CHSI Catalyst Health Solutions, (MM)

We maintain our ‘Neutral’ recommendation on Catalyst Health Solutions Inc. (CHSI) based on its imminent takeover by SXC Health Solutions Corp. (SXCI), which is expected to boost the merged company’s competitive strength. The Invest Now program should also be beneficial to earnings.

However, weak financial leverage and dependence on a couple of clients for a large portion of revenue are the downsides.

Catalyst Health 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.

Catalyst Health’s takeover by SXC Health is expected to be beneficial for its clients, who will be able to reap the benefits of SXC Health’s expertise in pharmacy benefit management services (PBM) as well as its industry-leading technology. The clients will also have access to a wider product portfolio.

Moreover, SXC Health shares Catalyst Health’s customer-centered approach as well as commitment to lowering healthcare costs without compromising on the quality. The acquisition will also help the two companies retain their competitive advantage in the rapidly consolidating PBM industry, which is leading to intense price competition.

Moreover, the Invest Now program – launched in 2011 – is expected to double the annual new business of the company over the next two years. While the initiative is expected to increase the SG&A expenses by $15 million in 2012, it is projected to generate a 300% return on investment from 2013 onwards. Moreover, the program will likely boost revenue by $400–500 million and EBITDA by $16 million from 2013.

However, Catalyst Health faces high debt obligations with inadequate cash balance, which casts a shadow on the company’s liquidity in both the long and short term. The company might find it difficult to meet its short-term obligations as its current liabilities exceed current assets. Moreover, the long-term debt is over five times the cash and cash equivalents, while the operating cash flow of Catalyst Health remains unsteady.

Furthermore, the PBM industry is highly competitive and dominated by large players, such as CVS Caremark Corporation (CVS), Medco Health Solutions, Inc. and Express Scripts Holding Co. (ESRX), who possess superior financial and technical resources compared to Catalyst Health.

Moreover, the company is highly dependent on a limited number of clients for a significant portion of its revenues. The company’s largest customers, Independence Blue Cross and Wellmark Blue Cross Blue Shield of Iowa, accounted for 16% and 10% of consolidated revenue, respectively, in 2011. The profitability and growth prospects of the company could be affected adversely by the loss of such key customers.

The Zacks Consensus Estimate for Catalyst Health’s first-quarter 2012 earnings stands at 57 cents per share, up an estimated 10.5% from the year-ago quarter. For 2012, earnings are expected to be $2.66 per share, a forecasted growth of 12.4% over 2011.

Currently, Catalyst Health holds a Zacks #3 Rank, implying a short-term ‘Hold’ rating.

 
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