Walgreen Co. (WAG) sold its pharmacy benefits management operation to Catalyst Health Solutions Inc. (CHSI) in a $525 million cash deal that doubles Catalyst's membership and again raises questions about the benefits of linking a drug-store chain with its own PBM business.
For Walgreen, operator of the largest U.S. retail drug-store chain, the move allows it to focus more on broadening its offering of pharmacy, health and wellness services. Catalyst, meanwhile, continues a rapid expansion that makes the Rockville, Md., company more of a rival to larger PBMs.
"This is a significant milestone for Catalyst and an important next step in our long-term growth strategy," Catalyst Chief Executive David Blair said.
Catalyst shares rose 18.6% to $52.80.
Acquiring Walgreens Health Initiatives broadens Catalyst's client type, improves the company's purchasing economies, expands its marketing opportunities and brings strategic assets from the Walgreen PBM, including health information-technology, management team and Medicare prescription-drug benefit services, Blair said.
Catalyst competes against the big three pharmacy-benefit managers--Medco Health Solutions Inc. (MHS), Express Scripts Inc. (ESRX) and CVS Caremark Corp. (CVS)--to provide prescription drug services for clients that are relatively small for the giant players, and with other relatively smaller PBMs, such as SXC Health Solutions Corp. (SXCI).
Analysts had considered SXC the other likely competitor for the Walgreen business.
Catalyst has traditionally served state governments, unions, health plans and employers. Walgreen's PBM customer base also includes national employer accounts.
Walgreen's decision to exit the PBM business comes as some analysts have questioned the wisdom of the 2007 merger that formed hybrid drug-store chain-pharmacy benefit manager CVS Caremark Corp.
Credit Suisse analyst Edward Kelly sees the deal as a positive for CVS Caremark. "While Walgreen's PBM sale is small, it should fuel the debate on a possible break-up at CVS," he said.
Walgreen "is clearly telling investors that it doesn't make sense to own a PBM, the transaction multiple highlights the value trapped within CVS...and Catalyst becomes a larger player in the industry," he said.
CVS Caremark spokeswoman Carolyn Castel said, however, that "there are no plans to split up the company," and products it has introduced since the merger are "gaining traction."
She pointed to comments from two other analysts who saw no link between Walgreen's decision and any move CVS Caremark might make regarding its PBM, one of whom said Walgreen hadn't made the same strategic commitment to its PBM business that CVS has.
Shares of Walgreen climbed less than 0.5% to $42.61.
Walgreen expects to record a gain on the sale of the business, which will offset any one-time or transition costs from the transaction in the current year. It expects the transaction to have no impact on its earnings in the fiscal 2012 year.
"We believe the divestiture makes sense since Walgreens Health Initiatives never had sufficient scale to compete with larger players," Credit Suisse analyst Kelly said.
While Walgreen will retain its specialty and mail-order pharmacy facilities, Catalyst will manage those benefits for clients, Blair said. The deal also includes an agreement for Catalyst to provide pharmacy-benefit services for Walgreen's 244,000 active employees plus retirees and dependents, and an agreement to administer the chain's Prescription Savings Club.
Catalyst is growing quickly through acquisitions, having substantially boosted membership in September when it purchased Independence Blue Cross's FutureScripts pharmacy benefits-management businesses for $225 million.
The Walgreen deal will swell Catalyst's membership to 18 million members from 7 million; and annual prescription volume will grow to more than 165 million from 80 million. Those prescriptions account for some 4% of the overall market, according to J.P. Morgan analyst Michael Minchak.
In the sometimes obscure world of drug pricing, Catalyst emphasizes a straightforward business model based on fixed fees, transparent, pass-through drug pricing and localized service.
While Catalyst has won some business from its larger rivals, and retained one of its largest customers in a contract renewal last year, not all of its growth has gone smoothly. For example, it remains unclear whether one of Catalyst's largest clients, the state of Maryland, will renew a multiyear contract set to expire this year; analysts had expected the contract to be decided months ago, and Catalyst CEO Blair last month said the timing was uncertain.
Also, last September, Catalyst disclosed a dispute with managed-care client MCS Advantage Inc., which planned to terminate its contract two years early.
