CHSI Catalyst Health Solutions, (MM)

Catalyst Health Solutions Inc. (CHSI) reported fourth-quarter operating earnings per share of 69 cents, beating the Zacks Consensus Estimate by 3 cents. The result also compares favorably with 56 cents earned in the prior-year quarter.

Operating income amounted to $50.8 million, up from $37.4 million in the fourth quarter of 2010. Operating income in the reported quarter excludes the impact of non-recurring items such as transaction costs and integration expenses related to the Walgreens Health Initiatives Inc. (“WHI”) acquisition and intangible asset amortization related to acquisitions. Including the non-recurring items, operating income amounts to $32.3 million.

The year-over-year upsurge was owing to strong prescription volume growth, which supported the top line and improved operational performance. Besides, the acquisition of WHI was significant and provided meaningful earnings growth. The acquisition further led to additional expenses thereby partially mitigating earnings growth.

Net income reported by Catalyst Health was $19.1 million or 39 cents per share, down from $22.6 million or 51cents in the prior-year quarter. Revenues for the reported quarter climbed 38% year over year to $1.54 billion from prior year earnings of $1.12 billion. The rise is attributable to higher prescription volume and higher drug prices, which were partly offset by the impact of increased generic utilization.

Additionally, total prescription volume excluding administrative services only (ASO) claims rose to 32.1 million from 24.6 million in the prior-year quarter. The growth of new clients along with the impact of the WHI acquisition resulted in the increase in prescription volume. Meanwhile, ASO claims increased to $21.1 million from $0.12 million in the year-ago quarter due to the impact of the WHI acquisition.

Generic utilization climbed to 75% from 73% in the fourth quarter of 2010, while gross profit rose to $92.6 million from $66.1 million in the year-ago quarter. Gross profit of the reported quarter includes the effect of amortization of intangible assets of acquired companies to the tune of $5.6 million. The increase in gross profit was attributable to additional volumes from the WHI acquisition, margin contribution from new clients and higher generic utilization, which were partly offset by compressed margins in renewal business.

Total operating expenses for the reported quarter upped to $1.51 billion from $1.08 billion in the year-ago quarter. Selling, general and administrative (SG&A) expenses surged 110.1% to $60.3 million from $28.7 million in the prior-year quarter.

Full-Year 2011 Highlights

For full-year 2011, Catalyst Health reported operating earnings per share of $2.37, breezing past the Zacks Consensus Estimate of $2.35 and the year-ago earnings of $1.93. Operating income declined to $114.2 million in 2011 from $132.5 million in the prior year. Net income came in at $67 million or $1.39 per share against $81 million or $1.82 per share in the prior year.

Total revenue was $5.33 billion, up 42% year over year from $3.76 billion, while total expenses increased to $5.22 billion from $3.63 billion in the prior year. Additionally, total prescription volume excluding ASO claims rose to 113.4 million from 84.0 million in 2010.

Business Update

On February 21, 2012, Catalyst Health announced the extension of its subsidiary Catalyst Rx’s alliance with WellCare Health Plans Inc. (WCG).  Catalyst Rx provides pharmacy benefit services to the company.

Outlook

Catalyst Health affirmed its 2012 revenue guidance range of $5.8–6.2 billion and adjusted earnings per share guidance range of $2.60–2.80 per share.

Non-recurring expense related to integration of WHI is expected to vary between $15–20 million, while the full year impact of amortization of acquisition intangibles is expected to stand at $40 million.

Conclusion

Catalyst Health reported improved top line on the basis of enhanced operational efficiency and increased prescription volume. Additionally, the acquisition strategy of the company proved to be advantageous, with WHI adding substantially to volume and thereby, earnings. The acquisition is expected to be profitablein future as well and is projected to generate EBITDA of $10 million and $15 million in the first and second quarters of 2012, respectively.

However, the expenses of the company are constantly rising, leading to a decline in the bottom line. Thus, effective cost control measures are required to enhance profitability.

Currently, Catalyst Health carries a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating. However, considering the fundamentals, we maintain a long-term ‘Neutral’ recommendation on the shares.

 
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