CATALYST HEALTH SOLUTIONS CHSI
March 22, 2011 - 10:21am EST by
quads1025
2011 2012
Price: 54.00 EPS $1.82 $2.16
Shares Out. (in M): 45 P/E 29.7x 25x
Market Cap (in $M): 2,430 P/FCF 0.0x 0.0x
Net Debt (in $M): -10 EBIT 133 191
TEV ($): 2,420 TEV/EBIT 18.3x 12.7x

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Description

Catalyst Health Solutions presents an attractive event-driven opportunity.   Catalyst is buying the PBM business of Walgreens and the combined entity should generate at least $3.40 in EPS in 2012.  As PBM's have historically traded at PE's of over 20x, its reasonable to project that the stock will reach at least $70, ~30% higher than its current price.

COMPANY DESCRIPTION

  • Catalyst Health Solutions, Inc. ("Catalyst") is a full-service pharmacy benefit management ("PBM") company. The Company operates primarily under the brand name Catalyst Rx. Clients include self-insured employers, state and local governments, managed care organizations ("MCOs"), unions, third-party administrators ("TPAs"), hospices, and individuals who contract with Catalyst to administer the prescription drug component of their overall health benefit programs. The Company provides clients access to a contracted, non-exclusive national network of approximately 63,000 pharmacies. Catalyst's primary business is to provide clients and their members with timely and accurate benefit adjudication, while controlling pharmacy spending trends through customized plan designs, clinical programs, physician orientation programs, and member education.

 INVESTMENT THESIS

  • Transformational Acquisition of Walgreens Health Initiatives, Inc. ("WHI") - On March 9, 2010 Catalyst announced the signing of a definitive agreement to acquire WHI, the PBM subsidiary of Walgreen Company (WAG). This is a transformational acquisition for Catalyst as it (i) brings together two of the leading national PBM's and (ii) effectively doubles Catalyst's size, increasing the Company's PBM membership from 7 million to over 18 million individuals and its annual prescription volume from 80 million to over 165 million. The main aspects of the transaction are as follows:
  • o Consideration - Catalyst is purchasing WHI for $525 million in an all-cash transaction. Catalyst is financing the transaction through $700 million in new credit facilities. Depending upon market conditions, Catalyst may choose to finance a portion of the purchase price through the issuance of new equity.
  • o Transaction Rationale - The transaction has several strategic merits. First, it significantly increases Catalyst's size and scale. Second, the acquisition will enhance Catalyst's Medicare capabilities, increases its discount card programs, and expands its national employer account customer base. Third, the addition of WHI to Catalyst will provide the Company with key strategic assets including advanced informatics, reporting capabilities, and formulary management tools that will accelerate product development and minimize planned IT development costs.
  • o Timing - The transaction is expected to close by June 30, 2011. Although management has stated that they do not expect the acquisition of WHI to be fully integrated into Catalyst until the end of 2012, Catalyst management is well known for "underpromising and overdelivering". During the Company's 4Q10 earnings conference call, management stated that Catalyst's integration of its acquisition of FutureScripts, LLC, completed on September 13, 2010, was well ahead of schedule and would be completed soon. This timeframe was significantly shorter than the "year period" of integration management originally projected.
  • o Financial Impact - Management has provided very limited information on the financial impact of the transaction. Management did state the WHI generates ~$1.1 billion in annual revenues and is expected to contribute $75 million in annual EBITDA. This EBITDA contribution includes projected synergies expected to result from increased purchasing power (leveraging provider agreements, pharmacy network optimization, etc.) as well as increased operating leverage. The transaction should be significantly accretive to Catalyst's earnings in 2012. Further, Catalyst is utilizing a 338(h)(10) election to effectuate the transaction. As a result of the election, the Company will reap tax benefits, estimated to be worth $90-110 million to Catalyst. Management stated these tax benefits will result in about $12 million in annual tax savings over the course of 15 years.
FUNDAMENTAL ANALYSIS
  • Positive Outlook for PBM Industry - Several key themes in the PBM industry portend a favorable environment for it at least over the next 12-24 months:
  • o Increased Pharmaceutical Expenditures - According to the journal Health Affairs, overall pharmaceutical expenditures in the United States are expected to be ~$274.7 billion in 2011, a 5.6% increase over 2010. Further, average annual increases in expenditures of 6.3% are expected through 2019. Price growth is projected to contribute to more than 50% of the total of those spending increases with the remainder resulting primarily from volume and utilization. Several factors are increasing pharmaceutical expenditures including (i) greater reliance on drug therapy by the physician community, (ii) increased "preventative prescribing" including the management of high cholesterol levels and digestive disorders, (iii) efforts by drug manufacturers to increase market share and extend single-source brand use, (iv) increased patient demand and education as a result of direct-to-consumer advertising and other pharmaceutical marketing efforts, (v) an aging workforce, and (vi) increased obesity among all age groups.
  • o Generic Utilization - PBMs are responsible for implementing and administering benefit plans that are care-effective and also seek to lower overall prescription spending by encouraging greater generic utilization, increasing the proportion of brand drugs dispensed from preferred categories and encouraging, where appropriate, non-prescription therapy and treatment alternatives. These objectives are accomplished through a combination of clinical, administrative, educational and technological initiatives directed towards pharmacies, physicians and members. For Catalyst specifically, the Company receives performance-related fees as generic use increases within a contract, raising its overall margins and profitability. As generic versions of branded drugs become more prevalent due to patent expiry, the profitability of PBM's should steadily increase. Of note, Catalyst's generic utilization rate has been steadily increasing from ~62% in 1Q08 to 73% in 4Q10.
  • Strong Business Stability and Visibility - Catalyst contracts with clients are typically at least 3 years in length with some being 7 years. Nine of Catalyst's top 10 accounts are contracted through at least 2012, giving Catalyst's business both strong stability as well as visibility into its future revenues and cash flows. This business stability was demonstrated by the Company's performance during the economic downturn of 2008 and 2009. Despite the downturn, Catalysts steadily grew its revenues and EBITDA each year during the 2006-2010 timeframe.

