SXC Health Solutions to Buy Catalyst in $4.4 Billion Deal

SXC Health Solutions Corp. (SXCI) agreed to buy Catalyst Health Solutions Inc. (CHSI) in a cash and stock transaction valued at $4.4 billion to stay competitive as larger pharmacy benefits managers join forces.

Catalyst investors will receive $28 in cash and 0.6606 shares of SXC stock for each Catalyst share under the terms of the agreement, the companies said today in a statement. That implies a purchase price of $81.02 per Catalyst share, 28 percent above yesterday’s closing stock prices.

Pharmacy benefits managers are combining after Express Scripts Inc., the largest one in the U.S., agreed to pay $29.1 billion for Medco Health Solutions Inc. SXC of Lisle, Illinois, one of the biggest providers of technology for processing prescription claims, was the target of speculation last month. The company is now in position to be one of the nation’s largest pharmacy benefit companies, said Brian Tanquilut, an analyst with Jefferies & Co. in Nashville, Tennessee.

“SXC will be the next big player in the PBM space,” Tanquilut said in a telephone interview. “The opportunity to win new business from the larger guys, meaning Express-Medco, CVS, is there.”

SXC rose 11 percent to $89.36 at 4 p.m. New York time. Rockville, Maryland-based Catalyst surged 34 percent to $85.23. SXC’s calculation understates the value of the share portion of the deal, and Catalyst is trading at the proper value, according to Tanquilut.

Big Four

SXC is targeting the current “big three” of the PBM world -- Express Scripts Holding Co. (ESRX), CVS Caremark Corp. (CVS) and UnitedHealth Group Inc., hoping to eventually make it a big four as his company grows, said SXC Chairman and Chief Executive Officer Mark Thierer.

“We’ve laid a three to five year plan out for our board,” Thierer said in an interview today. “I do see SXC moving right into the largest buyers, competing directly” with the biggest PBMs, he said.

His company will have “a lot of gunpowder” to do future deals, Thierer said. SXC will target companies that can help them grow is scale, as well as smaller, closely held companies with capabilities in specialty pharmaceuticals like expensive injectable drugs. “I’m expecting continued consolidation” he said. “People have a lot of money on the balance sheet, leverage is cheap, I’m expecting a lot more activity,” he said.

Transaction Costs

The enlarged company expects to incur about $40 million to $45 million of “transition expenses” while SXC expects to pay annual interest of about $70 million from financing the transaction with $1.7 billion in debt.

Thierer and will continue as CEO and chairman in the combined company.

“We will be the second-largest independent PBM in the country, in terms of prescription volume,” Thierer said on a conference call today. “The transaction will expand our reach to larger clients.”

The companies have little overlap among clients, with Catalyst having many state employers while SXC has state Medicaid clients, Thierer said.

“This catapults SXC and Catalyst into a much better negotiating stance,” said Anthony Vendetti, a Maxim Group LLC analyst in New York who follows both companies. “It gives them more leverage with drug manufacturers and drug distributors and because of their increased size, it gives them more leverage with clients.”

Seven Acquisitions

SXC made at least seven acquisitions since November 2004, according to data compiled by Bloomberg. Previous to today’s deal, their largest purchase had been Healthtrans LLC for $250 million in January.

“SXC has a history of acquiring companies and integrating them well,” Vendetti said in a telephone interview.

Founded as Systems Xcellence in 1993, SXC negotiates with drugmakers for lower prescription medicine prices on behalf of health insurers, Medicare and Medicaid plans, workers’ compensation programs and long-term care facilities.

SXC also makes software that processed one out of every five drug claims in the U.S, according to the company’s 2010 annual report. Jefferies’s Tanquilut said that most of the acquisitions have been clients who use SXC’s technology.

Tanquilut said the company may take a year to complete the integration, then move on to more deals to keep growing and compete with Express Scripts and CVS. The company needs to add smaller assets in specialty pharmaceuticals, most of which will probably be closely held regional companies, he said.

Deal Advisers

JPMorgan Chase & Co. served as lead financial adviser to SXC, while Barclays Plc assisted and Sidley Austin LLP provided legal advice. Goldman Sachs Group Inc. took the lead in advising Catalyst, with Citigroup Inc. offering additional advice and Milbank Tweed Hadley & McCloy acting as legal counsel.

JPMorgan is providing financing to SXC for the cash portion of the deal, according to today’s statement.

Express Scripts, which completed the purchase of Medco on April 2 after receiving approval from the Federal Trade Commission, is the subject of a lawsuit by trade groups that wanted to block the acquisition. St. Louis-based Express Scripts has asked that the lawsuit be dismissed because the trade groups waited too long to file the challenge. The companies agreed to the deal in July.

There have been more than $80 billion in deals in the pharmacy services industry worldwide over the past 10 years, the largest being Express Scripts’ purchase of Medco, according to data compiled by Bloomberg. SXC’s offer values Catalyst at 27 times earnings before interest, taxes, depreciation and amortization, the data show. The median in a survey of 10 deals over the past decade is about 14.

To contact the reporters on this story: Drew Armstrong in New York at darmstrong17@bloomberg.net; Trista Kelley in London at tkelley2@bloomberg.net

To contact the editors responsible for this story: Phil Serafino at pserafino@bloomberg.net; Reg Gale at rgale5@bloomberg.net

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