UnitedHealth Group Inc. (NYSE:UNH) is the nation’s largest health insurer, but it still needs every edge it can get when negotiating with pharmaceutical companies over soaring prescription drug costs.
Enter Catamaran Corp (USA) (NASDAQ:CTRX). The pharmacy benefits manager is being acquired by UNH for $12.8 billion in a move that will greatly increase the health insurer’s leverage in negotiations. Pharmacy benefits managers (PBMs) are on the front line in the fight against price inflation for specialty drugs.
Specialty drugs are used for diseases like multiple sclerosis or rheumatoid arthritis, and although they have a relatively low number of users, their use is expected to skyrocket. UNH and Catamaran say the specialty drug market is forecast to quadruple to $400 billion in five years.
Negotiation leverage and a growing market opportunity are sufficient to justify such a deal, and something like this was almost inevitable. After all, consolidation runs rampant among PBMs, and combing the third and fourth largest players in the sector is a no-brainer.
More importantly for anyone holding shares in Catamaran, UNH paid a very healthy premium, yet still managed to get a pretty good deal for itself.
UNH is paying $61.50 per share for Catamaran — all cash — which represents a 27% premium over Friday’s closing price of $48.32. That’s a level Catamaran stock has never touched. The all-time high is about $58-and-change, and that was nearly two years ago.
Furthermore, Catamaran has been lagging recently. The stock was off 7% year to date before the UNH deal. Over the last 52 weeks, Catamaran was trailing the broader market by about 4 percentage points, before news of the acquisition sent the stock up 25% Monday.
A Fair Price for UNH
At the same time, UNH hardly looks to have overpaid. The $12.8 billion price tag equates to 12 times next year’s earnings before interest, taxes, depreciation and amortization (which is usually fairly close to adjusted earnings). On that basis, Catamaran isn’t pricey compared to other large PBMs by adjusted forward earnings. Express Scripts Holding Company (NASDAQ:ESRX) goes for 14 times forward earnings, while CVS Health Corp (NYSE:CVS) changes hands at nearly 18 times forward earnings.
It’s not a bargain, but UNH shareholders can rest assured that the company isn’t throwing their cash away. At the same time, analysts give this deal the thumbs up, pointing to the cost savings UNH will harvest. Indeed, UNH says the acquisition will be accretive to next year’s earnings by 30 cents per share, which would boost estimated full-year 2016 earnings by more than 4%. Not bad.
The immediate boost to earnings appears to have helped the market like this deal. Shares in UNH got a substantial bump on the news, which is somewhat unusual, as the stock of the acquirer in any deal usually trades lower on the event.
In this case, the cost savings and other benefits make so much sense that they should only drive more upside in UNH stock, which is already on a tear. Year to date, UNH was up 17% before the CTRX announcement. The broader market, meanwhile, has scratched out a YTD gain of barely more than 1%.
If nothing else, there was already a pretty good bull case for UnitedHealth Group stock, and this acquisition only strengthens it.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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