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Executives

Jeffrey Park - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Finance

Analysts

Elliot Feldman - Barclays Capital, Research Division

Catamaran Corp. (CTRX) Barclays Global Healthcare Conference March 12, 2013 4:15 PM ET

Elliot Feldman - Barclays Capital, Research Division

Good afternoon, everyone. My name is Elliot Feldman. And with my associate, Kipp Davis, we work on the health care, distribution and technology team here at Barclays. Welcome to day 1 of our conference. Our next presenting company, Catamaran. We are pleased to once again be joined by CFO, Jeff Park; as well as Tony Perkins, from the Investor Relations team. This will be a fireside chat format. We'll throw a couple of questions to Jeff's way and then we'll be having a breakout session just down the hall in Poinciana 3 afterwards, where you guys can ask some questions on a more informal Q&A format. So Jeff, Tony, thank you guys, again, for coming. We appreciate you being here.

Jeffrey Park

Thanks for having us.

Elliot Feldman - Barclays Capital, Research Division

So I figure we start with a bit of a reflection, a bit less than a year since the Catalyst acquisition closed. Maybe can you touch on over the past 9 months or so, I mean, what has surprised you since the deal has gone through? How the integration has been progressing? And maybe what you still need to do over the next sort of 6 to 9 months or so?

Jeffrey Park

Yes, great. We announced the deal on July 1, 2012, so we've certainly had a good run since that time to get to now. Prior -- the deal was originally announced in April. It felt like a long time between April and July, where we had a lot of time to prep and plan, and it's coming up to almost 1 year since our original announcement. The biggest pieces from the integration that we're focused on was to make sure we could tie together the components of the business that would drive cost of good synergies for our shareholders and savings for our clients. The second was to make sure we are migrated and having all one system and platform for communication internally and externally. And then third, which sounds more intangible, which is the culture and the communication with the employees. As you know, anytime you put together large organizations, the culture of the businesses are what is going to define the success over a long period of time. So as we closed out the first fiscal year, with 2 quarters of financials under our belt, we had a great strong close to the end of the year. We were ahead of plan. We increased our financial targets from synergy perspective for the deal from what we had originally announced was $125 million to $175 million we expect to achieve through 2013. When you think about the acquisition itself, we acquired Catalyst that had around $240 million of EBITDA or so. So it's a great amount of synergies to add on. It's really been a big piece of the focus of our operations today just to ensure that we've -- we're going to be able to drive synergies through purchase improvements, manufacturer agreements, specialty, as well as headcount and management reductions as we put these businesses together. From a fit perspective, the companies had grown relatively similarly, growing through acquisitions, been very aggressive in the marketplace and been able to drive outside growth. So the cultures of the businesses were relatively aligned. And so some of the pleasant surprises have been really our ability to put these businesses and the pieces together. Catalyst had been a technology client of ours for over 10 years. So we are very familiar with the people, the clients, the processes. And at Catamaran, we've really developed the core competency of sourcing, financing and integrating acquisitions. We've made 6 acquisitions of customers in the past 6 years, and so we certainly seem to know what we're doing in that regard.

Elliot Feldman - Barclays Capital, Research Division

Drilling in a little bit more to the $125 million versus now $175 million, what are some of the areas that when you first looked at the numbers, you sort of said, I'm comfortable with $125 million. Is that just conservatism? Or was it, look, recontracting with the suppliers out there to give you a lot more of an opportunity for upside? Or was it something else?

Jeffrey Park

Yes. So a few things. When we look at making our announcements, first and foremost, what we communicate to The Street, were very thoughtful about ensuring we're providing conservative and clear advice. And so we announced the $125 million. We certainly have expectations internally of being able to drive higher synergies than that. The majority of the synergies are derived from how you contract effectively in the supply chain, being able to leverage the volumes that we have, as well as the strategies, whether it's through specialty, which I can spend a minute on, that we can really pull through more savings and margin for our business and savings for our clients. So the areas of improvement have really come from that cost of goods area.

