M&A Daily: Catalyst Becomes a Major PBM Player (CHSI, WAG, CVS, ESRX, MHS, RAD)

Catalyst Health Solutions, Inc. (NASDAQ: CHSI) is not as well known in American healthcare as it is about to be.  The pharmacy benefit management company has just signed a pact to acquire the PBM operations from Walgreen Company (NYSE: WAG) and investors are cheering this move.  They are cheering with good reason.

The aim of the PBM model is to better manage the costs associated with getting pharmaceutical drugs to end-users in a more efficient and cheaper manner.  Catalyst is paying some $525 million in cash to Walgreen versus what is a $2.3 billion market cap now that shares Catalyst shares have risen 16% to $51.80.

Normally you would expect the acquirer to get hit in a cash deal.  The terms do call that the $525 million is subject to certain adjustments.  Here is the kicker: Catalyst’s PBM membership will increase to more than 18 million members from 7 million or so members.  Annual prescriptions will grow by nearly 100% to more than 160 million.

Catalyst is about to move from a “maybe #4” to a “stronger #4” here behind CVS Caremark Corporation (NYSE: CVS), Express Scripts Inc. (NASDAQ: ESRX), and Medco Health Solutions Inc. (NYSE: MHS).  The deal also will eliminate some of the risks that have been ongoing with Catalyst’s government contracts that have been up for renewal or which may have been at-risk.

Rite Aid Corporation (NYSE: RAD) has been criticized for only being a standalone retail pharmacy operation, among other criticisms.  We don’t need to rehash the pain that has been seen there in the last decade or so.

What is amazing here is that the trend back in the day was for pharmacies to own a PBM business.  Catalyst will serve the Walgreen employees, beneficiaries, and pensioners as part of the deal.  Walgreen is expected to record a gain on top of the $40 million or so in transfer costs associated with the deal, but when you only a 0.5% gain in Walgreen to $42.59 and a 52-week and all-time high in Catalyst you have to wonder who got the best of who here.

Mergers and acquisitions often do not make sense and effectively end up being nothing more than opportunities for companies to make layoffs with the endless promise of scale and efficiency.  This is one of those instances that should be considered good M&A.  How often do you see an acquirer making an acquisition that is higher than the available cash balance that massively grows a customer base?  That is what you are seeing here.

JON C. OGG