KEY RISKS

  • New Equity Issuance - Although Catalyst has obtained full financing for the acquisition of WHI through new credit facilities, management stated that depending upon market conditions, they may choose to issue equity to partially finance the transaction. The prospect of this issuance may create a negative overhand on the price of Catalyst's stock until the offering, if executed, is completed.
  • Potential Loss of Maryland Contract Renewal - There is a high likelihood that Catalyst will loose its PBM contract renewal with the State of Maryland. While the contract is sizeable, estimated to represent ~9% of the Company's 2011E revenues, it is relatively low margin and likely represents only 5% of profits. Catalyst management stated on the Company's 4Q10 earnings call that should the Company loose the contract, management would not need to adjust 2011E EPS guidance, indicative that the earnings from the contract are minimal. Further, the loss of the contract already appears "priced into" Catalysts' stock. In January 2011 Catalyst's stock declined by ~10% over a three day period on rumors that the Company was going to loose the contract. Later, the Maryland Board of Public Works posted an agenda for its March 9, 2011 meeting that indicated that the state proposed to award the PBM contract to Express Scripts, Inc. (ESRX). The Board disclosed that a contract with Express Scripts would save the state $100 million over five years, a considerable figure given the state's budget challenges. However, Catalyst is protesting the award of the contract. Given Catalyst is headquartered in Maryland and jobs are potentially at stake, the situation has become a political tug-of-war. Resolution is not expected quickly as the protest process can drag out over a year with the incumbent, Catalyst, continuing to serve as PBM throughout it.
  • Health Care Reform Uncertainty - As health care remains a primary focus of both federal and state legislatures, the potential for passage of significant reform measures that might adversely impact the PBM industry will persist. Specifically, in 2010 the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were signed into law. These statutes require significant changes in the manner in which health insurance coverage is administered and made available in the United States, including applicable pharmacy benefits. The laws contain PBM transparency provisions that will require PBMs to report a variety of financial information to the federal government, including pricing, rebate, and discount information, which will be made publicly available by the federal government. It is unclear whether the public availability of commercial financial information from all PBMs will adversely alter the discounts, rebates, and fees that PBMs can negotiate in the commercial marketplace.

