UnitedHealth to acquire embattled specialty pharmacy Diplomat for $300M

UPDATE: Jan. 24, 2020: UnitedHealth Group disclosed in an SEC filing Wednesday that four separate lawsuits are attempting to enjoin its $300 million purchase of specialty pharmacy Diplomat. The lawsuits allege information about the deal was held back from Diplomat shareholders, including financial data. “We believe that plaintiffs’ allegations lack merit and intend to contest them vigorously,” UnitedHealth said in the filing.

Dive Brief:

• UnitedHealth Group is acquiring Diplomat, a struggling specialty pharmacy and infusion services provider, for roughly $300 million.
• Diplomat will be folded into Optum, UnitedHealth’s health services arm and a reliable cash cow for the Minnetonka, Minnesota-based healthcare behemoth. The transaction is expected to close early next year, according to financial filings with the SEC.
• The payer giant’s offer of $4 a share for the roughly 75 million shares outstanding is a relatively lowball offer considering its valuation, sending Diplomat’s stock down 31% in premarket trading Monday. Stock of the 44-year-old specialty pharmacy closed last week at $5.81 a share.

Flint, Michigan-based Diplomat manages specialty medications for patients with complex diseases, such as cancer, hepatitis, HIV and multiple sclerosis, and offers specialized infusion treatments nationwide. It’s the nation’s largest independent provider of these services.
In its 2015 heyday, Diplomat had a market value of $3 billion, then slowly ran out of cash as it struggled to compete with massive specialty drug players operated by CVS Health, Cigna and UnitedHealth itself.

Credit: Rebecca Pifer/Healthcare Dive

Diplomat, which went public in 2014 after raising $173 million, had a shoddy third quarter, with pharmacy benefit management revenue down almost 52% year over year and overall revenue down 5% to $1.3 billion.
John Prince, CEO of OptumRx, touted Diplomat’s “proven track record” of managing complex illnesses as what attracted UnitedHealth to the company. OptumRx has been on a steady expansion-by-acquisition campaign, snapping up Renton, Washington-based Genoa Healthcare, adding more than 430 pharmacies to its PBM, and Phoenix-based Avella, also a specialty operator, both in 2018.
Diplomat’s board of directors unanimously approved the deal, concluding joining OptumRx is in the “best interests of our shareholders, employees and clients,” Diplomat CEO Brian Griffin said in a statement Monday. Griffin previously ran IngenioRx, insurer Anthem’s in-house PBM.
Executive officers and Diplomat directors are set to make almost $72 million from the acquisition. Investor and philanthropist Philip Hagerman, who co-founded Diplomat in 1975 and owns 23% of the outstanding stock, will make $69 million alone, according to SEC documents.
UnitedHealth saw more than $60 billion in revenue in the third quarter, primarily driven by double-digit growth in Optum. OptumRx saw slightly deflated revenue growth of 5.8% in the quarter to $18.5 billion. It fulfilled 325 million scripts in the quarter, a decline of 2% year over year, due to changes to a single large account.
But Optum is still forecast to reach $110 billion in annual revenue this year, the segment’s CEO Andrew Witty, a former chief at GlaxoSmithKline, said on its third quarter earnings call.
The news comes as massive companies, usually payers, continue to bag smaller PBMs to round out their pharmacy offerings and consolidate the medical supply chain in-house. UnitedHealth runs UnitedHealthcare, the country’s largest private payer.
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