Catamaran PBM Business Eyeing More Fortune 500 Deals

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After one of the busiest and most important years in its history,Catamaran ( CTRX ) must now tackle another major project: holding on to its largest customer.

Catamaran, formerly known as SXC Health Solutions, provides pharmacy benefit services and health care information technology systems to corporate clients, managed care organizations, government entities and other customers.

As a PBM, the company handles drug benefits for health plans, employers and other health care payers. It works to reduce drug costs by helping clients' members get deeper discounts with retail pharmacies and manufacturers.

Catamaran's PBM business got a big boost last year when the company acquired rival Catalyst Health Solutions in a cash-and-stock deal valued at $4.4 billion.

That deal, which closed in July, is expected to make Catamaran more competitive with the nation's other major PBMs:Express Scripts ( ESRX ) andCVS Caremark ( CVS ).

Among other things, Catamaran has designs on landing more contracts with the kinds of Fortune 500 companies that were previously dominated by other PBMs.

"The business model Catamaran brings to the party is highly transparent, customer friendly and flexible, which should be attractive to Fortune 500 companies," said Brooks O'Neill, analyst at Dougherty & Co. "We estimate that the Fortune 500 employee market is as big as the overall market Catamaran has traditionally targeted."

While Catamaran chases more business with Fortune 500 firms, it must also focus on keeping its biggest customer: HealthSpring, a Medicare carrier that accounted for 24% of Catamaran's business during the 2012 third quarter.

Catamaran's contract with HealthSpring is set to expire at the end of this year. The decision on whether to renew it now rests with managed care firmCigna ( CI ), which acquired HealthSpring in 2012.

"It's a big customer and, obviously, an important contract," O'Neill said.

Cigna is expected to make its decision by midyear. Although the company has not tipped its hand, O'Neill and others sound confident Cigna will renew the HealthSpring contract with Catamaran.

"Our speculation is that Catamaran is likely to retain its relationship with HealthSpring and possibly even expand its business with Cigna," O'Neill said. "The recent commentary from Catamaran executives has been positive, where before it had been neutral."

In a Feb. 1 report for JPMorgan, analyst Lisa Gill offered a similar view, noting that Catamaran "remains well-positioned to win a larger outsourcing deal with Cigna."

Meanwhile, Catamaran has scored a couple of impressive wins with other high-profile clients.

In early November, it signed a three-year contract to provide PBM service toTarget ( TGT ), one of the country's largest employers. That deal covers about 188,000 of the retail giant's 365,000 workers nationwide. The contract was previously held by Express Scripts.

"The Target win supports the thesis that as a larger entity, Catamaran is much better positioned to win larger employer contracts, which have historically been the sweet spot for the larger PBMs," noted Gabriel Leung, analyst at Paradigm Capital.

Earlier last year, Catamaran signed a three-year contract, $1.2 billion, to provide PBM services to Blue Cross & Blue Shield of Rhode Island, or BCBSRI. The contract went into effect Jan. 1.

BCBSRI, a health insurer based in Providence, is the state's leading health insurer. It covers more than 600,000 members, over half the state's population. The previous PMB provider to BCBSRI was CVS, which is based in Rhode Island.

"It should be noted that CVS is the sixth largest employer in Rhode Island and the largest private-sector employer," noted Tom Liston, analyst at Cantor Fitzgerald Canada. "The BCBSRI contract underscores the competitive advantage Catamaran has in situations with complex requirements."

Those advantages include Catamaran's transparent pricing and technology leadership, he says.

Another advantage is an efficient operation that lets Catamaran be competitive on prices, analyst O'Neill said: "We believe Catamaran's EBITDA per script is lower than competitors, so they can be successful by charging customers less money."

Financially, Catamaran has built a reputation for delivering consistently strong growth. The company has increased annual earnings by double or triple digits every year since 2008. Quarterly profit has risen by double digits each of the past seven quarters.

Earnings during the 2012 third quarter came in at 25 cents a share, excluding buyout-related expenses. That was up from 22 cents the prior year and a penny above Wall Street views. Even if you include the acquisition costs, Catamaran earned a profit of 10 cents a share.

Revenue for the quarter more than doubled to $3.2 billion. It was the fifth time in the past seven quarters that Catamaran's top line rose by triple digits.

The company is slated to report fourth-quarter results on Feb. 20. Analysts polled by Thomson Reuters expect EPS of 35 cents a share, up from 24 cents a year earlier. They see full-year profit rising 37% for 2012 and 64% for 2013.

Catamaran's stock price hit a record high of 53.77 Feb. 1.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: CI , CTRX , CVS , ESRX , TGT

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