SUMMARY FINANCIALS

          Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012   2010 2011 2012
                                         
CATALYST HEALTH SOLUTIONS                                  
                                         
Prescription Volumes                                    
Retail Prescriptions     15,445 15,619 16,403 19,614 19,908 20,207 20,510 20,818 21,130 21,447 21,768 22,095   67,081 81,443 86,440
Total Mail Prescriptions     700 740 767 957 971 986 1,001 1,016 1,031 1,046 1,062 1,078   3,164 3,974 4,218
  Total Prescriptions     16,145 16,359 17,170 20,571 20,880 21,193 21,511 21,833 22,161 22,493 22,831 23,173   70,245 85,416 90,658
                                         
Prescription Volume Growth, %                                  
Retail Prescriptions     9.2% 1.1% 5.0% 19.6% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%   23.8% 21.4% 6.1%
Total Mail Prescriptions     46.4% 5.7% 3.6% 24.8% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%   58.9% 25.6% 6.1%
  Total Prescriptions     10.4% 1.3% 5.0% 19.8% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%   25.0% 21.6% 6.1%
                                         
Revenue Per Prescriptions     $ 51.55 $ 54.41 $ 53.88 $ 54.28 $ 54.82 $ 55.37 $ 55.93 $ 56.49 $ 57.05 $ 57.62 $ 58.20 $ 58.78   $ 53.59 $ 55.66 $ 57.92
  Growth, %       0.8% 5.5% (1.0%) 0.8% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%   4.0% 3.9% 4.1%
                                         
Revenues       $ 832.3 $ 890.1 $ 925.1 $ 1,116.6 $ 1,144.7 $ 1,173.5 $ 1,203.0 $ 1,233.3 $ 1,264.3 $ 1,296.1 $ 1,328.7 $ 1,362.1   $ 3,764.1 $ 4,754.4 $ 5,251.1
  Growth, %       11.3% 6.9% 3.9% 20.7% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%   30.0% 26.3% 10.4%
                                         
Direct Expenses     781.7 834.4 863.3 1,050.5 1,072.3 1,099.2 1,126.8 1,155.1 1,184.0 1,213.7 1,244.2 1,275.4   3,529.8 4,453.5 4,917.3
  Depreciation and Amortization   3.1 3.3 3.9 7.1 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2   17.3 12.8 12.8
Cash Direct Expenses     778.6 831.1 859.4 1,043.4 1,069.1 1,096.0 1,123.6 1,151.9 1,180.8 1,210.5 1,241.0 1,272.2   3,512.5 4,440.7 4,904.5
  Cash Gross Margin     53.8 59.0 65.6 73.2 75.6 77.5 79.4 81.4 83.4 85.5 87.7 89.9   251.6 313.8 346.6
  Margin, %       6.5% 6.6% 7.1% 6.6% 6.6% 6.6% 6.6% 6.6% 6.6% 6.6% 6.6% 6.6%   6.7% 6.6% 6.6%
                                         
Selling, General and Administrative   22.2 24.1 26.7 28.7 30.9 31.7 32.5 33.3 34.1 35.0 35.9 36.8   101.7 128.4 141.8
  % of Revenues     2.7% 2.7% 2.9% 2.6% 2.7% 2.7% 2.7% 2.7% 2.7% 2.7% 2.7% 2.7%   2.7% 2.7% 2.7%
                                         
EBITDA       31.6 34.9 38.9 44.5 44.6 45.8 46.9 48.1 49.3 50.5 51.8 53.1   149.8 185.4 204.8
  Margin, %       3.8% 3.9% 4.2% 4.0% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9%   4.0% 3.9% 3.9%
                                         
                                         
WALGREENS HEALTH INITIATIVES                                  
                                         
Revenues                   $ 275.0 $ 275.0 $ 275.0 $ 275.0 $ 275.0 $ 275.0     $ 550.0 $ 1,100.0
  Growth, %                   N/A   0.0% 0.0% 0.0% 0.0% 0.0%     N/A   100.0%
                                         
Operating Expenses                 265.7 265.7 256.2 256.2 256.2 256.2     531.3 1,025.0
  EBITDA                   9.4 9.4 18.8 18.8 18.8 18.8     18.7 75.0
  Margin, %                   3.4% 3.4% 6.8% 6.8% 6.8% 6.8%     3.4% 6.8%
                                         
PRO FORMA CONSOLIDATED                                  
                                         
Revenues       $ 832.3 $ 890.1 $ 925.1 $ 1,116.6 $ 1,144.7 $ 1,173.5 $ 1,478.0 $ 1,508.3 $ 1,539.3 $ 1,571.1 $ 1,603.7 $ 1,637.1   $ 3,764.1 $ 5,304.4 $ 6,351.1
  Growth, %       11.3% 6.9% 3.9% 20.7% 2.5% 2.5% 25.9% 2.0% 2.1% 2.1% 2.1% 2.1%   30.0% 40.9% 19.7%
                                         