Elliot Feldman - Barclays Capital, Research Division

Great. And maybe switching gears a bit, I know we're still a bit early, but maybe any comments on sort of the 2014 selling season, which I'm sure is starting to get underway here? Obviously, given your new size, I'm trying to get a sense of getting more looks, more at-bats, maybe a bit more shots at some of these conversations or somebody's larger health plans, larger employers. So any early feedback on that? Maybe secondly, maybe what some customers are asking for this year? Maybe in the backdrop of health care reform as well?

Jeffrey Park

Okay. Yes, we've been really pleased with the fact that our pipeline is growing pretty substantially over where we were positioned last year. Part of it is the growth of our business. We're certainly seeing more opportunities, but part of it is how we're positioned in the marketplace. Really, the PBM market is starting to break up into a couple of components: One, a mail-centric model. And the second, a specific retail-centric model, when our value proposition is the self-choice into the market. That's really what is playing for our clients and our prospects as they want to be able to have more flexibility in how they manage their benefits. Part of it is driving through health care reform. The one thing we know with certainty is that there's a lot of change, the change is unclear to different health plan providers across the country. Different states are choosing different alternatives. Federal programs, state programs, how they're going to participate effectively in these new markets, how they're going to be able to adapt to -- moving from a large group model to an individual selection model. These are definitely some pretty big changes for our health plan clients. And what they're looking for is a flexible partner, someone who could help them deliver on the inevitable change that's coming in the marketplace. So if I could kind of give a few perspectives around what some of our clients are looking for, first and foremost, they are looking for control. How do they get out and get into the gearbox inside of a pharmacy benefit manager? Have more access to the levers? Where is the money in the supply chain? How do you manage formulary? How do you manage, in a more open setting, multiple formularies and multiple playing designs and multiple eligibility fees? It's starting to get more and more towards access to information and managing data effectively. Ultimately, our principal job is to help clients save money, health plans, employers, state governments. We have to focus on driving synergies and savings for them, but this ability to have a more possible solution is certainly what's playing through in the marketplace.

Elliot Feldman - Barclays Capital, Research Division

Speaking of large health plans, I can't let you get away without asking you about Cigna. So I know you've kind of gave an update on them a few weeks ago when you had reported. Can you kind of remind us the size of that business? Where do you think the opportunity could go if you extend the relationship? Maybe talk a little bit about what you're doing for them in the Med-D space and sort of the value proposition you're delivering there. And kind of what it would mean to you if you expanded the relationship or maybe if you got scaled back?

Jeffrey Park

Sure. Cigna has been a client of ours through an acquisition of HealthSprings for a few years. We have provided them Part D benefits for a component of their book of business. And I won't be in a position to comment on specifics around any of our customers or specific opportunities, but large health plans are really interested in finding new ways to drive opportunities, to drive cost savings into their books of business. The other thing that large health plans are looking for is just control around different ways to save with the new model, like I was mentioning that are occurring in health care reform. Every state is unique in how a health plan will decide which state they want to participate in and what's the interdependencies and pieces that they need to connect in, whether it's a private exchange or a not-for-profit exchange or a state-based or federally funded exchange. All these things have an impact to our large health plan clients. And our job with all of them is to try to enable them to find the most cost-effective way to save money, and then also to try to find ways to help them find a flexible answer that's national in scope. So I don't have anything other specifics for you on Cigna, but that's how we look at it.

Elliot Feldman - Barclays Capital, Research Division

You mentioned the specialty before, obviously, a big topic of conversation, you guys have talked about quite a bit. Can you -- at a high level, can you talk with us about your capabilities in specialty, maybe the competitive landscape a bit? And do you believe there are any areas you need to invest more in and expand in? And do you believe you're sort of large enough now to be able to serve the needs of large employers and large health plans?

