Versant Partners: There's Still Upside in SXC Health

With another remarkable year of revenue growth, can SXC Health's Mark Thierer repeat as Cantech Letter's Tech Stock Exec of the Year in 2011?

SXC Health’s (TSX:SXC) meteoric rise, accomplished primarily through acquisition, has been nothing short of remarkable. The company, which was founded in Milton Ontario, has grown from revenues of $33 million in 2004 to just under $2 billion in fiscal 2010.

2010’s performance earned SXC Health CEO Mark Thierer Cantech Letter’s 2010 Canadian Technology Executive of the Year Award. Thierer appears to be lobbying for a repeat; each of the three quarters the company has reported this year have topped a billion dollars. The company’s recently reported Q3 revenue of $1.3 billion was 163% better than the $489.9-million just a year before.

SXC Health, alongside US based companies such as Medco and Caremark, is a leader in the Pharmacy Benefit Management (PBM) space. PBM’s process and pay prescription drug claims and act as an intermediary between the health care systems and the claimant. The space has grown rapidly; today more than more than 210 million Americans nationwide receive drug benefits administered by PBMs.

Versant Partners analyst Tom Liston notes that concerns about SXC now being too expensive have lingered. After all, he says, the stock has returned 600% over the past four years, while the overall market has returned -13%. But Liston says there is still a lot of upside in the now US based company.

Liston recently attended SXC Health’s annual investor day and like what he heard so much he raised his target price on the company to $72.50 from $68.

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Liston says there are two key profitability drivers for SXC. The first is a new service the company launched in August called Enhanced Coordination of Benefits. The service mines data to spot potential savings for State Medicaid clients in the US. Liston points out that the service’s first client, TennCare, is already seeing substantial savings. He believes TennCare will serve as a reference case that will help SXC win business.

The second driver, says Liston, is the rise in specialty drugs. Specialty drugs are drugs that are generally designed for patients with complex conditions such as cancer or multiple sclerosis. These medications are expensive, can require special handling, and are less likely to have generic equivalents.

A recent report from Express Scripts says that specialty drugs will account for 40% of drug spending in the U.S. by 2014. SXC Health says it expects revenues from Specialty Drugs to grow at a compound annual growth rate of 12.1%.

Shares of SXC Health closed on the TSX today down 1% to $56.77.

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