Cash Direct Expenses     778.6 831.1 859.4 1,043.4 1,069.1 1,096.0 1,389.3 1,417.5 1,437.1 1,466.8 1,497.2 1,528.4   3,512.5 4,972.0 5,929.5
  Cash Gross Margin     53.8 59.0 65.6 73.2 75.6 77.5 88.7 90.7 102.2 104.3 106.4 108.7   251.6 332.5 421.6
  Margin, %       6.5% 6.6% 7.1% 6.6% 6.6% 6.6% 6.0% 6.0% 6.6% 6.6% 6.6% 6.6%   6.7% 6.3% 6.6%
                                         
Selling, General and Administrative   22.2 24.1 26.7 28.7 30.9 31.7 32.5 33.3 34.1 35.0 35.9 36.8   101.7 128.4 141.8
  % of Revenues     2.7% 2.7% 2.9% 2.6% 2.7% 2.7% 2.2% 2.2% 2.2% 2.2% 2.2% 2.2%   2.7% 2.4% 2.2%
                                         
EBITDA       31.6 34.9 38.9 44.5 44.6 45.8 56.3 57.4 68.1 69.3 70.6 71.9   149.8 204.1 279.8
  Margin, %       3.8% 3.9% 4.2% 4.0% 3.9% 3.9% 3.8% 3.8% 4.4% 4.4% 4.4% 4.4%   4.0% 3.8% 4.4%
                                         
  Depreciation and Amortization   3.1 3.3 3.9 7.1 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2   17.3 12.8 12.8
                                         
EBIT       28.4 31.6 35.0 37.4 41.4 42.6 53.1 54.2 64.9 66.1 67.4 68.7   132.5 191.3 267.0
  % Margin       3.4% 3.6% 3.8% 3.4% 3.6% 3.6% 3.6% 3.6% 4.2% 4.2% 4.2% 4.2%   3.5% 3.6% 4.2%
                                         
Interest Expense                                    
  Revolving Credit Facility due 8/4/15           0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3       1.0
  Senior Bank Term Loan due 8/4/15           1.0 1.0 1.0 1.0 1.0 1.0 1.0 0.9       3.8
  Acquisition Financing             0.0 0.0 4.1 4.1 4.1 4.1 4.1 4.1       16.4
     Total Interest Expense     0.2 0.2 1.3 1.3 1.3 1.3 5.3 5.3 5.3 5.3 5.3 5.3   3.0 13.2 21.2
                                         
Interest Income     0.1 0.1 0.7 0.1 0.2 0.2 0.2 0.2 0.2 0.3 0.3 0.4   0.9 0.7 1.2
Other Income/(Expense)     0.0 0.0 0.0 0.0 0.0 (30.0) 0.0 0.0 0.0 0.0 0.0 0.0   0.0 (30.0) 0.0
                                         
EBT       28.3 31.5 34.4 36.2 40.3 11.5 47.9 49.1 59.8 61.1 62.4 63.7   130.4 148.8 247.0
  Taxes       10.9 12.0 12.9 13.6 15.3 4.4 18.2 18.7 22.7 23.2 23.7 24.2   49.5 56.5 93.9
  Tax Rate       38.4% 38.2% 37.5% 37.7% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0%   37.9% 38.0% 38.0%
  Net Income       $ 17.4 $ 19.5 $ 21.5 $ 22.6 $ 25.0 $ 7.1 $ 29.7 $ 30.5 $ 37.1 $ 37.9 $ 38.7 $ 39.5   $ 81.0 $ 92.3 $ 153.1
                                         
Minority Interest     0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0   0.0 0.0 0.0
Preferred Dividends     0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0   0.0 0.0 0.0
  Net Income to Common     $ 17.4 $ 19.5 $ 21.5 $ 22.6 $ 25.0 $ 7.1 $ 29.7 $ 30.5 $ 37.1 $ 37.9 $ 38.7 $ 39.5   $ 81.0 $ 92.3 $ 153.1
  % Margin       2.1% 2.2% 2.3% 2.0% 2.2% 0.6% 2.0% 2.0% 2.4% 2.4% 2.4% 2.4%   2.2% 1.7% 2.4%
                                         
