Catalyst Health Beats, Revs. Miss

Catalyst Health Solutions Inc. ( ) reported first-quarter operating earnings per share of 62 cents, beating the Zacks Consensus Estimate by 5 cents. The result also compares favorably with 52 cents earned in the prior-year quarter.

Accounting for the CHI transaction, transition and integration related cost of 11 cents, and amortization of intangible assets of 12 cents, the company reported net income of 39 cents per share, down from 45 cents per share earned in the year-ago quarter.

Operational Update

Revenue grossed $1.45 billion in the quarter, up 30% year over year. However, the top line failed to achieve the Zacks Consensus Estimate of $1.51 billion. The year-over-year increase in revenue was driven by added prescription volume from Catalyst Rx Health Initiatives, Inc. (“CHI”), commencement of services with new pharmacy benefits management (“PBM”) clients and higher prices of brand drugs. Nevertheless, client attrition, higher generic utilization, coupled with higher member co-payments, dwarfed the positives.

Additionally, total prescription volume, excluding administrative services only (ASO) claims, rose to 30.7 million from 24.9 million in the prior-year quarter. Meanwhile, ASO claims jumped to 22.8 million from 0.1 million in the year-ago quarter, attributable to a change in mix within the CHI client base.

Generic utilization in the quarter improved to 76% from 74% in the year-ago quarter.

Gross profit surged 54.8% year over year to $95.3 million. The addition of CHI, margin contribution from new clients, better generic utilization and enhanced retail pharmacy economics drove the improvement in gross profit. However, lower margins on renewal business, client attrition and startup costs associated with Script Relief were partial offsets.

Selling, general and administration expense more than doubled to $67.7 million in the quarter due to investments made in the CHI acquisition, Invest Now initiative, IT infrastructure improvements and Script Relief. Total operating expense escalated 35% year over year to $1.43 billion.

Operating income thus increased 19% year over year to $46.3 million in the quarter.

Merger Update

On April 18, Catalyst Health entered into a $4.4 billion takeover agreement with rival PBM company, SXC Health Solutions Corp. ( ( ) ).

As per the agreement, SXC Health will acquire Catalyst Health for $28 per share in cash and offer 0.6606 shares of SXC Health in exchange of every share of Catalyst Health.

Following the acquisition, the shareholders of SXC Health and Catalyst Health will own 65% and 35% of the combined company, respectively. The takeover is expected to be completed by the second half of this year.

Business Update

On March 19, Catalyst Health announced a long-term agreement with Regence Rx Inc. to exclusively provide pharmacy benefit management (“PBM”) service to the latter’s clients through its PBM unit - Catalyst Rx.

The PBM business of Catalyst Health will be boosted as Regence Health Plans cover over 1.2 million policyholders.

The deal will be effective from May 1, 2012 to December 31, 2017 and carries an option for extension till December 2021.

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

Outlook

Catalyst Health continues to expect 2012 revenue in the range of $5.8–6.2 billion and adjusted earnings per share guidance in the range of $2.60–2.80.

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, as CHI is adding substantially to volume and thereby, earnings.

However, the expenses of the company are constantly on the rise, thereby weighing on the margins.

We retain our neutral long term recommendation on Catalyst Health. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.