An interview with Mark Thierer, President of SXC Health

Four years ago, SXC Health was lost in the shuffle -a mid sized healthcare IT provider from Milton, Ontario with just over $80 million in revenue. Today, after aggressive acquisitions and organic growth, the company is an international healthcare IT King. SXC is a pioneer in the pharmacy benefit management sector, with revenues in excess of $1.4 billion. Recently named by FORTUNE Magazine as one of the 100 fastest Growing Companies, SXC Health has become one of the biggest Canadian technology success stories in recent memory. Mark Thierer is the man who has been at the helm of SXC since 2006. Cantech Letter readers quiz him on what’s next.

5 Questions with Mark Thierer, President and CEO of SXC Health

1. (from John in Toronto)

It seemed that it took a long time for the health care industry in the United States to embrace technology, but that the pace has really ramped up in this area. A recent SXC’s press release is about the D.0 NCPDP Telecommunication Standard. Can you explain how this creates efficiencies for the consumer and for the agencies tasked with improving the pharmacy benefit management process?

Mark Thierer:

The move to D.0 by the Department of Health and Human Services is meant to streamline the documentation required for transactions and address newer programs and developments such as Medicare Part D. At SXC, we took an industry leadership role in helping to define and develop the D.0 standard with the Department and its stakeholders.
We have not only completed development testing of software to support the new standard, but in fact, earlier this summer we announced that we are the first PBM in the industry to be fully compliant with it. Following robust internal testing as well as field testing with select partners last fall, we have rolled out the introduction of D.0 to clients. We expect that all clients and partners will be using the software prior to January 2011, which is one full year ahead of the mandated deadline. This is a great achievement from a programming perspective that differentiates us and the clients we service from the competition.
In terms of D.0 and how it creates efficiencies, it supports advanced functionality which includes more complete information on claims for compound prescriptions, more information to support consumer directed health initiatives, better handling of claims involved in coordination of benefits and the ability to handle claims for pharmaceutical services outside of the dispensing process. All of these enhancements support advancement of technology and programs that lead to better health care outcomes for consumers and better overall health care cost management for payors. Starting January 1, 2012 there will be only one transaction standard approved by the U.S. Department of Health and Human Services, and that’s D.0.

2. (from Brian in Windsor)

Will SXC continue a strategy of growth through acquisition or do you see the growth coming more organically now that you have hit a certain size?

MT:

We believe that both organic growth and acquisitions are tangible opportunities as we move forward at SXC. Our primary focus today is organic growth and there are essentially four ways for us to grow our business. First, our business is driven by the macro economics of drug spending and utilization which have provided increases of approximately four to five percent a year. We also grow by adding new customer wins, like HealthSpring Inc. earlier this year and a series of wins in 2009 including Ohio Bureau of Workers’ Compensation, the UFCW & Employers Benefit Trust, the Commonwealth of Virginia, Presbyterian Health Plan, Spectral Solutions, Prime Therapeutics LLC and PharMerica Corporation. We can also deliver growth through our ability to transition accounts from technology to a more full service PBM solution which allows us to bring through more revenues as we manage drug spend and clinical interventions. Finally there is also the ability to grow as our clients grow, as our 70 health plan and PBM accounts build their business operations we processes more transactions and that allows us to expand with their business.
So while our focus remains on selling new business and growing current clients, we are keeping our eyes open for future acquisition opportunities and we continue to maintain a strong balance sheet for that reason. We will remain disciplined in this regard and adhere to three core principles as we new evaluate new opportunities. First, there needs to be a strategic fit with our existing business. Secondly, we need to make sure we see good synergies and the opportunities to integrate. And then, finally, it needs to be at a fair price.

3. (from Michael in Richmond)

How large do you think the Pharmacy Benefits Management market is worldwide? Do you see SXC deriving the bulk of its revenue from The United States or do you see opportunity in other parts of the world?

MT:

We operate predominantly in the U.S. today and it is most certainly the largest PBM market in the world. A good proxy for the overall PBM market size is the prescription drug spend in a market because that is the primary driver of the PBM business. Historically, that breaks down with the U.S. representing approximately 40 percent of the worldwide pharmaceutical sales, the EU 35 percent and the rest of the world is the remainder. So from that perspective there are growth opportunities in the PBM space beyond the U.S. But with that, you have to consider the diversity of the other jurisdictions, whether it is among the EU member countries and the structure of their healthcare delivery systems or the broader markets in general. With that in mind we believe there are still great growth opportunities within the U.S. market for SXC, both in terms of organic growth as well as growth through acquisitions.

4. (from Jesse in Waterloo)

I was looking at the deal you made with Allscripts. It makes sense that electronic prescribing would have a lot of benefits such as reducing errors in prescribing medications, but I wondered how fast this might be adopted on the other end. For instance, are you seeing more doctors using Blackberries and iPhones?

MT:

We believe there are many benefits provided by greater use of electronic prescribing and electronic health records. The goal here is to give doctors the ability to review patient information in real time, in order to make safer and more cost-effective decisions on the spot. One of the drivers to engage physicians to use the technology is funding from the stimulus packages that is directed toward technology investments and SXC intends to take a leadership role in this area.
In terms of adoption, a study published in early 2009 by the Pharmaceutical Care Management Association, shows that fewer than 15 percent of U.S. prescribers were using electronic prescribing at that time and they expect that number will increase to more than 75 percent by 2014. The report predicts that about 90 percent of physicians will e-prescribe by 2018. In terms of benefits, the study estimates that e-prescribing could save the U.S. government nearly $22 billion over the next 10 years, preventing 3.5 million medication errors and 585,000 hospitalizations by 2018.
In terms of our own experience, over the course of 2009 we saw the e-prescribing volumes increase substantially and part of that growth is due to the stimulus funding as well as more physicians just adopting the technology.

5. (from Paul in Vancouver)

My question is about the margins on your PBM business. Do you expect them, over the next five years or so, to improve, stay the same, or thin out?

MT:

There are a number of key elements that provide margin opportunities within our PBM business that we track on a regular basis. Generic pharmaceuticals are one of the most important. Approximately $100 billion of branded drugs are lined up to be genericized over the next five years and that provides us with a great opportunity to grow margin. Historically at SXC, we have led our industry with a generic dispense rate in excess of 70 percent, and during our most recent period we achieved 75 percent. Driving a high generic dispense rate at the point of sale is a key element of cost containment for our clients, especially as these new generics are introduced over the next few years.
A second element is the growth in specialty pharmaceuticals expected over the next three to five years. Approximately 40 percent of the new drug applications coming through the FDA are specialty medications. At SXC, we have a strong specialty footprint that’s growing inside our business, which is a higher margin aspect of the business, and that sets us up very well as specialty pharmaceuticals play a greater role in the delivery of healthcare.
The third element is mail order delivery of prescriptions as measured by mail penetration. We continue to push more effective mail utilization as a way for client savings and medication adherence. Our mail penetration has grown substantially over the last few years from mid single digits to more than 11 percent. We expect this growth to continue into the mid teen range through the end of this year, which is still below the industry average of approximately 22 percent, and that means there is still more room for margin growth in this area. Overall, we think that we are really still in the very early innings of a pretty significant transition from a company that was once solely focused on healthcare IT into a full service PBM.

About Nick Waddell

Cantech Letter founder and editor Nick Waddell has lived in five Canadian provinces and is proud of his country's often overlooked contributions to the world of science and technology. Waddell takes a regular shift on the Canadian media circuit, making appearances on CTV, CBC and BNN, and contributing to publications such as Canadian Business and Business Insider.

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