Catalyst Health Solutions Inc. (CHSI) reported fourth-quarter 2010 adjusted earnings of 56 cents per share, surpassing the Zacks Consensus Estimate of 52 cents. The results also compare favorably with earnings of 43 cents in the prior-year quarter.

In fiscal 2010, Catalyst Health posted adjusted earnings of $1.93, which exceeded the Zacks Consensus Estimate of $1.88 and the prior-year earnings of $1.55.

Catalyst Health’s adjusted earnings in the reported quarter exclude the adjustment for amortization of FutureScripts related intangible assets and all other acquisition-related intangible assets. Including amortization adjustments, net income reported by Catalyst Health was $22.6 million or 51 cents per share, as against $18.0 million or 41 cents in the prior-year quarter; while it was $81.0 million or $1.82 per share in fiscal 2010, as opposed to $65.2 million or $1.48 per share in 2009.

The year-over-year increase was attributable to a strong marketing strategy and leveraging its infrastructure and controlling overhead expenses. Besides, client renewals and a higher generic utilization were strongly supported by the beneficial acquisition of FutureScripts subsidiaries and securing new acquisitions.

Quarter in Detail

Revenues for the reported quarter climbed 49.3% year over year to $1.12 billion, exceeding the Zacks Consensus Estimate of $1.06 billion and the prior year earnings of $747.9 million. The rise was attributable to higher prescription volume and price inflation for branded drugs.

The increase was mitigated partially by the impact of the increase in generic utilization. Revenue in fiscal 2010 was $3.76 billion, which exceeded the Zacks Consensus Estimate of $3.71 billion and the prior year earnings of $2.89 billion.

Total unadjusted claims processed in the quarter rose approximately 41.1% year over year to $20.6 million, whereas it increased 24.9% to $70.2 million in fiscal 2010. The addition and growth of clients along with the acquisition impact of FutureScripts resulted in the increase in prescription volume both in the reported quarter and year 2010.

Generic utilization has climbed to 73% from 68% in the comparable quarter of 2009, while it jumped to 71% from 67% in fiscal year 2009.

Gross profit for the quarter came in at $66.1 million or 5.9% of revenues as opposed to $50.5 million, or 6.8% of revenues, in the comparable quarter of 2009. Gross profit in fiscal 2010 was $234.2 million or 6.2% of revenues, compared with $185.8 million, or 6.4% of revenues in 2009.

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 50.2% year over year to $1.08 billion and increased 30.2% to $3.63 billion in fiscal 2010. Selling, general and administrative (SG&A) expenses grew approximately 34.5% to $28.7 million in the quarter and 25.6% to $101.7 million in fiscal 2010.

The increase in SG&A expenses was primarily attributable to the company’s growth-oriented initiatives such as additional employee, facilities and vendor costs to serve and implement new clients. Besides, the growth in SG&A expenses reflects the consolidation of the operating expenses from the Catalyst Health’s recent acquisitions and the associated transaction related fees.

The increase in Catalyst Health’s gross profit, offset by a rise in SG&A expenses, led to the rise in operating income by 28.1% to $37.4 million in the fourth quarter of 2010, and by 26.6% to $132.5 million in fiscal 2010.

FutureScripts Acquisition Update

Catalyst Health closed the acquisition of the Independence Blue Cross’ (IBC) FutureScripts subsidiaries in September, 2010 for an all cash transaction of $225 million, which includes the value of a future tax benefit for Catalyst Health.

Catalyst Health now maintains the FutureScripts brand, retains FutureScripts’ staff and manages IBC’s pharmacy benefits services, under the terms of a 10-year contract, to approximately 1 million members and manages over 14 million prescriptions annually.

Outlook

Catalyst Health provided its guidance for 2011 in the range of $4.6 billion and $4.8 billion in revenue and adjusted earnings per diluted share between $2.20 and $2.39 per share. Earnings for 2011 will be weighted to the third and fourth quarters due to implementation and transition expenses associated with the integration of FutureScripts.

Including the adjustment for amortization of FutureScripts related intangible assets and all other acquisition-related intangible assets, earnings per share for 2011 is expected to lie in the range of $2.00-$2.19 per share.

Our Take

Catalyst Health successfully generated new clients, renewed key customer contracts, achieved higher generic utilization and formulary compliance and secured additional business, which have contributed to growth. Furthermore, Catalyst Health anticipates positive operating cash flow, which combined with available cash resources, should be sufficient to meet the expenses.

Further, Catalyst Health relies on growth through acquisition and has completed multiple acquisitions over the past few years. We believe that with the acquisition of FutureScripts subsidiaries, Catalyst Health will achieve a superb management team and will be able to control costs via delivering improved integrated health solutions. This acquisition will also provide significant growth opportunities and drive improved outcomes for IBC’s clients and members.

Its competitor, CVS Caremark Corporation (CVS) reported fourth-quarter adjusted earnings of 80 cents per share on February 3, beating both the Zacks Consensus Estimate and the year-ago period by a penny. Another rival Express Scripts Inc. (ESRX) reported fourth-quarter earnings of 71 cents per share (excluding special items) on February 17, exceeding the Zacks Consensus Estimate by a penny and the year-ago adjusted earnings of 49 cents per share.

Currently, Catalyst Health carries a Zacks #2 Rank, which translates into a short-term Buy recommendation, indicating slight upward pressure on the shares over the near term.

 
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