustrative of the fact that while Express Scripts processes the prescriptions of a huge portion of the market, their true negotiating power is limited to the beneficiaries of health plans that have agreed to cede their control over formulary management and accept the Express Scripts ‘national formulary’. While the deeper discount offered by AbbVie has the potential to drive cost savings for Express Scripts in these lives and any additional plans that opted-in to that deal, it also poses a significant risk. If health plans where VIEKIRA PAK is preferred are unable to pull-through this preference and fold to physician demand for SOVALDI / HARVONI, Express Scripts and their health plan customers will be responsible for covering those costs without the benefit of a discount from Gilead.

The cost and complexity of biologic therapies has been a major driver of PBM consolidation, but shifts in delivery and reimbursement channels have provided an equally influential impact of the rise of specialty therapies on PBM strategy. Many PBMs have opted to acquire specialty pharmacies (SPs), which provide disease management and allow the PBM to capture the pharmacy margins on high-cost drugs, which can be very significant. While Express Scripts and CVS Health are well positioned in this manner, OptumRx and Catamaran may be able to take their leverage over the specialty channel a step further by offering greater medical-pharmacy benefit integration under the broader offerings of UnitedHealth Group. Such integration also increases the importance of health resource reduction (i.e., reduction of medical benefit costs) to the PBM by increasing its risk across benefits. At the same time, it also must be considered that the absorption of Catamaran by UnitedHealth presents conflicts. For instance, in 2013 Catamaran entered into a 10-year agreement to provide pharmacy benefit services to Cigna, a direct competitor of UnitedHealthcare.

The medical-pharmacy offerings that may differentiate UnitedHealth’s PBM from Express Scripts and CVS Health could allow for unique approaches to manufacturer contracting. Catamaran and Cigna were late-movers in the HCV deals struck earlier in 2015, but were the first managed care organizations to agree to outcomes-based contracts in this space. Specifics of these deals are not public, but it is expected that the level of Gilead’s discounts will be determined by the outcomes achieved by the plans’ members. Christopher Bradbury, VP of integrated clinical and specialty drug solutions for Cigna, describes this as “an innovative outcomes incentive alignment based on HARVONI achieving sustained virologic response (SVR) results across Cigna’s customer population.” Furthermore, he highlights that “Cigna’s pharmacy benefit is integrated with our medical benefit, enabling us to work with doctors to evaluate cure rates.” Arrangements such as this may be possible at an even greater scale under the banner of UnitedHealth.

There are several hurdles that the new OptumRx faces in the short term, such as consolidating accounts under a single platform and determining the future of Catamaran’s relationship with Cigna (which accounts for one-third of its revenue), but there are clear strengths of this acquisition. Pharmaceutical manufacturers now have a third major PBM to engage, one that seeks to differentiate itself through its technology platform, its vast array of health data, and expansive medical / care management integration. Optum CEO Larry Renfro stated the goal to Catamaran employees very clearly: “We expect to negotiate for lower prices and offer lower costs to our customers.” This is not a new stance from a major PBM following an acquisition, but in light of recent activity in HCV it must be highlighted that increased negotiating power requires both scale and centralized decision making. The wide array of medical and pharmacy services tied to the new OptumRx may place this PBM in a unique position to make demands of pharmaceutical manufacturers as the next generation of specialty therapies and biosimilars come to market.