  FD Shares Outstanding     44.4 44.5 44.6 44.6 45.0 45.0 45.0 45.0 45.0 45.0 45.0 45.0   44.5 45.0 45.0
  FD EPS       $ 0.39 $ 0.44 $ 0.48 $ 0.51 $ 0.56 $ 0.16 $ 0.66 $ 0.68 $ 0.82 $ 0.84 $ 0.86 $ 0.88   $ 1.82 $ 2.05 $ 3.40
  Growth, %     N.A.  11.5% 10.2% 4.8% 10.0% (71.5%) 317.0% 2.6% 21.7% 2.2% 2.2% 2.2%   227.1% 12.8% 66.0%
 
VALUATION ANALYSIS

 

Pharmacy Benefit Management Industry                                        
Consensus Estimates                                              
                                                 
                                                 
Bloomberg   Stock Price Market Enterprise   EV / Revenues   EV / EBITDA   EBITDA Margins   PE Ratio   Net Income Margins
Ticker Name 3/22/2011 Cap Value   2011 2012 2013   2011 2012 2013   2011 2012 2013   2011 2012 2013   2011 2012 2013
                                                 
CVS CVS CAREMARK COR $33.44 45,752 54,412   0.5 x 0.5 x 0.5 x   6.9 x 6.3 x 5.9 x   7.3% 7.6% 7.8%   12.1 x 10.7 x 9.3 x   3.5% 3.8% 4.2%
WAG WALGREEN CO $38.68 35,679 35,829   0.5 x 0.5 x 0.4 x   7.0 x 6.4 x 5.9 x   7.1% 7.3% 7.6%   14.0 x 12.4 x 10.9 x   3.5% 3.8% 4.1%
ESRX EXPRESS SCRIPT $52.73 27,856 29,827   0.6 x 0.6 x 0.6 x   10.1 x 8.8 x 7.9 x   6.3% 7.0% 7.7%   16.5 x 13.6 x 11.6 x   3.6% 4.2% 4.9%
MHS MEDCO HEALTH SOL $53.67 21,705 25,822   0.4 x 0.4 x 0.4 x   8.2 x 7.2 x 6.9 x   4.6% 4.9% 5.3%   13.2 x 10.8 x 9.3 x   2.4% 2.8% 3.3%
SXCI SXC HEALTH SOLUT $50.45 3,118 2,796   0.8 x 0.6 x 0.5 x   16.7 x 13.3 x 11.9 x   4.6% 4.8% 4.2%   32.1 x 25.4 x 22.6 x   2.7% 2.8% 2.4%
CHSI CATALYST HEALTH $54.18 2,438 2,428   0.5 x 0.5 x 0.4 x   12.9 x 10.4 x 8.2 x   3.9% 4.3% 4.9%   23.5 x 19.3 x 16.5 x   2.2% 2.4% 2.5%
                                                 
Mean     22,758 25,186   0.5 x 0.5 x 0.5 x   10.3 x 8.8 x 7.8 x   5.6% 6.0% 6.2%   18.6 x 15.4 x 13.4 x   3.0% 3.3% 3.6%
Median     24,781 27,824   0.5 x 0.5 x 0.5 x   9.1 x 8.0 x 7.4 x   5.5% 6.0% 6.4%   15.3 x 13.0 x 11.3 x   3.1% 3.3% 3.7%
High     45,752 54,412   0.8 x 0.6 x 0.6 x   16.7 x 13.3 x 11.9 x   7.3% 7.6% 7.8%   32.1 x 25.4 x 22.6 x   3.6% 4.2% 4.9%
Low     2,438 2,428   0.4 x 0.4 x 0.4 x   6.9 x 6.3 x 5.9 x   3.9% 4.3% 4.2%   12.1 x 10.7 x 9.3 x   2.2% 2.4% 2.4%

PBM's have historically traded at PE's over over 20x.  Right now the group is trading at 18.6x 2011E EPS (see comps) which is on the lower end of where it has traded in the past.

Catalyst

Market appreciation of the EPS accretion which should result from Catalyst's purchase of WHI
Incorporation of WHI into sell-side estimates for Catalyst (should take place after the transaction closes at the end of June)
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    Description

    Catalyst Health Solutions presents an attractive event-driven opportunity.   Catalyst is buying the PBM business of Walgreens and the combined entity should generate at least $3.40 in EPS in 2012.  As PBM's have historically traded at PE's of over 20x, its reasonable to project that the stock will reach at least $70, ~30% higher than its current price.

