SXC Health Solutions: Hidden Gem of the PBM Ecosystem

Posted by admin on March 7th, 2010

SXCI Catches a Big Fish

Shares of pharmacy benefit manager SXC Health Solutions (SXCI) spiked 23% over the last two days after the company reported a very solid Q4:09 a well as signing a large PBM deal with Medicare-driven managed care company Healthspring to manage the prescription drug benefit for 500,000 HS lives with roughly $1B in annual drug spend. At a 2% pre-tax margin and 34% tax rate, the contract could be worth as much as +$0.42 to EPS (over the life of the contract); at a more conservative 1% pre- tax margin, it’s worth roughly +$0.22 bump to the bottom-line. Recall that managed care contracts are less profitable than employer wins for most PBMS.

The HS contract begins 1/1/2011. Back of the enveloping it, I suspect the HS impact to 2011E EPS could be in the ballpark of +$0.08. Meanwhile, 2010 EPS will be dragged modestly by implementation costs going into the contract (this is typical of PBM contracts’ year 1, wherein start up costs are the highest). Strikingly, the big 3 PBMs all bid for this contract (~15MM claims) and lost out to SXCI.