CHSI Catalyst Health Solutions, (MM)

Catalyst Health Solutions Inc. (CHSI) reported first-quarter 2011 adjusted earnings of 52 cents per share, surpassing the Zacks Consensus Estimate of 50 cents. The results also compare favorably with earnings of 41 cents in the prior-year quarter.

Catalyst Health’s adjusted earnings in the reported quarter exclude the adjustment for Walgreens Health Initiatives, Inc. (“WHI”) transaction related costs, amortization of FutureScripts related intangible assets and all other acquisition-related intangible assets.

Including amortization adjustments, net income reported by Catalyst Health was $20.3 million or 45 cents per share, as against $17.4 million or 39 cents in the prior-year quarter.

The year-over-year increase was attributable to a strong marketing strategy and leveraging its infrastructure and controlling overhead expenses. Besides, the strategic initiative of WHI was significant and provided meaningful growth in earnings.

Quarter in Detail

Revenues for the reported quarter climbed 34.8% year over year to $1.12 billion, lagging the Zacks Consensus Estimate of $1.14 billion, while exceeding the prior year earnings of $832.3 million. The rise was attributable to higher prescription volume and price inflation for branded drugs. However this was offset by the impact of the increase in generic utilization.

Total unadjusted claims processed in the quarter rose approximately 29.2% year over year to $20.8 million. The addition and growth of clients along with the acquisition impact of FutureScripts resulted in the increase in prescription volume in the reported quarter of 2011.

Generic utilization has climbed to 74% from 70% in the comparable quarter of 2010.

Gross profit for the quarter came in at $61.6 million or 5.5% of revenues as opposed to $50.6 million, or 6.1% of revenues, in the comparable quarter of 2010.

The increase in gross profit was attributable to higher revenues, greater generic utilization, contribution of performance management fees, higher formulary compliance apart from improved contract performance pertaining to drug manufacturer rebates and pharmacy reimbursements.

Total operating expenses for the reported quarter upped 35.3% year over year to $1.09 billion in the quarter. In the first quarter of 2011, expenses relating to the WHI transaction were approximately $1.5 million and this expenditure was excluded from the adjusted earnings per share.

Selling, general and administrative (SG&A) expenses grew approximately 23.9% to $27.5 million in the quarter. The increase in SG&A expenses was primarily attributable to the company’s growth-oriented initiatives such as additional employee, facilities and vendor costs to serve and implement new clients.

The growth in SG&A expenses reflects the consolidation of the operating expenses from the Catalyst Health’s recent acquisitions as well as their integration.

The increase in Catalyst Health’s gross profit, offset by a rise in SG&A expenses, led to the rise in operating income by 20.0% to $34.1 million in the first quarter of 2011.

WHI Acquisition Update

Catalyst Health has agreed to acquire the pharmacy benefit management (PBM) business of Walgreen Co. (WAG) for $525 million. Catalyst Health will fund the acquisition with a combination of its credit facility and cash on hand. The transaction is expected to close by the end of second quarter of 2011. Walgreen anticipates the deal to be EPS-neutral in fiscal 2012.

Subsequent to this deal, Walgreen will be able to better focus on its 7,700 drug stores. On the other hand, through this transaction Catalyst Health will raise its membership to more than 18 million from the current level of 7 million while annual prescription volume will expand from approximately 80 million to over 165 million.

FutureScripts Acquisition Update

Catalyst Health closed the acquisition of the Independence Blue Cross’ (IBC) FutureScripts subsidiaries in September, 2010 for an all cash transaction of $225 million, which includes the value of a future tax benefit for Catalyst Health.

Catalyst Health now maintains the FutureScripts brand, retains FutureScripts’ staff and manages IBC’s pharmacy benefits services under the terms of a 10-year contract, to approximately 1 million members and manages over 14 million prescriptions annually.

Outlook

Catalyst Health will update its 2011 guidance after the completion of the WHI transaction and will include estimated revenue and earnings contributions from WHI as well as the expected timing and scope of upfront integration and transactional expenses.

Our Take

Catalyst Health successfully generated new clients, renewed key customer contracts, achieved higher generic utilization and formulary compliance and secured additional business, which have contributed to growth. Furthermore, Catalyst Health anticipates positive operating cash flow, which combined with available cash resources, should be sufficient to meet its expenses.

Further, Catalyst Health relies on growth through acquisition and has completed multiple acquisitions over the past few years. We believe that with the acquisition of FutureScripts subsidiaries, Catalyst Health will achieve a superb management team and will be able to control costs via delivering improved integrated health solutions. This acquisition will also provide significant growth opportunities and drive improved outcomes for IBC’s clients and members.

The acquisition of WHI will enable the company to expand its PBM business.

Its competitor, CVS Caremark Corporation (CVS) reported first-quarter adjusted earnings of 57 cents per share on May 5, beating the Zacks Consensus Estimate of 55 cents. Another rival Express Scripts Inc. (ESRX) reported first-quarter earnings of 66 cents per share on April 25, lagging the Zacks Consensus Estimate of 70 cents per share.

Currently, Catalyst Health carries a Zacks #3 Rank, which translates into a short-term Hold recommendation, indicating no directional pressure on the shares over the near term.

 
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