Should You Expect More Healthy Gains from Catamaran?

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Shares of Catamaran (NASDAQ: CTRX) enjoyed some healthy gains after reporting record third quarter earnings.  This was a big quarter for the company, having just completed their merger with Catalyst Health Solutions to create Catamaran.  The merger drove some very impressive results as they beat earnings estimates by a penny and raised earnings guidance for the full year.

The new Catamaran delivered revenue of $3.2 billion, which is up 148% over last year, while adjusted earnings per share grew by 14%.  The business is generating solid cash flow from operations, which, while down in the quarter due to merger related expenses, is up 74% year to date.  They used some of that cash flow to repay $100 million worth of debt. 

While the company re-affirmed their revenue guidance for the rest of the year, they raised earnings guidance.  Both GAAP and adjusted earnings were raised above the high end of the previous range, and they now expect GAAP earnings of $0.64 to $0.68 a share and adjusted EPS of $1.09 to $1.13 a share.  The market took this as a good sign of things to come.

One of those signs came by way of two big contract wins.  First, they signed a three year full service PBM contract with Target (NYSE: TGT).  They cover 180,000 lives and were looking for an alternative to the traditional model.  Catamaran was able to sell them a full suite PBM, including specialty pharmacy, but in a unique package by unbundling and customizing it.  Additionally, Catamaran signed a six year, $60 million deal with HCIT for tools and PBM services with the State of Indiana’s Medicaid program. 

While their merger integration is going well and the newly combined company is growing sales, there is another merger integration that brings some future uncertainty.  Health insurer Cigna (NYSE: CI) bought HealthSpring earlier this year, and they are an important customer to Catamaran.  That contract runs out at the end of next year, making this an important year to either win new Cigna business or perhaps lose it entirely. 

On the conference call, CEO Mark Thierer said: “Our business relationship with Cigna continues to be very strong. We are totally focused on helping them execute on their strategy and now post their acquisition of HealthSpring and Bravo. We’ve spent a lot of time with their leadership team and keep in mind they’ve been a client of ours, Cigna had for a long time, some of our tools and technology prior to their acquisition of HealthSpring. So we’ve got great respect for their leadership team. And so nothing new to report other than to say that you know we do think the fact that we don’t compete in the Medicare part D business is an important differentiator for us here at Catamaran. That applies to any health plan that we’re doing business with, and secondly you know obviously our new combined skill and scale set up well to help any large health plan release operating leverage in a meaningful way, and we continue to talk to Cigna along those lines as well.”

When that deal was announced, it sent shares of the former SCX Health Solutions down 23%, so it is something investors need to keep watching.  The newly combined company is much stronger to both withstand the loss of the business and to gain additional Cigna business.  With shares now at all-time highs, it appears investors have put these concerns on the back burner for now.

A final interesting note from the conference call is that Catamaran isn’t done growing by acquisition.  Thierer noted on the conference call that they have ample firepower to make a deal.  He also said that they plan to continue the thesis of acquiring clients that are already operating on their platform; note that there are more than 30 clients on platform.

Overall, it was another great quarter by Catamaran.  Integration is going very well and it appears that they’ll soon be on the move for another target.  They have a great dual approach to growth by adding scale via acquisition and then using that scale to grow organically and add larger clients like Target.  They have a great story and one worth watching. I think investors will continue to see some healthy gains from Catamaran.

latimerburned owns shares of Catamaran. The Motley Fool owns shares of Catamaran. Motley Fool newsletter services recommend Catamaran. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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