CVS Health Corporation (CVS)

[EZ2]

CHSI --- I guess we should have bought CHSI !!

Catalyst, with a roughly $2 billion market cap, has traditionally served state governments, unions, health plans and employers. It competes against the big three pharmacy-benefit managers--Medco Health Solutions Inc. (MHS:$61.94,00$-0.3500,-0.56%) , Express Scripts Inc. (ESRX:$53.778,0$-0.662,0-1.22%) and CVS Caremark Corp. (CVS:$33.72,00$0.3600,1.08%) --for clients that are relatively small for the giant players, and with other relatively smaller PBMs, such as SXC Health Solutions Corp. (SXCI:$48.14,00$-1.60,00-3.22%) .

Stand-alone PBMs Medco and Express Scripts (ESRX:$53.778,0$-0.662,0-1.22%) both have market caps well in excess of $20 billion.

Catalyst is growing quickly through acquisitions, having substantially boosted membership in September when it purchased Independence Blue Cross's FutureScripts pharmacy benefits-management businesses for $225 million.

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UPDATE: Catalyst To Buy Walgreen Drug-Benefit Unit For $525M 03/09 10:46 AM


(Adds company comments, analysis and background, in the first, third through seventh and ninth through 18th paragraphs.)


By Dinah Wisenberg Brin

Of DOW JONES NEWSWIRES

Drug-store chain Walgreen Co. (WAG:$42.4100,$0.0200,0.05%) plans to shed its pharmacy benefits- management operation, selling to Catalyst Health Solutions Inc. (CHSI:$52.5499,$8.0199,18.01%) a rapidly expanding, second-tier PBM that will more than double Catalyst's membership as a result of the $525 million cash deal.
Catalyst shares rose 14.5% to $51 in recent trading, while Walgreen (WAG:$42.4100,$0.0200,0.05%) climbed 0.75% to $42.71.
Walgreen (WAG:$42.4100,$0.0200,0.05%) , which operates the largest U.S. retail drug-store chain, said exiting the PBM business accelerates its strategy of broadening pharmacy, health and wellness services to consumers, employers and health plans. The company aims to grow its specialty, infusion and mail pharmacy services, a spokesman said.
Catalyst, which many industry watchers already considered the fourth-largest PBM other than those owned by health insurers, will swell its membership to 18 million members from seven million by acquiring Walgreens Health Initiatives; annual prescription volume will grow to more than 165 million from 80 million.
Those prescriptions account for some 4% of the overall market, according to J.P. Morgan analyst Michael Minchak.
"This is a significant milestone for Catalyst and an important next step in our long-term growth strategy," Catalyst Chief Executive David Blair said. The deal includes an agreement for Catalyst to provide pharmacy-benefit services for Walgreen's (WAG:$42.4100,$0.0200,0.05%) 244,000 active employees plus retirees and dependents, and an agreement to administer the chain's Prescription Savings Club.
Catalyst expects to close the deal in the first half of this year and to complete integration of the purchase in 18 months, Chief Financial Office Hai Tran said during a conference call. The transaction should be neutral or add slightly to earnings in 2011, he said.
Walgreen (WAG:$42.4100,$0.0200,0.05%) expects to record a gain on the sale of the business, which will offset any one-time or transition costs from the transaction in the current year. It expects the transaction to have no impact on its earnings in the fiscal-2012 year.
"We believe the divestiture makes sense since Walgreens Health Initiatives never had sufficient scale to compete with larger players," Credit Suisse analyst Edward Kelly said. Walgreen (WAG:$42.4100,$0.0200,0.05%) will retain the higher-margin specialty- pharmacy and mail-service businesses, which it can continue to expand through its Catalyst relationship, he said.
Catalyst, with a roughly $2 billion market cap, has traditionally served state governments, unions, health plans and employers. It competes against the big three pharmacy-benefit managers--Medco Health Solutions Inc. (MHS:$61.94,00$-0.3500,-0.56%) , Express Scripts Inc. (ESRX:$53.778,0$-0.662,0-1.22%) and CVS Caremark Corp. (CVS:$33.72,00$0.3600,1.08%) --for clients that are relatively small for the giant players, and with other relatively smaller PBMs, such as SXC Health Solutions Corp. (SXCI:$48.14,00$-1.60,00-3.22%) .
Stand-alone PBMs Medco and Express Scripts (ESRX:$53.778,0$-0.662,0-1.22%) both have market caps well in excess of $20 billion.
Catalyst is growing quickly through acquisitions, having substantially boosted membership in September when it purchased Independence Blue Cross's FutureScripts pharmacy benefits-management businesses for $225 million.
The company emphasizes a straightforward business model based on fixed fees, transparent, pass-through drug pricing and localized service. While it has won some business from its larger rivals, and retained one of its largest customers in a contract renewal last year, not all its client relations have been worry- free.
It is unclear whether one of Catalyst's largest clients, the state of Maryland, will renew a multiyear contract set to expire this year; analysts had expected the contract to be decided months ago and Catalyst CEO Blair last month said the timing was uncertain. And last September, Catalyst disclosed a dispute with managed-care client MCS Advantage Inc., which planned to terminate its contract two years early.
Walgreen's (WAG:$42.4100,$0.0200,0.05%) decision to exit the PBM business comes as some analysts have questioned the wisdom of the 2007 merger that formed hybrid drug-store chain- pharmacy benefit manager CVS Caremark Corp. (CVS:$33.72,00$0.3600,1.08%)
CVS Caremark (CVS:$33.72,00$0.3600,1.08%) critics have been pressuring the Federal Trade Commission to reverse the merger.
Credit Suisse analyst Kelly sees the deal as a positive for CVS Caremark (CVS:$33.72,00$0.3600,1.08%) .
"While Walgreen's (WAG:$42.4100,$0.0200,0.05%) PBM sale is small, it should fuel the debate on a possible break-up at CVS," he said. Walgreen (WAG:$42.4100,$0.0200,0.05%) "is clearly telling investors that it doesn't make sense to own a PBM, the transaction multiple highlights the value trapped within CVS...and Catalyst becomes a larger player in the industry," which could help the argument against a need to sell CVS's drug-benefit business, he said.
-By Dinah Wisenberg Brin, Dow Jones Newswires; 215-982-5582; dinah.brin@ dowjones.com
--Maxwell Murphy and Matt Jarzemsky contributed to this article.
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(END) Dow Jones Newswires
03-09-111046ET
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