Wednesday, April 18, 2012

The SXC-Catalyst Merger: Initial Thoughts On the Deal

Well, that didn't take long!

This morning, SXC Health Solutions (NASDAQ:SXCI) announced its acquisition of Catalyst Health Solutions (NASDAQ:CHSI), bringing together the two largest, fastest-growing mid-market PBMs. Read the press release or view this morning's presentation.

File this deal under "inevitable surprise," given that the ink is barely dry on Express Scripts’ (NASDAQ: ESRX) acquisition of Medco Health Solutions. An SXC-Catalyst combination will be well-positioned to compete with the larger PBMs.

Read on for my first-take observations on the deal.

This will be a credible competitor in the PBM space. The combined company will have revenues of $13 billion and be the fourth largest PBM (behind Express Scripts, Caremark, and OptumRx). I estimate that the combined company will handle about 8% of 2012 estimated store-based, retail prescription claims, based on the estimates in Exhibit 30 of the 2011-12 Economic Report on Retail and Specialty Pharmacies. On today's call, both CEOs talked about each company's growing number of RFPs from larger employers.

Both companies have been (and will continue to be) active acquirers of smaller PBMs. Catalyst's significant acquisitions include FutureScripts (2010) and Walgreens Health Initiatives (2011). SXC's recent deals include Medfusion, PTRx, Health Trans, and MedMetrics. SXC's technology platform will also make it easier to roll up other regional PBMs.

They are already talking about retail network differentiation. On this morning's call, SXC CEO Mark Thierer made a clear point of discussing the value of retail pharmacy and the importance of plan sponsors choosing pharmacy network size. He said: "If you don't have Walgreens in your network, you don't have a competitive network." Very intriguing given all the talk about narrow networks. Last Fall, Catalyst visibly aligned with Walgreens (NYSE: WAG), creating a clear point of differentiation regarding network size. See Boo! Catalyst Says Walgreens is Cheaper. Note that Catalyst doesn't even have fulfillment operations, while SXC does have specialty and mail facilities. It sounded to me like SXC may try to pick up discarded mail or specialty assets from Express Scripts.

There should be few antitrust hurdles. The companies have limited customer overlap and will operate in the shadow of the largest PBMs. The Federal Trade Commission (FTC) explicitly contemplated these companies as competitive alternatives in its statement on the Express Scripts/Medco deal. The FTC wrote:
"There are also several standalone PBMs that are substantially smaller than the Big Three but have had recent success winning significant employer business, including large employer accounts. These PBMs usually compete by trying to differentiate themselves from the Big Three and health plan-owned PBMs by emphasizing a transparent pricing model, providing more individualized account management support, and offering customized PBM offerings. Examples of these PBMs include CatalystRx and SXC, both of which are experiencing considerable growth."
The integration should be fairly smooth. SXC is the technology backend for one-third of the regional PBMs, including Catalyst. Plus, SXC has been adding significant executive talent from the larger PBMs.

Stay tuned for much more change in the PBM industry!


  1. Good analysis, Adam. I always thought Catalyst's upside was limited based on your last point: that they are powered by SXC technology. It really should make the merger easier both because they won't have to swap out systems and because SXC really knows what it's getting into operationally as a result of insights gleaned from serving Catalyst.

  2. PUTT-Dave MarleyApril 19, 2012

    The bigger the fish the bigger the target. When all the "new efficiencies" fail to translate in reduced employer PMPM costs, maybe then the employers will realize that it's time to fire their existing benefits consultant and PBM.

  3. The Redheaded PharmacistApril 20, 2012

    Excellent article and analysis Dr. Fein.  I learn something every time I come to this site!  I think this merger is the beginning of the response to the Medco/ESI deal.  Further PBM consolidation was almost inevitable.  These other PBMs are now forced into looking at strategic mergers simply to keep up and compete.  It will be interesting to see what happens next and how all of this consolidation affects the next round of contracts with retail pharmacies.  As to this specific deal, it seems to make sense for both SXC and Catalyst.  It looks like they will integrate together quite smoothly.  But fair warning Dr. Fein- taking a PBM CEO's comments at face value can be shortsighted.  There always seems to be a bigger story behind their words.