Zacks_Analysts' Blog : Catalyst Health Beats Estimate - Analyst Blog

Catalyst Health Solutions Inc. (CHSI) reported third-quarter operating earnings of 63 cents per share, beating the Zacks Consensus Estimate of 61 cents. The results also compare favorably with earnings of 51 cents in the prior-year quarter.

Operating earnings in the reported quarter exclude the impact of non-recurring items such as transaction costs and integration expenses related to the Walgreens Health Initiatives Inc. (WHI) acquisition and amortization related to acquisitions.

The year-over-year increase was attributable to strong prescription volume growth, which supported the top-line and improved operational performance. Besides, the acquisitions of WHI and FutureScripts were significant and provided meaningful earnings growth. However, the acquisitions led to additional expenses as well thereby, partially setting off  earnings growth.

Net income reported by Catalyst Health was $15.2 million or 31 cents per share, substantially down from $21.5 million or 48 cents in the prior-year quarter.

Revenues for the reported quarter climbed 55% year over year to $1.43 billion from prior year earnings of $925.1 million. The rise is attributable to higher prescription volume, which was partly offset by the impact of the increase in generic utilization.

Total unadjusted claims processed excluding administrative services only (ASO) claims rose to $24.4 million in the reported quarter from $17.0 million in the year-ago quarter.

Additionally, total prescription volume excluding ASO claims rose to 30.4 million from 20.5 million in the prior-year quarter. The growth of new clients along with the acquisition impact of WHI and FutureScripts resulted in the increase in prescription volume in the reported quarter.

Generic utilization climbed to 74.2% from 71.5% in the comparable quarter of 2010, while gross profit rose to $84.1 million from $61.7 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 $2.4 million.

The increase in gross profit was attributable to increased revenues due to WHI and FutureScripts acquisitions, higher generic utilization and margin contribution from new clients, which were partly offset by compressed margins in renewal business.

Total operating expenses for the reported quarter upped to $1.4 billion from $890 million in the year-ago quarter.  Selling, general and administrative (SG&A) expenses surged 116.5% to $57.8 million from $26.7 million in the prior-year quarter.

The increase in SG&A expenses and acquisitions-related transition and integration costs and amortizations led to a fall in operating income to $26.3 million from $35.0 million in the third quarter of 2010.

Business Update

During the reported quarter, Catalyst Health secured new pharmacy benefit management (PBM) business consisting of self-funded employers, such as The Hertz Corporation and MGM Resorts International (MGM), and managed care plans, such as Health Alliance Medical Plans. The new business is expected to generate over $400 million in annualized revenue in 2012.

Outlook

Catalyst Health reaffirmed its 2011 revenue guidance range of $5.1–5.3 billion and adjusted earnings guidance range of $2.30–2.40 per share.

Additionally, the company issued a preliminary 2012 revenue guidance range of $5.8–6.2 billion. EPS is expected to grow 13–17% in 2012 to $2.60–2.80.

Non-recurring expense related to integration of WHI is expected to vary between $15–20 million, while the full year impact of amortization of acquisition intangibles is expected to stand at $36 million.

Our Take

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

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.