(CHSI) Catalyst Health Solutions Performs Well

Catalyst Health Solutions Inc. (CHSI) reported second-quarter operating earnings of 53 cents per share, at par with the Zacks Consensus Estimate. The results compare favorably with earnings of 46 cents in the prior-year quarter.

Catalyst Health’s operating earnings in the reported quarter excludes the impact of non-recurring items such as costs related to Walgreens Health Initiatives Inc. (“WHI”) acquisition and amortization of FutureScripts related intangible assets.

Including amortization adjustments, net income reported by Catalyst Health was $12.3 million or 25 cents per share, substantially down from $19.5 million or 44 cents in the prior-year quarter.

The year-over-year increase was attributable to a strong marketing strategy that supported the top-line and improved operational performance. Besides, the acquisition of WHI was significant and provided meaningful growth in earnings. However, it led to additional expenses as well, resulting in partial set-off of the additional earnings.

Revenues for the reported quarter climbed 39% year over year to $1.2 billion, beating the Zacks Consensus Estimate of $1.16 billion as well as exceeding the prior year earnings of $0.9 billion. The rise was attributable to higher prescription volume and price inflation for branded drugs. However, this was offset by the impact of the increase in generic utilization.

Total unadjusted claims processed in the quarter rose to $21.3 million from $16.2 million in the year-ago quarter. The addition and growth of clients along with the acquisition impact of WHI resulted in the increase in prescription volume in the reported quarter.

Generic utilization climbed to 74% from 71% in the comparable quarter of 2010, while gross profit rose to $69.6 million from $55.7 million in the year-ago quarter. Gross profit of the reported quarter includes the effect of amortization of intangible assets of FutureScripts to the tune of $3.2 million.

The increase in gross profit was attributable to higher revenues, greater generic utilization, 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 to $1.21 billion from $858 million in the year-ago quarter.  Selling, general and administrative (SG&A) expenses doubled to $48 million from $24 million in the prior-year quarter.

The increase in SG&A expenses was primarily attributable to the company’s growth-oriented initiatives but it also reflects the consolidation of the operating expenses and amortization of intangible assets of the Catalyst Health’s recent acquisitions as well as their integration costs.

The increase in SG&A expenses led to a fall in operating income to $21.6 million from $31.6 million in the second quarter of 2010.

Stock Update

On April 13, 2011, Catalyst Health issued 4.5 million new shares for $228 million, taking the weighted average outstanding diluted shares for the reported quarter to 48.77 million.

Business Update

On June 13, 2011, Catalyst Health completed the acquisition of WHI, the pharmacy benefit management (PBM) business of Walgreen Co. (WAG) for $525 million. The company funded the acquisition with a combination of its credit facility and cash on hand. The integration of WHI is expected to be completed by the end of 2013.

Outlook for 2011

Following the acquisition of WHI, Catalyst Health updated its 2011 guidance. The company expects the revenue for the year to be between $5.1 billion and $5.3 billion, which translates into a year-over-year growth of 35-41%, while the projected range for operating earnings per share is $2.30 to $2.40.

Our Take

Catalyst Health reported improved top-line and bottom-line on the basis of enhanced operational efficiency and increased prescription volume. The acquisition strategy of the company also proved to be profitable, with both the recent acquisitions adding to the earnings. However, the expenses of the company are soaring and effective cost control measures are required to enhance profitability.

Catalyst Health’s competitor, CVS Caremark Corporation (CVS) is expected to announce its second-quarter earnings on August 4. Another rival, Express Scripts Inc. (ESRX), reported earnings of 71 cents per share (excluding special items), in line with the Zacks Consensus Estimate but well above the year-ago adjusted earnings of 60 cents per share

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

CATALYST HEALTH (CHSI): Free Stock Analysis Report

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EXPRESS SCRIPTS (ESRX): Free Stock Analysis Report

WALGREEN CO (WAG): Free Stock Analysis Report

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