Last Wednesday, SXC Health (TSX:SXC) announced it would merge with rival Catalyst Health in a cash and stock transaction valued at $4.4-billion. The move combined two up-and-comers in pharmacy benefit management, a space that is growing rapidly; more than 210 million Americans receive drug benefits administered by PBMs.
Versant analyst Tom Liston is a long-time follower of SXC Health, and is no stranger to upgrading the stock because of material changes. After the merger was announced Liston, in a research update to clients, upgraded SXC again, this time to $103. The Versant analyst said the acquisition, which more than doubles SXC’s EBITDA is a “highly accretive and strategic transaction…” Liston’s previous target was $80.
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The trajectory of SXC’s rise is almost without parallel in the recent history of Canadian tech. In February the company reported its fiscal 2011 results and the numbers surprised even its most ardent supporters. SXC’s revenue grew a whopping 155% to $5 billion, from $1.9 billion in 2010. Earnings were up too, increasing 45% to $166.4 million. When SXC took home top spot recently in Fortune Magazine’s 2011 One Hundred Fastest Growing Companies, many were unaware that as late as 2004 the Milton, Ontario company was plodding along more than a decade after it was founded with just $33 million in revenue.
Liston says the Catalyst deal will not be hard for SXC to absorb, he believes the integration risk are very low because SXC has provided technology services to not only Catalyst Health, but also the former PBM group of Walgreens, which was acquired by Catalyst. Liston believes the synergies in 2012 alone will fall somewhere between $125 and $135-million.
Shares of SXC Health on the TSX closed Friday down 1.4% to $95.17.