    COMPANY DESCRIPTION

     INVESTMENT THESIS

    FUNDAMENTAL ANALYSIS

    KEY RISKS

    SUMMARY FINANCIALS

              Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012   2010 2011 2012
                                             
    CATALYST HEALTH SOLUTIONS                                  
                                             
    Prescription Volumes                                    
    Retail Prescriptions     15,445 15,619 16,403 19,614 19,908 20,207 20,510 20,818 21,130 21,447 21,768 22,095   67,081 81,443 86,440
    Total Mail Prescriptions     700 740 767 957 971 986 1,001 1,016 1,031 1,046 1,062 1,078   3,164 3,974 4,218
      Total Prescriptions     16,145 16,359 17,170 20,571 20,880 21,193 21,511 21,833 22,161 22,493 22,831 23,173   70,245 85,416 90,658
                                             
    Prescription Volume Growth, %                                  
    Retail Prescriptions     9.2% 1.1% 5.0% 19.6% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%   23.8% 21.4% 6.1%
    Total Mail Prescriptions     46.4% 5.7% 3.6% 24.8% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%   58.9% 25.6% 6.1%
      Total Prescriptions     10.4% 1.3% 5.0% 19.8% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%   25.0% 21.6% 6.1%
                                             
    Revenue Per Prescriptions     $ 51.55 $ 54.41 $ 53.88 $ 54.28 $ 54.82 $ 55.37 $ 55.93 $ 56.49 $ 57.05 $ 57.62 $ 58.20 $ 58.78   $ 53.59 $ 55.66 $ 57.92
      Growth, %       0.8% 5.5% (1.0%) 0.8% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%   4.0% 3.9% 4.1%
                                             
    Revenues       $ 832.3 $ 890.1 $ 925.1 $ 1,116.6 $ 1,144.7 $ 1,173.5 $ 1,203.0 $ 1,233.3 $ 1,264.3 $ 1,296.1 $ 1,328.7 $ 1,362.1   $ 3,764.1 $ 4,754.4 $ 5,251.1
      Growth, %       11.3% 6.9% 3.9% 20.7% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%   30.0% 26.3% 10.4%
                                             
    Direct Expenses     781.7 834.4 863.3 1,050.5 1,072.3 1,099.2 1,126.8 1,155.1 1,184.0 1,213.7 1,244.2 1,275.4   3,529.8 4,453.5 4,917.3
      Depreciation and Amortization   3.1 3.3 3.9 7.1 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2   17.3 12.8 12.8
    Cash Direct Expenses     778.6 831.1 859.4 1,043.4 1,069.1 1,096.0 1,123.6 1,151.9 1,180.8 1,210.5 1,241.0 1,272.2   3,512.5 4,440.7 4,904.5
      Cash Gross Margin     53.8 59.0 65.6 73.2 75.6 77.5 79.4 81.4 83.4 85.5 87.7 89.9   251.6 313.8 346.6
      Margin, %       6.5% 6.6% 7.1% 6.6% 6.6% 6.6% 6.6% 6.6% 6.6% 6.6% 6.6% 6.6%   6.7% 6.6% 6.6%
                                             
    Selling, General and Administrative   22.2 24.1 26.7 28.7 30.9 31.7 32.5 33.3 34.1 35.0 35.9 36.8   101.7 128.4 141.8
      % of Revenues     2.7% 2.7% 2.9% 2.6% 2.7% 2.7% 2.7% 2.7% 2.7% 2.7% 2.7% 2.7%   2.7% 2.7% 2.7%
                                             
    EBITDA       31.6 34.9 38.9 44.5 44.6 45.8 46.9 48.1 49.3 50.5 51.8 53.1   149.8 185.4 204.8
      Margin, %       3.8% 3.9% 4.2% 4.0% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9%   4.0% 3.9% 3.9%
                                             
                                             
    WALGREENS HEALTH INITIATIVES                                  
                                             
    Revenues                   $ 275.0 $ 275.0 $ 275.0 $ 275.0 $ 275.0 $ 275.0     $ 550.0 $ 1,100.0
      Growth, %                   N/A   0.0% 0.0% 0.0% 0.0% 0.0%     N/A   100.0%
                                             
    Operating Expenses                 265.7 265.7 256.2 256.2 256.2 256.2     531.3 1,025.0
      EBITDA                   9.4 9.4 18.8 18.8 18.8 18.8     18.7 75.0
      Margin, %                   3.4% 3.4% 6.8% 6.8% 6.8% 6.8%     3.4% 6.8%
                                             