Jeffrey Park

Great question. We're really proud of our specialty footprint. We are the fifth largest specialty provider in the country. We differentiate ourselves in a few different ways. First and foremost, we need to make sure that you can provide cost-effective solutions. But secondly, you need to be able to understand that specialty is one of the fastest-growing drug categories in the country. So it's expected to go to 40% of the drug spend over the next 4 years. So if you think about that, with generics already running at close to 80%, 83%, having 83% generic utilization and then 40% specialty, people will be taking a specialty medication or a generic. How do you drive costs down with specialty medications when the injections can cost $10,000 a month? What is the right treatment patterns? And how do you ensure that people stay adherent to their specialty treatments so that they can avoid hospitalizations? These are generally the areas that our health plans and employer clients are struggling to make sure they can find the ways to manage effectively. The first thing people want to do is reduce the number of specialty pharmacies that they're buying from. Roughly 45% of all specialty medications are still getting distributed through open networks and in retail settings. These aren't the best settings to drive specialty in compliance on medication. Physicians want to know that you actually understand the chronic condition and the specific disease that's getting managed. These are very expensive treatments. They get shipped to a doctor's office for injection or they get shipped to home for self injection. And so you need to make sure that the care that goes around and the side effect that occur that you're understanding all the costs of going to specialty. So we talk to our clients around the chronic diseases and the clinical programs that drive compliance and the cost reductions that we can help them with, with their specialty footprint. We've got access to all of the required specialty medications across the country, and the way we're different is we have distributed footprint. So instead of having a centralized order intake and fulfillment for specialty, we have local and more geographic distribution. Because we believe nationally, you can set the patterns for what health care is, but it is really managed more regionally in focus, where certain populations can have higher cost treatments based on their health care delivery systems. And then ultimately, it's an individual treatment. There's a personalized cost and impact in individuals, so you need to be able to be local. And so we have taken a different approach to how we manage specialty as more of a high touch care than sort of a large central field distribution model.

Elliot Feldman - Barclays Capital, Research Division

Specifically, in specialty, it seems like you still have a lot of those benefits managed under the medical benefit. There are a lot of physicians that are making a lot of money through the buy-and-build model. What are the barriers and what are the opportunities to get that shifted into the pharmacy benefit? Is it working with payors to kind of rethink how that gets reimbursed? What are some of the things you're doing in that space?

Jeffrey Park

Yes, it's a great question. 50% -- roughly 50% of all specialty spend is still running through the medical benefits to your point, and they're not running through at the most cost-effective prices inside of a medical benefit. They're encapsulated or buried in with a number of different services that may be provided. So you need to partner, first of all, what we do with our health plan clients and look to append or pull the claim, so that before that claim is paid, you can set aside or pull out the specialty fulfillment component of it. The simple answer, first, is to just reduce the price and reimburse the physician at the lower reimbursement level. But that doesn't answer the total question because in aggregate, you're dealing with specialists like in oncology, where you can't just reduce the reimbursement by 15% and see how your network holds together. You have to be able to partner with them on the aggregate reimbursement, as well as being able to get the lowest cost for the specialty fulfillment. So we work with our health plan patient or health plans with doing both. The technology to be able to pull apart the claim is the easiest part. How do you manage the network of these specialists is the really, the bigger issue. And so that's where when you start to think about how health plans are targeting specifically these high-cost conditions with new accountable care models or pay-for-performance, you really need to start to link the incentives towards clinically driving the right outcomes not just reducing the cost of a prescription.

Elliot Feldman - Barclays Capital, Research Division

Switching over to capital deployment and in particular, M&A, obviously, an important part of your story, particularly over the past few years. Can you give us a sense of maybe where your pipeline is right now? And particularly, after you guys basically doubled in size, can you give us a sense of how your pipeline has increased or changed since the Catalyst deal has gone through? And maybe some things you're thinking about as we enter in 2013 into '14?

