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Drug-Benefits War Heats Up

Pharmacy benefits management goliath Express Scripts has a smaller but fattened-up competitor nipping at its heels. An interview with Jeff Park, CFO of new number-four player Catamaran.
David McCann, CFO.com | US
July 24, 2012

Three months after the Federal Trade Commission finally approved the merger of Express Scripts and Medco, the country's two largest pharmacy benefits managers, another PBM combination this month made fewer headlines and will affect fewer health-plan sponsors.

Everything is relative, though. While the industry leader is a mammoth, the $4.4 billion acquisition by SXC Health Solutions of Catalyst Health Solutions, which was finalized on July 2, resulted in a new company that, with revenue of $13 billion, is comfortably within the Fortune 250.

A week later, a new name for the company, Catamaran, was announced. The surviving CFO is Jeff Park, a former venture-capitalist investor in SXC who became its finance chief in 2006 and guided it through an initial public offering that year, when he was 35 years old. Since then the company has averaged an acquisition per year, which is in large part responsible for an annual growth rate of more than 150% from 2007 to 2011.

SXC started out in 2001 as a supplier of technology and tools for PBMs. Because most of the acquisitions were of client companies, it has become a PBM in its own right. Now, as Catamaran, it is fourth largest in the field, behind Express Scripts-Medco (about nine times larger, with combined revenue of $116 billion), CVS Caremark, and UnitedHealthcare.

Park recently spoke with CFO about the integration of companies, competition in the PBM market, and what it's like to be a CFO in that industry. An edited version of the interview follows.

What's up with the name change?
The fusion of our two businesses is similar to the catamaran, which is a two-hulled boat. The company is neither SXC nor Catalyst. The catamaran really broke the mold in the traditional sailing world, and that's what we're doing here in the PBM environment.

Even with a larger company, how are you going to be able to compete with the overwhelming volume advantage of Express Scripts and Medco?
We have enough scale to buy effectively. If we couldn't, we wouldn't be able to continue winning clients.

But our sale is based on flexibility. Generally speaking, PBMs control a lot of decisions: what drugs are in the formulary, what networks are available, and what kind of clinical programs to offer. But many clients want to make those choices themselves. So what we sell is the flexibility of our technology and the ability to break it into its components. Some clients want to use our member call-center tools, some want the call center itself, some want our clinical tools, some want clinical services. The ability to break those things apart has been our secret sauce. You can buy our clinical tools and formulary, or you can use your own.

When the Express Scripts-Medco deal was before the FTC, there was very loud opposition to it from Congress, state attorneys general, and consumer-protection groups, which portrayed the PBM industry as an anticompetitive one marked by unfair business practices. What do you say?
The goal of a PBM is to drive down costs for clients and plan members, so anything that's not principally focused on that brings criticism. But we are incentivized to save money for clients, so our interests are aligned.

Were the six M&A deals you've done in the past six years the key driver of your growth?
Yes. We've also been successful at growing our business organically, but one of the core pieces of a company is its operating platforms, and when you buy a customer that's using your technology, it minimizes the challenge of integration. Targeting and integrating acquisitions has been one of our core competencies. For a company you haven't heard too much about, our technology manages one in five prescriptions in the United States.

When companies are integrated, it often happens that a lot of transition and conversion risk is placed on the customers. But with companies we buy having used our technology, we have a good understanding of them and the ultimate clients. We don't have to recard members, for example. Disruptions are minimized.

We've also acquired specialty-drug companies that sell high-cost injectable pharmaceuticals, one of the fastest-growing drug categories. The average treatment costs $1,200 to $1,400.

What level of duplication of duties have you encountered with your acquisitions?
Any time you put two companies together you have overlap in executive talent and administrative positions in finance, human resources, and legal, for example. But in the areas that touch the client, like account management and clinical services, we don't see a lot of duplication. So there's not as much overlap as you might think.

Was the Catalyst deal different from the others?
We have a large specialty-drug distribution footprint, and Catalyst didn't have any. They were outsourcing $1 of specialty-drug spend to other providers. So that creates an opportunity for us.

How do you decide how to structure the financing for a deal like that?
The free cash flows from our business have been used to deploy acquisitions. For this most recent one, it was 65% stock and 35% cash to insure we had a [manageable] level of leverage and enough flexibility for continued future acquisition possibilities.


We were a $6 billion company buying a $6 billion company. With a deal value of $4.4 billion, 35% of that [or $1.5 billion] is a lot of cash. We also wanted to retire some existing debt, both ours and Catalyst's, and then there are transactions costs. So we looked at how much cash we could deploy without overlevering our books yet still take advantage of what is really a good credit market out there today. We had $800 million in preacquisition cash and we used a debt facility of $1.4 billion, or about 2.7 times EBITDA on a pro forma basis.

When companies come together, part of the value is efficiencies in purchasing and savings for clients. We announced roughly $125 million of synergies on the transaction. The shareholders that are staying can enjoy that.

How does the fact that you're in the PBM business influence what you do in your job day to day?
Like any CFO, my job is to manage financial reporting, internal risk and audit, and the internal reporting and control process. But a big piece is that we're also managing costs for our customers: employers, health plans, and state governments. We help them understand how to manage their costs and how to fund effectively to pharmacies. We also help them make sure their employees are managing their health by properly adhering to physicians' treatments so as to reduce hospitalization and physician costs.

Also, I have to make sure we underwrite customer contracts effectively. The contracts are generally for three years, and we've got a very high customer-retention rate: about 98%. That means when we sign a client up for a first three-year term, we're usually going to keep them for quite a long time. So we need to make sure the contracts [are] priced appropriately. A few percentage points will make an impact for the duration of the relationship.

What was your reaction to the Supreme Court decision that left the Affordable Care Act in place?
We're pleased that the ACA is going to be able to provide 25-30 million new people into the health-care system. This will be good for the entire PBM industry as well as for patients.




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