Catalyst Health Exceeds Estimates - Analyst Blog

Catalyst Health Solutions Inc. (CHSI) reported third-quarter 2010 adjusted earnings of 51 cents per share, surpassing the Zacks Consensus Estimate of 47 cents. The results also compare favorably with earnings of 41 cents in the prior-year quarter.

Adjusted earnings in the reported quarter exclude the adjustment for amortization of FutureScripts related intangible assets and all other acquisition-related intangible assets. Including amortization adjustments, net income reported by Catalyst Health was $21.5 million or 48 cents per share, as against $17.2 million or 39 cents in the prior-year quarter.

The year-over-year increase was attributable to higher revenues coupled with client renewals and a higher generic utilization, supported by the beneficial acquisition of FutureScripts subsidiaries.

Quarter in Detail

Revenues for the reported quarter climbed 27.5% year over year to $925.1 million, exceeding the Zacks Consensus Estimate of $901.0 million. The rise was attributable to higher prescription volume and price inflation for branded drugs. The increase was mitigated partially by the impact of the increase in generic utilization.

Total unadjusted claims processed in the quarter rose approximately 23.7% year over year to 17.2 million. The addition of new clients and the acquisition impact resulted in the increase in prescription volume in the third quarter of 2010. Generic utilization has climbed to 72% from 67% in the comparable quarter of 2009.

Gross profit for the quarter came in at $61.7 million or 6.7% of revenues as opposed to $49.0 million, or 6.7% of revenues, in the comparable quarter of 2009.

The increase in gross profit was attributable to higher revenues, greater generic utilization, continued realization of the economics of the Catalyst Health's mail service pharmacy, contribution of performance management fees, higher formulary compliance apart from improved contract performance pertaining to drug manufacturer rebates and pharmacy reimbursements.

Total operating expenses for the reported quarter upped 27.6% year over year to $890.1 million. Selling, general and administrative (SG&A) expenses grew approximately 26.7% to $26.7 million. The increase in SG&A expenses was primarily attributable to the company's growth-oriented initiatives such as additional employee, facilities and vendor costs.

The increase in Catalyst Health's gross profit, offset by a rise in SG&A expenses, led to the rise in operating income by 25.6% to $35.0 million in the third quarter of 2010.

FutureScripts Acquisition Update

Catalyst Health closed the acquisition of the Independence Blue Cross' (IBC) FutureScripts subsidiaries in September, 2010 for an all cash transaction of $225 million, which includes the value of a future tax benefit for Catalyst Health. The company incurred approximately $1.6 million of acquisition related expenses through the third quarter.

Catalyst Health now maintains the FutureScripts brand, retains FutureScripts' staff and manages IBC's pharmacy benefits services, under the terms of a 10-year contract, to approximately 1 million members and manages over 14 million prescriptions annually.

Outlook

2010: Catalyst Health reiterates its earnings outlook of $1.80, which equates to $1.91 adjusted earnings per share for fiscal year 2010.

Catalyst Health also forecasts revenue of approximately $3.7 billion for fiscal 2010.

2011: With new sales commitments, recent client renewals and trends in prescription utilization, Catalyst Health has provided a preliminary outlook for 2011 and projects revenue to grow by 25% to 30%.

Further, Catalyst Health expects its adjusted earnings to grow 15% - 25% in 2011, which equates to $2.20 to $2.39 adjusted earnings per share. Catalyst Health believes that earnings will be largely impacted by non-recurring expenses related to the integration of FutureScripts, which the company expects to be $6 to $10 million.

However, the adjusted earnings per share guidance growth reflects the current uncertainty regarding the timing and extent of anticipated upfront FutureScripts implementation and transition expenses as well as post-transition revenue and earnings contributions for 2011.

Also, net income and revenue for 2011 may be impacted by a greater-than-projected generic utilization.

Our Take

Catalyst Health successfully generated new clients, renewed key customer contracts, achieved higher generic utilization and formulary compliance and secured additional business, which have contributed to growth. Furthermore, Catalyst Health anticipates positive operating cash flow, which combined with available cash resources, should be sufficient to meet the expenses.

Further, Catalyst Health relies on growth through acquisition and has completed multiple acquisitions over the past few years. We believe that with the acquisition of FutureScripts subsidiaries, Catalyst Health will achieve a superb management team and will be able to control costs via delivering improved integrated health solutions. This acquisition will also provide significant growth opportunities and drive improved outcomes for IBC's clients and members.

Currently, Catalyst Health carries a Zacks #3 Rank, which translates into a short-term Hold recommendation, indicating no clear directional pressure on the shares over the near term.

 
CATALYST HEALTH (CHSI): Free Stock Analysis Report
 
Zacks Investment Research