Can SXC be the Catalyst for Your Portfolio?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Shares of SXC Health Solutions (NASDAQ: CTRX) were up by a healthy clip Wednesday after announcing they were acquiring Catalyst Health Solutions (NASDAQ: CHSI) for $4.4 billion in cash and stock. The deal will create one of the largest independent pharmacy benefits managers in the country, though the combined company is still dwarfed in size when compared to the newly combined Medco Health Solutions and Express Scripts (NASDAQ: ESRX). I still think that SXC has plenty of room to grow and think the Catalyst merger will help provide the scale that is increasingly necessary in the PBM industry.
As an SXC shareholder for many years, I have been holding on to this under-the-radar rule breaker for an 800% gain. SXC has been growing both organically and through smart acquisitions to transform themselves into a true player in the industry. When I first purchased my shares in SXC they were a technology provider to the PBM industry; the real game changer came when they acquired one of their PBM clients, which has driven much of their recent growth. Catalyst started as a client of SXC as they continue on their path of working with their PBM rivals thanks to their technology business and developing a working relationship with them so that it makes for a very seamless transition.
The deal with Catalyst is expected to be accretive to earnings in 2013 while providing about $125 million in cost synergies over the next two years. The combined company will generate roughly $13 billion in revenue while covering 25 million members to provide over 200 million prescriptions each year. SXC has been expected to grow earnings by 47% in 2012 and 24% in 2013 after averaging earnings growth of just shy of 40% the past five years. Revenue has continued to grow at a fast clip growing by over 130% annually over the past five years, though they started with a smaller base due to their legacy technology platform.
According to SXC CEO Mark Thierer they are going to, “create a disruptive new player to provide an alternative.” They will do this by offering an array of a la carte services such as their technology all the way up to the full PBM suite. While it’s their legacy technology platform that will continue to set them apart as it helps then gain relationships within the industry, their growing scale will help them seal more deals and steal market share from the industry leaders.
There has been a lot of consolidation in the industry over the past few years. The biggest being the Express Scripts – Medco merger that just closed. Last year Catalyst had its own acquisition when it bought the PBM business from Walgreen’s (NYSE: WAG) as Walgreen’s took the opposite approach as rival CVS Caremark when they merged the drug store business with a major PBM. With the SXC/Catalyst deal they are creating a company that can begin to rival the scale of CVS Caremark and Express Scripts as well as PBMs that health insurance providers are developing internally.
SXC’s technology platform and growing scale should help them to grow for many years as companies, unions and local governments look cut costs on their drug spend. They are not without risks and one major risk that remains stems from large health insurer Cigna (NYSE: CI) with its own PBM arm due to their recent acquisition one of SXC's major clients, HealthSpring. SXC still has some time on that contract, which could give them enough time to win more business instead of losing business and it could eventually make sense that they just take over the PBM from Cigna, which is more palpable with their increased scale. While SXC has been a massive winner of the past few years I think they have plenty of room to run. They should easily outperform the market even with its recent gains.
Motley Fool newsletter services recommend Express Scripts, and SXC Health Solutions . The Motley Fool has no positions in the stocks mentioned above. latimerburned owns shares of SXC Health Solutions. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.