Yikes. Catalyst Health Solutions (Nasdaq: CHSI) reported a 37% plunge in second-quarter profits, hurt by its recent acquisition of Walgreen's (NYSE: WAG) pharmacy benefit business. But as I see it, this was a mostly temporary effect of its attempt to digest its new acquisition.
A look at the numbers
Revenue for the quarter surged 39% from year-ago levels to $1.23 billion. The increase was driven by higher prescription volumes and an increase in prices of branded drugs. Higher prescription volumes resulted from addition of new clients.
Gross profits in the quarter increased to $69.6 million, up 33% from last year. This was helped by higher revenue and generic utilization, the latter of which increased because of the acquisitions of FutureScripts and Walgreens Health Initiative.
Selling, general, and administrative expenses nearly doubled to $48 million due to transaction, transition, and integration costs associated with the WHI acquisition. This led to a 37% drop in net income to $12.3 million.
Why WHI makes sense
It's going to be tough competing in the pharmacy benefits space, especially after industry heavyweights Express Scripts (Nasdaq: ESRX) and Medco Health Solutions (NYSE: MHS) decided to tie the knot last month. That's one reason why Catalyst's WHI acquisition makes sense. WHI will nearly double Catalyst's covered subscriber count to around 18 million subscribers with roughly 165 million prescriptions annually. The deal should add to Catalyst's revenue going forward and also help it increase its market share.
The Foolish bottom line
Despite a drop in profit, Catalyst's current quarter was not completely disappointing. It saw decent top-line growth and I expect this trend to continue in future. As WHI gets integrated into Catalyst's fold, it should add to revenue -- as well as earnings -- in the long run.
