Don't let it get away!
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This time really doesn't count for pharmacy benefits manager Catamaran (Nasdaq: CTRX ) . Sure, the market will react to the earnings announcement for the last quarter. However, these results are likely to be largely irrelevant to the company's performance going forward. Here are three reasons why.
1. It's too early to see the impact of the merger with Catalyst.
When the merger between SXC Health Solutions and Catalyst Health was announced in April, the companies stated that the deal would be closed in the second half of 2012. That turned out to be technically correct, but barely, as the merger completed on July 2 followed soon thereafter by the new name of Catamaran.
Shareholders for both companies voted overwhelmingly in favor of the merger. The markets responded positively with both stocks rising sharply after the initial announcement. They all had good reasons to be happy.
Catamaran expects the merger to generate operating cost synergies of $125 annually. The new company now ranks as the fourth largest pharmacy benefits manager (PBM) in the U.S. This increased scale should better position Catamaran to compete for larger business.
None of these opportunities will be reflected in the earnings numbers for last quarter, though. Investors will have to wait to see good news manifested in earnings announcements. Catamaran projects accretive earnings -- but not until 2013.
2. A large potential customer departure hangs in the balance.
Catamaran's numbers for last quarter include significant revenue from HealthSpring, the company's largest customer. It is unclear, though, how long Catamaran will be able to count on that revenue.
Cigna (NYSE: CI ) acquired HealthSpring earlier this year. That was potentially bad news for Catamaran because Cigna operates its own PBM. The HealthSpring contract expires at the end of 2013. A decision by Cigna not to renew would certainly hurt Catamaran.
However, earlier this year, Cigna stated that it is "keeping all options on the table" with respect to its PBM unit. These options included the possibilities of selling the PBM unit or renewing the Catamaran contract. According to a recent Wall Street Journal report, Catamaran CEO Mark Thierer stated that his company is "spending a lot of time talking to Cigna about the possibilities."
The Cigna acquisition of HealthSpring could ultimately be good news for Catamaran. Perhaps the company can pick up additional business from Cigna in addition to its HealthSpring contract. Maybe Catamaran will even buy Cigna's PBM entirely.
For now, though, we simply don't know what will happen. And because of that uncertainty, any earnings in the most recent quarter related to HealthSpring don't help much in determining future prospects for Catamaran.
3. The landscape has changed.
The landscape for PBMs is already quite different than it was throughout the second quarter and continues to change rapidly.
Earnings over the last quarter were made in a world where drugstore chain Walgreen (NYSE: WAG ) didn't do business with the nation's largest PBM Express Scripts (Nasdaq: ESRX ) . That world was one in which industry had yet to fully feel the impact of the acquisition of Medco by Express Scripts.
Things are different now. Express Scripts is perhaps stronger than ever after Walgreen blinked in their contract skirmish. CVS Caremark (NYSE: CVS ) , which is the second largest PBM, also emerges stronger. The company floundered for a while following its acquisition of PBM Caremark. However, CVS Caremark's pharmacy business has profited from getting Express Scripts customers who shopped at Walgreen prior to the dispute.
The acquisition of Medco also makes Express Scripts more formidable. The combined company has a 45% share of the PBM market. Catamaran must now compete against this giant, especially for larger-scale business.
Sails full of wind
In my view, Catamaran stands to benefit from the acquisition of Catalyst. The merger better positions the company to go head-to-head with Express Scripts. It also could help absorb the shock in the event Cigna pulls the HealthSpring business after 2013.
Catamaran appears to have its sails full of wind. But its latest earnings release doesn't really tell us much about the company's likelihood of success. What happens in the second quarter stays in the second quarter.
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