Catalyst Health Makes Big Noise For A Small Drug-Benefit Co
February 16 2010 - 3:35PM
Dow Jones News
Catalyst Health Solutions Inc. (CHSI), a relatively small player
next to the three giants of the pharmacy benefits management
industry, has won business from its larger rivals in recent years
by promising greater transparency on drug costs and more customized
service.
The Rockville, Md., company's Catalyst Rx pharmacy benefits
management unit is considered a leader among smaller stand-alone
PBMs, with a client list that includes state governments,
self-insured employers and unions. While the unit has more than six
million members, it remains tens of millions of members behind its
rivals, making it more of an annoyance than a menace.
Yet, Catalyst continues to win accounts from its larger rivals,
and its transparency on costs may have led the big players to lower
prices in a key profit area--generic drugs dispensed through the
mail.
Catalyst has added about $500 million to $600 million in new
business each year for the past three or four years, with 90% of
those accounts won from the big three PBMs, Chief Executive David
Blair told Dow Jones Newswires. Its client retention rate is 97% or
higher each year, he said, and profits have grown by an average of
30% annually since 2005.
Catalyst's stock, up nearly 59% over the past 12 months, has
outpaced that of its larger stand-alone rivals and trades at a
richer valuation than them, even though Catalyst's shares remain
below their five-year average valuation. The company carries a
market cap of $1.67 billion.
Catalyst has a focused business model that is different than
what the big three offer and has been "getting the rebounds," said
John Malley, national practice leader in pharmacy benefits
consulting at consulting company Towers Watson & Co. Malley
said about 10% of his clients with contracts up for bid the past
two or three years have switched to Catalyst.
"It's clean. It's very, very easy to follow. It's easy to
measure the value proposition of what they offer," Malley said.
Catalyst charges one comprehensive fee, without the ad hoc fees
that larger PBMs assess for various services, he said. And while
the big three PBMs do offer some transparency, passing along
discounts and manufacturer rebates to clients for prescriptions
filled at retail, they don't offer the transparency that Catalyst
does for generic mail-order prescriptions, Malley explained.
For their mail-order operations, a key profit driver, the bigger
PBMs don't disclose their actual costs to acquire generic
prescription drugs, which limits clients' ability to audit the
actual prices those PBMs paid, according to Malley. Catalyst does
share its actual costs, he said.
Catalyst, which has been in the PBM business for nearly a
decade, charges clients its wholesale acquisition costs for
mail-order prescription drugs, plus a fee, and has no incentive to
drive customers to its own mail-order facility, CEO Blair said.
"The client precisely knows where Catalyst is making its
margin," and the company acts as a fiduciary, he said.
While Catalyst is more transparent, it may or may not offer the
best deal for a given client, depending on the markup fee, Malley
said. And while Catalyst's larger rivals haven't adopted its
business model, Malley said he believes Catalyst's transparency has
forced the bigger companies to lower prices on mail-order
generics.
Blair said Catalyst clients' drug spending is significantly
below industry trends.
Medco Health Solutions Inc. (MHS) declined to comment for this
story, citing a quiet period before it reports earnings. CVS
Caremark Corp. (CVS) and Express Scripts Inc. (ESRX) also declined
to comment, saying they don't make remarks about competitors.
K. Newton Juhng, health-care analyst with BB&T Capital
Markets, acknowledged Catalyst's considerable growth, while
doubting the company's long-term prospects, given larger
competitors' broader in-house service offerings.
"They're not a competitive threat. They're an inconvenience. The
bigger guys must pay attention to them to some degree," because
Catalyst is taking contracts, Juhng said. Catalyst, however, is
missing certain important features of the bigger PBMs' business
models, such as an in-house specialty pharmaceuticals operation,
Juhng said. The company uses an outside partner for that
business.
Catalyst "will continue to grow and at some point once they get
big enough...I wouldn't be surprised if you actually saw someone
take them out," Juhng said. "I don't think they're really built for
the long term."
-By Dinah Wisenberg Brin, Dow Jones Newswires; 215-656-8285;
dinah.brin@dowjones.com
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