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Coverage Initiation: Catamaran Corporation
Value Line recently initiated coverage of Catamaran Corporation (CTRX) in its flagship product, The Value Line Investment Survey. The company was formerly known as SXC Health Solutions, which merged with Catalyst Health Solutions in July of 2012. Catamaran is a leading provider of pharmacy benefit management (PBM) services and healthcare information technology (HCIT) solutions to the healthcare benefits management industry. The company’s products are designed to assist customers in lowering the cost and managing the complexity of prescription drug programs. Catamaran’s primary customers include pharmacy benefit managers, managed care organizations, self-insured employer groups, unions, third-party health-care administrators, and state and federal government entities. Its revenues are primarily derived from sales of prescription drugs, along with associated fees.
Catamaran conducts business in both the United States and Canada, although Canadian revenues represented less than 1% of 2011’s total sales. As of December 31, 2011, it had 1,433 employees, most of whom were located in Lisle, Illinois and Scottsdale, Arizona. The company has never had a work stoppage, and personnel are not unionized. Most of its business is generated from a small number of customers. In 2011, HealthSpring (a subsidiary of Cigna (CI)) accounted for 40% of total sales. As a result, a loss of any of its primary customers could have a material adverse affect on business. The company’s balance sheet is in good shape, with no debt and ample cash, which allows it to make acquisitions from time to time.
The PBM group is marketed under the informedRx brand and offers services that are more flexible and cost effective compared to traditional PBM offerings employed by health plans, government agencies, and employers. This segment represents the core of Catamaran’s business, generating 97.7% of 2011 revenue. The group’s services typically allow customers to have increased control of their pharmacy benefit dollars and higher quality of care through a wide range of pharmacy management services, including formulary administration, benefit plan design and management, pharmacy network management, and drug utilization review, among others.
The company’s HCIT segment, which represented 2.3% of 2011 total revenues, includes RxCLAIM, an on-line transaction processing system that gives instant adjudication of prescription drug claims. Other systems include RxMAX, a rebate management system, and Zynchros, a site with on-demand formulary management tools. These solutions are available on a license or transaction fee basis.
Some of the key factors that affect Catamaran’s business include the volume of prescription drugs and the amount spent on these drugs. The rate of prescription drug utilization in North America will likely continue to rise, given an aging population, which should support business prospects. The company may also benefit from recent healthcare reform initiatives, which could provide drug coverage for an additional 32 million people in the form of expanded Medicaid coverage. Catamaran’s specialty pharmacy program could also profit from strong growth for specialty drug spending.
Some of Catamaran’s competitive strengths include its customized services, which allow customer control for tailored solutions and flexible pricing. It also has one of the most comprehensive claims processing platforms in the industry. Finally, the company believes its pricing model helps clients achieve measurable cost savings compared to competitors.
Competition in the pharmacy benefit space is fierce, with several companies providing similar services. Some are large, publicly traded companies, while others are small and privately owned. Catamaran’s larger competitors include Express Scripts (ESRX) and CVS Caremark (CVS). The primary factors affecting the industry are quality of service, scope of available services, and price. Catamaran is constantly negotiating prices with pharmacies, drug manufacturers, and third-party rebate administrators.
The company plans to remain competitive by continuing to drive purchasing efficiencies of pharmaceuticals to improve margins. It also plans to make acquisitions in an attempt to expand its product portfolio and customer base. Its revenues in 2011 jumped from $1.95 billion to $4.98 billion, driven largely by the implementation of a significant contract with its largest customer, HealthSpring, along with recent acquisitions. We expect big jumps in sales and earnings over the next couple of years thanks to the company’s recent three-year full-service PBM contract with Target (TGT), which is the largest employer contract in the company’s history.
Subscribers interested in learning more about this pharmacy benefit manager are advised to consult Value Line’s quarterly reports for Catamaran, as well as any supplemental reports and relevant articles that may arise as important news comes to light.
At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.