Catalyst Health In Line with Zacks - Analyst Blog

Catalyst Health Solutions Inc. (CHSI) reported second quarter 2010 income from continuing operations of $19.5 million or earnings of 44 cents per share, in line with the Zacks Consensus Estimate. The result compares favorably with the earnings of $16.2 million or 37 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 deal to buy FutureScripts subsidiaries.
 
Quarter in Detail
 
Revenues for the reported quarter climbed 24% year over year to $890.1 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 18% year over year to 16.4 million. The addition of new clients resulted in the increase in prescription volume in the second quarter of 2010. The total prescription volume for the second quarter of 2010 (post adjustments) stood at 17.8 million as against 14.9 million a year ago. Generic utilization has climbed to 71% from 67% in the comparable quarter of 2009.
 
Gross profit for the quarter came in at $55.7 million or 6.3% of revenues as opposed to $45.1 million, or 6.3% 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 company’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 24.1% year over year to $858.5 million. Selling, general and administrative (SG&A) expenses grew approximately 24.9% to $24.1 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 gross profit, offset by a rise in SG&A expenses, led to the rise in operating income by 22.0% to $31.6 million in the second quarter of 2010.
 
Acquisition Update
 
On August 4, Catalyst Health signed a pact to acquire Independence Blue Cross’ (IBC) FutureScripts subsidiaries. Under the terms of the agreement, Catalyst Health will maintain the FutureScripts brand, retain FutureScripts’ staff and provide IBC a full complement of services. Following its closing, Catalyst Health will manage IBC’s pharmacy benefits.
 
The transaction is expected to close in 2010, subject to customary closing conditions and the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act.
 
Credit Facility
 
During the reported quarter, Catalyst Health also secured a new five-year $350 million senior credit facility, replacing the previous $100 million secured revolving credit facility. The new $350 million senior credit facility comprises a $200 million revolving credit facility and a $150 million term loan.
 
2010 Outlook
 
Catalyst Health now forecasts its earnings outlook at the low end of the previously provided guidance range of $1.80 and $1.88 for fiscal year 2010. This is attributable to the transaction expenses and financing costs related to the acquisition of FutureScripts and the new credit facility, which are expected to be 6 cents per share in the second half of 2010.
 
Excluding the results of the FutureScripts transaction, Catalyst Health expects 2010 revenue guidance of $3.3 billion to $3.6 billion.
 
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.
 
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.