SXC Health Solutions: A clean bill of health
The way SXC Health Solutions (Nasdaq:SXCI) sees it, even through current market malaise, the company is standing firm with its two corporate feet firmly planted in two complementary arenas: it's providing pharmacy benefits management services and developing the technology engine needed to keep costs under control.
Bringing down health-care costs remains a hot-button issue, as the baby boomers reach retirement age, Medicaid and Medicare grow, and drug costs continue to rise.
Pharmacy benefits management is one course of action to rein in costs, and one of growing importance: witness the CVS (NYSE:CVS) acquisition of PBM giant CaremarkRx in a $21 billion deal last year.
SXC Health Solutions, formerly known as Systems Xcellence, is a niche player in the benefits marketplace, with a market cap of $364 million. Headquartered outside Chicago, SXC Healthís stock has traded on Nasdaq since a 2006 public offering, and with Canadian operations, it's also listed on the Toronto Stock Exchange.
Niche players can be big players in this $4.5 billion market: SXC says one in four 1-in-4 U.S. managed-pharmacy benefit transactions last year touched its technology. Clients include unions, universities and businesses, along with federal, local, state or provincial governments. SXC says recurring contracts account for more than 80% of revenue. In 2007, transactions increased 30% to 404 million.
SXC Health's share price has risen 11.6% in the past three months. Analysts generally have a favorable opinion about the performance going forward: of the 16 analysts polled by Thomson Reuters, three rate it a "strong buy," six call it a "buy," another six place it at "hold," with just one labeling it "underperform."
SXC Health's informedRx business sells management services mostly to government and universities, while its Healthcare IT Group develops the technology behind the services and provides a revenue stream via software licensing. Among the licensees are UnitedHealth Group (NYSE:UNH) and Walgreen's (NYSE:WAG) Healthcare Plus unit.
SXC Health more than doubled it drug-benefit customer base with its recently completed $143 million acquisition of National Medical Health Card. SXC entered the deal managing drug benefits for roughly 1.5 million people while National Medical managed 2.3 million. SXC also added National Medical's mail-order and specialty prescription operations.
Total 2007 revenue grew 15% to $93.2 million, but net income slipped 2% to $13.2 million. Bringing in National Medical, for the six months ended June 30, revenue climbed to $252.1 million from $47.4 million at mid-2007, but net income was flat: $6.6 million versus $6.7 million the year before. For 2008, the company is expecting earnings of $0.41 to $0.50 a share.
Analyst Glenn Jamieson of Macquarie Research concluded in a Sept. 17 note to investors that the company might have been conservative in estimating the timetable for integrating National Medical. Calling the stock undervalued, Jamieson wrote that he sees "momentum building through 2009 as we do not believe the market has given SXC credit for successfully integrating NMHC and driving sales growth on its expanded platform." He kept his rating on SXC at "outperform" (having raised his outlook in August from "neutral") but boosted his price target to $20 from $18.50.
SXC stock has traded as high as $17.34 on June 16, and as low as $9.85 on March 17. The Thomson Reuters median price target is $20, about $10 below its high point in recent years, $31.48 in July 2007. SXC Health Solutions closed Tuesday at $15.25.
