Two growing healthcare companies last week announced they were gobbling up smaller businesses in key sectorspart of a strategic effort to boost market share in an increasingly competitive environment.
Cigna Corp. said it planned to acquire Great-West Healthcare, a U.S. division of Great-West Lifeco of Winnipeg, Manitoba, for $1.5 billion in cash. And Inverness Medical Innovations of Waltham, Mass., announced it would buy disease-management provider ParadigmHealth, Upper Saddle River, N.J., for $230 million cash.
Analysts applauded the Cigna acquisition as significant for the Philadelphia-based insurer during a time when insurers are scrambling to reach and hold onto those coveted consumers still covered by their employers.
Great-West Healthcare, based in Greenwood Village, Colo., insures 2.2 million people nationwide, including 1.5 million through employers, with a network of 4,275 hospitals and 575,000 physicians and other providers. Its top markets are California, Colorado, Florida, Illinois and Texas, and its clients are mostly small and midsize businesses.
H. Edward Hanway, Cignas chairman and chief executive officer, told investors on a conference call last week that the acquisition accelerates our expansion into the small-business segment and enhances our presence in key geographies. Cigna has historically targeted national accounts and larger employers.
Some analysts likened the Cigna purchase to UnitedHealth Groups planned acquisition of Fiserv Health for $775 million in cash, announced Nov. 2. The ability to gain market share from these third-tier players is one of the reasons that the larger plans in the industry have been able to continue growing their administrative-services-only, or nonrisk, enrollment in recent years, wrote Carl McDonald of CIBC World Markets in a research note. This was likely one of the driving forces behind Fiservs decision to sell its healthcare business to UnitedHealth.
Cigna scooped up Great-West for a song, analysts said, noting the divisions enrollment and revenue have been flat for several years. The purchase priceeven with a promised additional $400 million in capital investmentswas a nearly 40% discount to average valuations in other managed-care deals over the past five years, said analyst Joseph France of Bank of America. Great-West has been a little lost the past few years, McDonald concurred. And its worth a lot more to Cigna than it is to Great-West.
Cigna plans to keep the Great-West brand, while boosting its reach in areas with strong population growth. A great example of this is in the Pacific Northwest, said David Cordani, president of Cigna HealthCare, on the investor call. However, that doesnt mean that customers and providers will remain unaffected. Cigna should switch most of the acquired members into its more favorable provider contracts, McDonald said. The transaction, subject to regulatory approvals, is expected to close in the first half of 2008.
Meanwhile, Inverness Medicals deal to purchase ParadigmHealth continued the companys buying spree of smaller disease-management players.
In November, the diagnostics company completed its acquisition of Alere Medical, a Reno, Nev.-based chronic-illness management firm, and HemoSense, San Jose, Calif., a maker of drug monitoring and testing products. Other recent pickups include Panbio, a diagnostic testing company; Bio-stat Healthcare Group, a British distributor of diagnostic testing products; and Biosite, a developer of diagnostics for laboratory medicine.
Ron Zwanziger, president and CEO of Inverness Medical, said on a recent conference call with investors that the company is offsetting the spending by moving manufacturing to China, adding: I think its a fair assumption that (acquisitions) will stay at the kind of pace weve seen recently.