Jeffrey Park

Okay. So we've been very active in the past, and we continue to be with respect opportunities for acquisitions. Part of our history was we sold technology to health plans and PBMs to manage their pharmacy benefit. That means that we're in a position to not only have pharmacy benefits that we provide, but we were also the technology engine behind 30, 33 PBMs inside in the U.S.. That means these clients, much like our acquisition of Catalyst, use our technology, tools and systems to be able to provide them services. We've made 6 acquisitions in the last 6 years. They've all followed the same mode of operandi, which will be technology clients of ours that we've been able to pull through into our full PBM. When we're able to do this, it really minimizes the risk of integration. They're already on our platform. Their clients are set up a few floors below my office in our data center operations, there's no disruption to members, there's no new ID cards that need distribution, and the integrations are significantly derisked. So our thesis is to continue to look into the marketplace for a roll-up. It's an area where we continue to be active. First and foremost, we're in a good position. With the landscapes that have changed first with the Medco and Express Scripts merger and then with the Catalyst and our merger, it has created opportunities for us to continue to see areas to roll up in the middle market. And we've become sort of the strategic exit for most of the middle market. It's an area where we can -- we're going to continue to be active. But when we triage, which deals we look at, first and foremost, we need to make sure that the deals are accretive. And they're accretive because of the amount of synergies that we can derive principally due to our purchasing power. The second thing we look at is the valuation. Clearly, that's driven off of the accretion. And then the final is to how will the culture and the pieces of the business fit together to what we're trying to arrive at. The majority of the properties that we're looking at today would be in middle market, their niche certain geographic areas, certain specialized PBMs and certain therapies or markets. And so we continue to be active but disciplined at -- about how we deploy capital.

Elliot Feldman - Barclays Capital, Research Division

And do you know what the size roughly is? Were you able to kind of comment on the average size in terms of drug spend for those, across, I think you said there were 33 or so companies in this space? It just might be helpful to help people kind of get an idea of -- or we can come up with our own assumptions about what percentage of them you might be interested in buying. But I was just kind of curious about sort of average drug spend for those customers.

Jeffrey Park

If you look at the aggregate U.S. market, there's around $320 billion of drug spend last year. Around $100 million of it -- $100 billion of it, I'm sorry, would be in Medco and Express Scripts combined. CVS would be around $45 billion or $55 billion. United, which is a technology client of ours, would be another $35 billion or so I think. We'd be $15 billion. That would leave around $100 billion, $120 billion or so of drug spend that's left in the marketplace. And like I said, we have roughly 30, 33 of those clients would be on our platforms today. So the ones we look at, they all range in different sizes. But that's maybe a way to think about how big the market opportunity would be.

Elliot Feldman - Barclays Capital, Research Division

I think a quick question maybe on just overall utilization. I think one of your competitors mentioned they expect sort of flat to 1% growth as for core utilization in their book. Can you give us some perspective on maybe what that figure for you guys was last year? And maybe embedded in your expectations for this year, what's sort of core utilization growth might be?

Jeffrey Park

Yes. So utilization growth is dependent on the mix of business that you have. Different populations have different utilization. If you've got an aged population, you're going to continue to see utilization growth. If you've got a younger, more immortal population, you may see a younger -- lower utilization. So some of it is based on the books of business in the mix that each of us would have. As we were rolling out our trend document with respect to the 2012 utilization, I'm embarrassed to say, I can't remember exactly the number, but I'd put it in at sort of 1.5% to 2%. And as we estimate -- make an estimate for next year, we're expecting that the utilization number would be between 1% and 1.5%. Utilization of drugs is one thing. Price increases from brand manufacturers is the thing that drives trend up. The only natural offset to that is the increasing generic consumption of medication, which starts to soften some of the overall trend. So again, trend is made up of utilization and then brand drugging -- brand drug price increases, offset by generics. That's really how we'd look at utilization into next year.

Elliot Feldman - Barclays Capital, Research Division

One question we've gotten and I think another company in the mix that people thinking about is UnitedHealth. Obviously, they're in the process of pulling strips over that were formerly in Medco. Just kind of curious, are you seeing that out in the market yet? It sounds like they're investing heavily in that business there. And I guess, what are you folks sharing on The Street about their sort if intentions and their strategy to further penetrate the space?

