Pharmacy benefit manager merger seen driving competition

ROCKVILLE, Md.—The $4.4 billion purchase by SXC Health Solutions Corp. of Catalyst Health Solutions Inc. is likely to increase competition among the industry's largest pharmacy benefit managers and could drive prescription discounts for major employers, expert say.

The deal announced last week also is a sign that more PBM mergers and acquisitions are on the horizon as companies cope with drug pricing pressures.

“We're just at the beginning of acquisitions in this space,” said Brenda Motheral, executive director of the Pharmacy Benefit Management Institute in Plano, Texas.

SXC and Catalyst said the boards of directors of each company unanimously approved the merger in which Catalyst shareholders will receive $28 in cash and a 0.66 share of SXC stock for each Catalyst share under the transaction, the firms said in a joint statement.

The pending acquisition would create an estimated $13 billion company that would be headquartered in Illinois and maintain offices in Maryland, according to last week's statement. The deal is expected to close in the second half of 2012, pending regulatory and shareholder approval.

SXC reported $4.98 billion in 2011 revenue, while Catalyst reported $5.33 billion in revenue, the PBMs said in their annual reports.

Employers are hopeful the merger will result in a major PBM market player that can negotiate prescription pricing deals, said Edward Kaplan, New York-based senior vp and national health practice leader at The Segal Co., an independent benefit, compensation and human resources firm.

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“You get to a point where you're big enough where the big manufacturers have to take you seriously, and that should help them negotiate rebate savings,” Mr. Kaplan said.

The institute's Ms. Motheral agreed that the deal could mean more prescription discounts.

“For larger employers, this is probably pretty positive because it gives another option of a player who can compete effectively,” she said.

SXC and Catalyst face competition from PBMs that are several times their size. Medco Health Solutions Inc. of Franklin Lakes, N.J., ranked No. 1 in the Business Insurance 2011 ranking of the 10 largest PBMs, with $66 billion in unbundled PBM revenues for 2010.

Woonsocket, R.I.-based CVS Caremark Corp. ranked No. 2 in the 2011 ranking, reporting $47.8 billion in unbundled PBM revenues in 2010. St. Louis-based Express Scripts Inc. was No. 3 with nearly $45 billion in unbundled PBM revenues.

Citing Express Scripts' deal earlier this month to buy Medco for $29.1 billion, Ms. Motheral said consolidation in the PBM market is being driven largely by decreasing margins in the mail-order pharmacy business.

During a conference call with analysts last week, SXC CEO Mark Thierer said SXC and Catalyst—which have specialized in mid-market clients—plan to compete directly against larger PBMs.

“The combination brings together two highly complementary businesses, which collectively will have an increased scale and scope to better control drug costs and deliver customized solutions to payers, including employers, health plans and government clients,” said Mr. Thierer, who will remain CEO of the combined company whose stock will trade under the SXC symbol.

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While SXC and Catalyst separately are much smaller than the top PBMs, their combined strength could help them double in size during the next five years, said Brian Tanquilut, a Nashville-based health care services equity research analyst with Jefferies & Co. Inc.

“This allows them to play offense and really try to go head-to-head with the larger PBMs to gain as much market share as possible,” Mr. Tanquilut said.

Brooks O'Neil, Minneapolis-based senior research analyst with Dougherty & Co. L.L.C., said SXC is known for having a sophisticated information technology structure. That system, along with increased negotiation power, could make SXC-Catalyst a strong contender to the top PBMs, Mr. O'Neil said.

“You need to be able to help your clients manage their pharmacy costs in the ways that are most comfortable for them and you need to be able to deliver exceptional quality of care to members,” Mr. O'Neil said.

SXC and Catalyst may look to gain customers from Express Scripts and Medco as that merger shakes out, Mr. Tanquilut said.

“There are lots of clients that are evaluating their relationship with Express Scripts right now, so there's a lot of opportunity for these guys to pick up...market share,” Mr. Tanquilut said.

As the Express Scripts and SXC mergers move forward, the institute's Ms. Motheral said other PBMs likely will consider similar deals in order to stay competitive.

“I suspect we'll see one (deal) every quarter for the next 18 months or so,” she said.