Catalyst expects to close the Walgreen deal in the first half of this year and to complete integration of the purchase in 18 months, Chief Financial Officer Hai Tran said. The transaction should be neutral or add slightly to earnings in 2011, he said.
For Walgreen, operator of the largest U.S. retail drug-store chain, the move allows it to focus more on broadening its offering of pharmacy, health and wellness services. Catalyst, meanwhile, continues a rapid expansion that makes the Rockville, Md., company more of a rival to larger PBMs.
"This is a significant milestone for Catalyst and an important next step in our long-term growth strategy," Catalyst Chief Executive David Blair said.
Catalyst shares rose 18.6% to $52.80.
Acquiring Walgreens Health Initiatives broadens Catalyst's client type, improves the company's purchasing economies, expands its marketing opportunities and brings strategic assets from the Walgreen PBM, including health information-technology, management team and Medicare prescription-drug benefit services, Blair said.
Catalyst competes against the big three pharmacy-benefit managers--Medco Health Solutions Inc. (MHS), Express Scripts Inc. (ESRX) and CVS Caremark Corp. (CVS)--to provide prescription drug services for clients that are relatively small for the giant players, and with other relatively smaller PBMs, such as SXC Health Solutions Corp. (SXCI).
Analysts had considered SXC the other likely competitor for the Walgreen business.
Catalyst has traditionally served state governments, unions, health plans and employers. Walgreen's PBM customer base also includes national employer accounts.
Walgreen's decision to exit the PBM business comes as some analysts have questioned the wisdom of the 2007 merger that formed hybrid drug-store chain-pharmacy benefit manager CVS Caremark Corp.
Credit Suisse analyst Edward Kelly sees the deal as a positive for CVS Caremark. "While Walgreen's PBM sale is small, it should fuel the debate on a possible break-up at CVS," he said.
Walgreen "is clearly telling investors that it doesn't make sense to own a PBM, the transaction multiple highlights the value trapped within CVS...and Catalyst becomes a larger player in the industry," he said.
CVS Caremark spokeswoman Carolyn Castel said, however, that "there are no plans to split up the company," and products it has introduced since the merger are "gaining traction."
She pointed to comments from two other analysts who saw no link between Walgreen's decision and any move CVS Caremark might make regarding its PBM, one of whom said Walgreen hadn't made the same strategic commitment to its PBM business that CVS has.
Shares of Walgreen climbed less than 0.5% to $42.61.
Walgreen expects to record a gain on the sale of the business, which will offset any one-time or transition costs from the transaction in the current year. It expects the transaction to have no impact on its earnings in the fiscal 2012 year.
"We believe the divestiture makes sense since Walgreens Health Initiatives never had sufficient scale to compete with larger players," Credit Suisse analyst Kelly said.
While Walgreen will retain its specialty and mail-order pharmacy facilities, Catalyst will manage those benefits for clients, Blair said. The deal also includes an agreement for Catalyst to provide pharmacy-benefit services for Walgreen's 244,000 active employees plus retirees and dependents, and an agreement to administer the chain's Prescription Savings Club.
Catalyst is growing quickly through acquisitions, having substantially boosted membership in September when it purchased Independence Blue Cross's FutureScripts pharmacy benefits-management businesses for $225 million.
The Walgreen deal will swell Catalyst's membership to 18 million members from 7 million; and annual prescription volume will grow to more than 165 million from 80 million. Those prescriptions account for some 4% of the overall market, according to J.P. Morgan analyst Michael Minchak.
In the sometimes obscure world of drug pricing, Catalyst emphasizes a straightforward business model based on fixed fees, transparent, pass-through drug pricing and localized service.
While Catalyst has won some business from its larger rivals, and retained one of its largest customers in a contract renewal last year, not all of its growth has gone smoothly. For example, it remains unclear whether one of Catalyst's largest clients, the state of Maryland, will renew a multiyear contract set to expire this year; analysts had expected the contract to be decided months ago, and Catalyst CEO Blair last month said the timing was uncertain.
Also, last September, Catalyst disclosed a dispute with managed-care client MCS Advantage Inc., which planned to terminate its contract two years early.
Catalyst expects to close the Walgreen deal in the first half of this year and to complete integration of the purchase in 18 months, Chief Financial Officer Hai Tran said. The transaction should be neutral or add slightly to earnings in 2011, he said.
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