Jeffrey Park

United has always been in the open market through their prescription solutions business. Generally, health plans have been successful at selling PBM services more to their medical customers than selling them standalone in the open market. As they've been -- we've got a lot of respect for United. They've been a long-term client of ours from the technology perspective, and I think that they're one of the preeminent providers in the marketplace. They definitely have the scale to be effective should they decide to be more aggressive in the merchant market or to self-PBM but services, it's just generally not been an area that health plans have done very -- as effectively as I'm sure they would like to in the past. A large part of the market for health plans are carved out. They can't sell to other health plans, so they're targeting employers. And so it's just not generally an area that has been high growth.

Elliot Feldman - Barclays Capital, Research Division

And maybe we have a few more questions a couple of minutes here. Just a quick question on mail. You mentioned earlier, with the competitive landscape, you have one player, you mentioned mail, one more of a retail-focused strategy. And you guys a little more kind of agnostic, more about choice. Obviously, mail is an important growth driver for the industry, profit growth driver as well. Can you talk about your strategy in mail going forward? And how important it is for Catamaran to invest in mail and maybe expand your capabilities there and focus on mail kind of going forward?

Jeffrey Park

Yes, great question. I think if you look back over the last 4 or 5 years, the mail drum has been a pretty constant one for the PBM industry. But in aggregate, mail penetration rates in the industry have now sort of softened for the last 2 years of decline from a growth perspective. And why is that? It's principally due to the fact that retailers are matching mail pricing. This has been one of the principal reasons why mail utilization has slowed down and now started to revert a little bit. The other reason why mail penetration has slowed is that there's 2 populations that are growing in the United States: One is, uninsured and they don't have a mail benefit. And the second is, people that are over 65 in Part D benefits, and they generally don't have or don't have mandated mail order. They're -- if given the choice of driving equal savings, clients will generally choose choice, which will allow them to choose -- have members pick a mail benefit or 90-day at retail. So retailers are putting their balance sheets to drive those scripts back into the store. So our strategy as it relates to mail, mail fits for certain clients. And so we've been able to see a nice increase in our mail book of business, although be it a much smaller percentage of penetration than the rest of the industry, our penetration is around 11% to 12%. The industry penetration, like I said, 20%, 21%. So we're continuing to see mail growth, but we're not going to see mail growth to the same as the market. Where we are seeing a lot of growth is the Retail 90 programs, and that's close to 20% or 23% utilization inside of our book of business. So it's definitely a pretty big increase. So don't look for us to go out and buy out and build up a big mail facility. That won't be our strategy.

Elliot Feldman - Barclays Capital, Research Division

Does that make it a little tougher? You've got CVS, who obviously has a model that in and of themselves at least through their own channel, their own retail channel, they've been, I'd say, more vocal in the last year or so than they used to be about being somewhat channel agnostic and finding ways to leverage the excess capacity in their retail pharmacies. Do you see that as a challenge? Or do you feel like -- you kind of feel like the reimbursement rates you're even getting from CVS are favorable enough that it doesn't hurt you relative to a company like them?

Jeffrey Park

CVS has set the -- set the pace with this with their Retail 90 programs on maintenance choice. And that's really what has had all the other retailers follow suit to drive pricing down in their 90-day networks. So as we started out, we have a channel-agnostic strategy, which means we're driving utilization into retail stores not into our mail facilities. That's helping us with our reimbursement. And we have competitive reimbursement across the network with all the major providers. That's, I guess, proof in the pudding is our ability to drive new wins. But an important piece for us is to make sure we've got a very competitive retail network pricing.

Elliot Feldman - Barclays Capital, Research Division

Great. I think that's all of the time we have. The breakout session will be in Poinciana 3, which is out the doors to the right. Jeff, thanks very much.

Jeffrey Park

Thanks for having me.

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