    PRO FORMA CONSOLIDATED                                  
                                             
    Revenues       $ 832.3 $ 890.1 $ 925.1 $ 1,116.6 $ 1,144.7 $ 1,173.5 $ 1,478.0 $ 1,508.3 $ 1,539.3 $ 1,571.1 $ 1,603.7 $ 1,637.1   $ 3,764.1 $ 5,304.4 $ 6,351.1
      Growth, %       11.3% 6.9% 3.9% 20.7% 2.5% 2.5% 25.9% 2.0% 2.1% 2.1% 2.1% 2.1%   30.0% 40.9% 19.7%
                                             
    Cash Direct Expenses     778.6 831.1 859.4 1,043.4 1,069.1 1,096.0 1,389.3 1,417.5 1,437.1 1,466.8 1,497.2 1,528.4   3,512.5 4,972.0 5,929.5
      Cash Gross Margin     53.8 59.0 65.6 73.2 75.6 77.5 88.7 90.7 102.2 104.3 106.4 108.7   251.6 332.5 421.6
      Margin, %       6.5% 6.6% 7.1% 6.6% 6.6% 6.6% 6.0% 6.0% 6.6% 6.6% 6.6% 6.6%   6.7% 6.3% 6.6%
                                             
    Selling, General and Administrative   22.2 24.1 26.7 28.7 30.9 31.7 32.5 33.3 34.1 35.0 35.9 36.8   101.7 128.4 141.8
      % of Revenues     2.7% 2.7% 2.9% 2.6% 2.7% 2.7% 2.2% 2.2% 2.2% 2.2% 2.2% 2.2%   2.7% 2.4% 2.2%
                                             
    EBITDA       31.6 34.9 38.9 44.5 44.6 45.8 56.3 57.4 68.1 69.3 70.6 71.9   149.8 204.1 279.8
      Margin, %       3.8% 3.9% 4.2% 4.0% 3.9% 3.9% 3.8% 3.8% 4.4% 4.4% 4.4% 4.4%   4.0% 3.8% 4.4%
                                             
      Depreciation and Amortization   3.1 3.3 3.9 7.1 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2   17.3 12.8 12.8
                                             
    EBIT       28.4 31.6 35.0 37.4 41.4 42.6 53.1 54.2 64.9 66.1 67.4 68.7   132.5 191.3 267.0
      % Margin       3.4% 3.6% 3.8% 3.4% 3.6% 3.6% 3.6% 3.6% 4.2% 4.2% 4.2% 4.2%   3.5% 3.6% 4.2%
                                             
    Interest Expense                                    
      Revolving Credit Facility due 8/4/15           0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3       1.0
      Senior Bank Term Loan due 8/4/15           1.0 1.0 1.0 1.0 1.0 1.0 1.0 0.9       3.8
      Acquisition Financing             0.0 0.0 4.1 4.1 4.1 4.1 4.1 4.1       16.4
         Total Interest Expense     0.2 0.2 1.3 1.3 1.3 1.3 5.3 5.3 5.3 5.3 5.3 5.3   3.0 13.2 21.2
                                             
    Interest Income     0.1 0.1 0.7 0.1 0.2 0.2 0.2 0.2 0.2 0.3 0.3 0.4   0.9 0.7 1.2
    Other Income/(Expense)     0.0 0.0 0.0 0.0 0.0 (30.0) 0.0 0.0 0.0 0.0 0.0 0.0   0.0 (30.0) 0.0
                                             
    EBT       28.3 31.5 34.4 36.2 40.3 11.5 47.9 49.1 59.8 61.1 62.4 63.7   130.4 148.8 247.0
      Taxes       10.9 12.0 12.9 13.6 15.3 4.4 18.2 18.7 22.7 23.2 23.7 24.2   49.5 56.5 93.9
      Tax Rate       38.4% 38.2% 37.5% 37.7% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0%   37.9% 38.0% 38.0%
      Net Income       $ 17.4 $ 19.5 $ 21.5 $ 22.6 $ 25.0 $ 7.1 $ 29.7 $ 30.5 $ 37.1 $ 37.9 $ 38.7 $ 39.5   $ 81.0 $ 92.3 $ 153.1
                                             
    Minority Interest     0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0   0.0 0.0 0.0
    Preferred Dividends     0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0   0.0 0.0 0.0
      Net Income to Common     $ 17.4 $ 19.5 $ 21.5 $ 22.6 $ 25.0 $ 7.1 $ 29.7 $ 30.5 $ 37.1 $ 37.9 $ 38.7 $ 39.5   $ 81.0 $ 92.3 $ 153.1
      % Margin       2.1% 2.2% 2.3% 2.0% 2.2% 0.6% 2.0% 2.0% 2.4% 2.4% 2.4% 2.4%   2.2% 1.7% 2.4%
                                             
