Catalyst Health in line, Reaffirms – Analyst Blog

Catalyst Health Solutions Inc.’s (CHSI) first quarter 2010 earnings of 39 cents per share are in line with the Zacks Consensus Estimate. The company earned 32 cents in the year-ago quarter. The year-over-year increase was attributable to higher revenues coupled with improved gross margins.

 

Revenue for the reported quarter climbed 18% year-over-year to $832.3 million. The rise was attributable to higher prescription volume and price inflation for brand drugs. The increase was mitigated partially by the impact of the increase in generic utilization.

 

Total unadjusted claims processed in the reported quarter climbed approximately 17% year over year to 16.1 million. The addition of new clients resulted in the increase in prescription volume in the first quarter of 2010. The total prescription volume for the first quarter of 2010 (post adjustments) stood at 17.5 million as against 14.8 million a year ago. Generic utilization has climbed to 70% from 67% in the comparable quarter of 2009.

 

Gross profit for the quarter came in at $50.6 million or 6.1% of revenue as opposed to $41.1 million, or 5.8% of revenue, in the comparable quarter of 2009.

 

The increase in gross profit was attributable to higher revenue, greater generic utilization, continued realization of the economics of the company’s mail service pharmacy, 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 climbed 18% year-over-year to $803.9 million. Selling, general and administrative (SG&A) expenses grew approximately 15% to $22.2 million.

 

The increase in SG&A expenses was primarily attributable to the company’s growth-oriented initiatives. Furthermore, the increase in SG&A expenses for the reported quarter reflects the consolidation of operating expenses from Catalyst Health’s recent acquisition.

 

 

Catalyst Health backs the earnings guidance it had previously provided for fiscal year 2010. The Rockville-based, pharmacy benefits manager forecasts 2010 earnings per share between $1.80 and $1.88. The Zacks Consensus Estimate for 2010 indicates earnings of $1.84.

 

 

Currently we are Neutral on Catalyst Health. While we are pleased with the company’s wide range of products and its efforts to expand its offerings, we remain concerned about the fierce competition faced by the company.

 

Furthermore, even though the company relies on growth through acquisition and has completed multiple acquisitions over the past few years, expanding its product portfolio and being on a lookout for more; such a strategy runs attendant risks. Additionally, Catalyst Health’s reliance on a limited number of partners for generating the bulk of its revenues is uncertain.

 

Our Neutral long-term outlook on the stock indicates that it will perform in line with the overall US equity market over the next six to twelve months. We advise investors to retain the stock over this time period.