Medco Health Solutions, the largest pharmacy benefits manager by revenue in the U.S., has agreed to buy closely held United BioSource Corp. (UBC) for $730 million in an all-cash deal.

Franklin Lakes, N.J.-based Medco supplies nearly 65 million members. Bethesda, Md.-based UBC conducts safety and effectiveness testing on drugs and devices after they have been approved by federal regulators. The company fits Medco’s strategy to promote medical treatment based on research evidence.

In a joint statement, the companies said the deal “extends Medco’s core capabilities in data analytics and research to further accelerate pharmaceutical knowledge—advancing patient safety and furthering evidence-based medicine.”

The transaction, which will be funded through Medco’s free cash and existing debt facilities, is expected to close in the third quarter of 2010. The new business is expected to be slightly accretive to Medco shareholders in 2011, excluding one-time items and amortization.

UBC anticipates 2010 revenue of approximately $280 million, and has an annual growth rate of more than 20%. Upon closing the transaction, UBC would become a wholly-owned subsidiary of Medco that will be run independently from Medco's core business to ensure compliance with contractual requirements and client expectations.

“To meet the three main objectives of national health care reform—improving quality and reducing costs in order to extend access—it is more critical than ever to ensure that our use of medicines is driven by scientific evidence and proven economic value,” said Medco CEO David B. Snow Jr. "UBC's products and services broaden the Medco portfolio consistent with our core mission of making medicine smarter."

"Our scientists are focused on delivering actionable evidence to guide the safe and effective use of biopharmaceuticals and enhance the quality and value of health care," said Ethan Leder, UBC CEO, who founded the company in 2003 with President and CFO Mark Clein. "Medco provides our team with an array of exciting new resources to accelerate growth, including opportunities to collaborate with its clients and contribute to the mission of delivering the right drug to the right patient at the right time."

According to Bloomberg News, analyst Helene Wolk at Sanford C. Bernstein in New York says UBC operations fit into the kind of work Medco’s chief medical officer Robert Epstein has been pursuing at Medco Research Institute. Medco has emphasized the need to conduct genetic testing to assess the effectiveness of drugs, buying San Francisco-based DNA Direct in February.

“The objective is quite distinct,” Wolk said. “This appears to represent research on behalf of the pharmaceutical manufacturers versus Medco’s objective which is typically on behalf of payers.”

Investors may think a stock buyback would have been a better use of the money, analyst Arthur Henderson at Jefferies & Co. of Nashville told Bloomberg News. “I wonder if investors are going worry that they paid too much for this given how little accretion they expect in 2011,” he said.

Medco shares have fallen 28% this year, compared with a 7.6% decline in the S&P 500 Health Care Index, according to Bloomberg. Medco shares have been dropping since July 27 when CVS Caremark of Woonsocket, R.I., announced a 12-year, $9.5 billion agreement to supply the drug-benefits unit of Aetna, based in Hartford, Conn. Medco had looked at buying the Aetna PBM and the deal effectively took it off the table, said Wolk.

Competition has intensified among pharmacy-benefits managers this year as St. Louis-based Express Scriptsbegan integrating the WellPoint benefits manager it bought in 2009. CVS Caremark also began to win contracts, such as the Capital Blue Cross of Pennsylvania deal it took away from Express Scripts.

With more than 20,000 employees, Medco Health Solutions had 2009 revenues of nearly $60 billion and ranked 35th on the Fortune 500 list. Its Medco Research Institute is an evidence-based research organization focused on novel research, analytics and new discoveries that close the gap between scientific discovery and medical practice for improved patient outcomes and lower overall healthcare costs.

UBC is a global scientific and medical affairs organization that partners with life science companies to develop and commercialize biopharmaceuticals, medical devices, and other health care products, with offices in North and South America, Europe and Asia.