Catalyst Health Makes Big Noise For A Small Drug-Benefit Co

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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