PBM Consolidation: The Feeding Frenzy Begins

It’s Shark Week! So, it’s appropriate that we take a look at two recent pharmacy benefit manager (PBM) acquisitions:

• Catamaran announced the acquisition of ReStat. Read the press release. 

• TPG, a major private equity firm, announced its acquisition of EnvisionRx. Read the press release. 

Below, I examine each transaction. The TPG/ EnvisionRx deal is more significant, because it signals major outside financial investment in restructuring the PBM industry.

With blood in the water, expect PBM consolidation to accelerate. Bigger PBMs have more bargaining power against manufacturers, pharmacies, and wholesalers. Chomp!

SWIMMING WITH THE SHARKS

In Catamaran Sails Away with Cigna’s PBM: Deal Analysis, I predicted that Catamaran would continue to consolidate the PBM middle market, with deals resuming in 2014.

Looks like I was right about the outcome, but wrong about the timing.

Restat is a smaller PBM with a transparent pass-through pricing model. It was one of the first PBMs to market a preferred pharmacy model (Align) to self-insured employers. At launch, the preferred network included Walmart and Target, along with many supermarkets, regional chains, and the independent pharmacies in McKesson’s Health Mart franchise. I last wrote about Restat’s model in January 2011’s Pharmacy Profits in Preferred Networks with PBM Transparency.

Restat will add about $650 million in annual drug spend to Catamaran. Catamaran expects to close the transaction in the fourth quarter, and take about 18 months to integrate the business.

SXC Health Solutions, the predecessor to Catamaran, has been rolling up the companies for which it provides the back-end technology platform. (See The SXC-Catalyst Merger: Initial Thoughts On the Deal.) Restat, which is reportedly on a McKesson platform, is the first non-customer PBM acquisition. Looks like its full steam ahead for Catamaran.

WE'RE GOING TO NEED A BIGGER BOAT

Like Restat, EnvisionRx is a mid-sized PBM with a transparent, pass-through pricing model to plan sponsors. Notably, EnvisionRx manages the Costco member prescription program, and is rumored to be the back-end infrastructure behind Costco’s PBM. (See Costco Unveils Its Own PBM.) Given last week’s controversy over Walgreens and the 340B drug discount program, I also note that EnvisionRx has a 340B solution.

While this transaction didn’t get much attention, it will ultimately have a much bigger industry impact. TPG has A LOT of capital and clearly sees an opportunity to consolidate the PBM industry.

With TPG’s funding, EnvisionRx also becomes the most likely acquirer of independent specialty pharmacies, especially very large ones that are looking for a strategic exit.

According to Wikipedia: “A shark feeding frenzy occurs when a number of sharks fight for the same prey.” Since the big PBMs are temporarily on the M&A sidelines, expect bidding wars for independent PBMs and specialty pharmacies.