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UnitedHealth-Catamaran deal sets up healthcare M&A chessboard

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(Reuters) — UnitedHealth Group Inc.'s planned takeover of No. 4 U.S. pharmacy benefits provider Catamaran Corp. will give the companies added heft in price talks with drug companies, serving as a catalyst for deals allowing other insurers to bulk up.

The $12.8 billion deal comes at a time when Wall Street has been parsing the possibilities that top insurers like Aetna Inc. with Cigna Corp. could pair up. Smaller companies like Health Net Inc., Molina Healthcare Inc. or WellCare Health Plans Inc. are also increasingly seen as takeover targets.

“There has been chatter about large-scale M&A coming out of some recent investor conferences,” Mizuho Securities senior healthcare analyst Sheryl Skolnick said. “I don't know if $12.8 billion qualifies as large scale M&A in the space, but now you have the answer. Yes, there will be transactions.”

Express Scripts Holdings Corp., the largest pharmacy benefit manager and the only stand-alone PBM, may be pressed to do a deal with a distribution company or pharmacy if margins become too tight, analysts said on Monday.

The link-up could force a tie-up between Express Scripts and Walgreens Boots Alliance, for instance, which has pharmacy and drug distribution operations but no pharmacy management business, Evercore ISI analyst Michael Cherny said in a research report.

That could put it at a disadvantage to CVS Health, the No. 2 pharmacy benefit manager which also owns one of the nation's largest pharmacy chains. Meanwhile, Envision RX, a small pharmacy benefit manager, recently announced plans to be bought by national drug store chain Rite Aid.

Healthcare companies are able to use scale to negotiate better prices. Late last year, for instance, Express Scripts was able to negotiate a steep discount for an important hepatitis C drug from AbbVie Inc., and has said it will use its size to extract discounts for cancer drugs and cholesterol drugs in the future.

A spokesman for Express Scripts, whose shares were up 3.7% to $85.39 in mid-afternoon trading, declined to comment on the Catamaran deal but said its business model was differentiated and in demand.

Impacting insurers

The shifting competitive landscape could mean more changes for Humana Inc., which manages pharmacy benefits for Medicare, Skolnick said. Humana had been reviewing the possible sale of that business, but ultimately decided to keep it.

The purchase will make Humana the fourth largest pharmacy benefit manager, and it could make sense for Humana to invest in that business, grow the commercial pharmacy business and add more covered customers, she said.

Other insurers will be reviewing where they stand now against UnitedHealth. Anthem, Aetna and Cigna have inked deals in recent years where they turned to Express Scripts, CVS and Catamaran respectively to manage their pharmacy benefits and get better prices, Leerink Partners analyst Ana Gupte explained.

“In some ways the deal could catalyze more consolidation,” Ms. Gupte said, adding that insurers would face pressure to bulk up. “Clearly scale is an advantage more than ever in this business,” Gupte said.