      FD Shares Outstanding     44.4 44.5 44.6 44.6 45.0 45.0 45.0 45.0 45.0 45.0 45.0 45.0   44.5 45.0 45.0
      FD EPS       $ 0.39 $ 0.44 $ 0.48 $ 0.51 $ 0.56 $ 0.16 $ 0.66 $ 0.68 $ 0.82 $ 0.84 $ 0.86 $ 0.88   $ 1.82 $ 2.05 $ 3.40
      Growth, %     N.A.  11.5% 10.2% 4.8% 10.0% (71.5%) 317.0% 2.6% 21.7% 2.2% 2.2% 2.2%   227.1% 12.8% 66.0%
     
    VALUATION ANALYSIS

     

    Pharmacy Benefit Management Industry                                        
    Consensus Estimates                                              
                                                     
                                                     
    Bloomberg   Stock Price Market Enterprise   EV / Revenues   EV / EBITDA   EBITDA Margins   PE Ratio   Net Income Margins
    Ticker Name 3/22/2011 Cap Value   2011 2012 2013   2011 2012 2013   2011 2012 2013   2011 2012 2013   2011 2012 2013
                                                     
    CVS CVS CAREMARK COR $33.44 45,752 54,412   0.5 x 0.5 x 0.5 x   6.9 x 6.3 x 5.9 x   7.3% 7.6% 7.8%   12.1 x 10.7 x 9.3 x   3.5% 3.8% 4.2%
    WAG WALGREEN CO $38.68 35,679 35,829   0.5 x 0.5 x 0.4 x   7.0 x 6.4 x 5.9 x   7.1% 7.3% 7.6%   14.0 x 12.4 x 10.9 x   3.5% 3.8% 4.1%
    ESRX EXPRESS SCRIPT $52.73 27,856 29,827   0.6 x 0.6 x 0.6 x   10.1 x 8.8 x 7.9 x   6.3% 7.0% 7.7%   16.5 x 13.6 x 11.6 x   3.6% 4.2% 4.9%
    MHS MEDCO HEALTH SOL $53.67 21,705 25,822   0.4 x 0.4 x 0.4 x   8.2 x 7.2 x 6.9 x   4.6% 4.9% 5.3%   13.2 x 10.8 x 9.3 x   2.4% 2.8% 3.3%
    SXCI SXC HEALTH SOLUT $50.45 3,118 2,796   0.8 x 0.6 x 0.5 x   16.7 x 13.3 x 11.9 x   4.6% 4.8% 4.2%   32.1 x 25.4 x 22.6 x   2.7% 2.8% 2.4%
    CHSI CATALYST HEALTH $54.18 2,438 2,428   0.5 x 0.5 x 0.4 x   12.9 x 10.4 x 8.2 x   3.9% 4.3% 4.9%   23.5 x 19.3 x 16.5 x   2.2% 2.4% 2.5%
                                                     
    Mean     22,758 25,186   0.5 x 0.5 x 0.5 x   10.3 x 8.8 x 7.8 x   5.6% 6.0% 6.2%   18.6 x 15.4 x 13.4 x   3.0% 3.3% 3.6%
    Median     24,781 27,824   0.5 x 0.5 x 0.5 x   9.1 x 8.0 x 7.4 x   5.5% 6.0% 6.4%   15.3 x 13.0 x 11.3 x   3.1% 3.3% 3.7%
    High     45,752 54,412   0.8 x 0.6 x 0.6 x   16.7 x 13.3 x 11.9 x   7.3% 7.6% 7.8%   32.1 x 25.4 x 22.6 x   3.6% 4.2% 4.9%
    Low     2,438 2,428   0.4 x 0.4 x 0.4 x   6.9 x 6.3 x 5.9 x   3.9% 4.3% 4.2%   12.1 x 10.7 x 9.3 x   2.2% 2.4% 2.4%

    PBM's have historically traded at PE's over over 20x.  Right now the group is trading at 18.6x 2011E EPS (see comps) which is on the lower end of where it has traded in the past.

    Catalyst

    Market appreciation of the EPS accretion which should result from Catalyst's purchase of WHI
    Incorporation of WHI into sell-side estimates for Catalyst (should take place after the transaction closes at the end of June)

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