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Catamaran Corporation (CTRX) was formed in July 2012 through the acquisition of Catalyst Health Solutions, Inc. by SXC Health Solutions Corp., which changed its name after the purchase. Until 2008, SXC’s business was restricted to selling and licensing healthcare software to healthcare providers. In 2008, it entered the pharmacy benefit management industry through a major acquisition. Since then, it has grown largely through additional purchases, lifting its non-GAAP earnings 47% in 2011, to $1.63 a share, from $1.11 a share in 2010, before amortization of acquisition-related intangibles. The combined company is now the fourth-largest pharmacy benefits manager, serving plans with about 25 million members and filling around 200 million prescriptions a year.

Catamaran’s pharmacy benefits management services (PBM), marketed under the informedRx brand, include electronic point-of-sale pharmacy claims management, retail drug store network management, mail claims processing, specialty pharmacy claims management, and formulary administration, among others. Catamaran also offers services for MedicarePart D, drug review and analysis, and benefit design and other consulting services. PBM customers include managed care organizations, self-insured employers, unions, third-party healthcare plan administrators, and state and federal entities. 

The company offers healthcare information technology (HCIT) to customers that administer and manage pharmacy benefits, including healthcare plans, federal, state, and provincial governments, workers’ compensation programs, and long-term/chronic care facilities. Catamaran’s software facilitates claims processing and helps with billing and updating of benefit, price, drug, and provider information. HCIT products also measure and predict pharmacy risk, create and maintain formularies, automate the prior authorization process, and manage rebates from drug manufacturers.

To date, the company has concentrated on the middle market and customers that require more flexibility than is usually offered by the very large PBMs, such as Express Scripts Holding Company (ESRX) or CVS Caremark (CVS). Local workers’ compensation and Medicaid programs are examples. Along with frequent acquisitions, Catamaran has grown by moving customers from just HCIT up to the full range of PBM services. And many of the acquisitions have been of clients, which has made growth by acquisition fairly smooth, since companies acquired, for the most part, had already been using Catamaran data processing systems and software.

Catalyst brought the company a national sales organization with clients such as Ford Motor (F) and MGM (MGM). Catamaran plans to use the added capacity to compete for business with the largest 100 companies in the U.S., while retaining its efforts to serve the middle market, which offers higher prices along with a need to tailor healthcare offerings. The company also expects to realize around $125 million in annual cost savings by the end of 2013, though at a cost of around $45 million. And we look for further growth from present customers as Catamaran either acquires them or succeeds in selling them more services. Nonetheless, the purchase of Catalyst will be diluting, as it added 33 million shares and about $1.4 billion of debt. Catamaran forecasts 2012 adjusted earnings per share of around $2.15 including Catalyst, compared with $2.40 for just SXC Health before the merger closed, in both cases before all amortization costs.

Catamaran has above-average growth prospects from present customers, and, like its industry, should benefit from new business from the Patient Protection and Affordable Care Act of 2012. But at this point, with a price of over 25 times our forecast for 2013 earnings per share before amortization, we believe the shares are now rather pricey. A material pullback, though, would probably make this solid growth story that much more appealing.          

At the time of this article’s writing, the author did not have positions in any stocks mentioned.