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Cashing in on the U.S. drug craze Add to ...

It's the sort of box score that should make any ambitious entrepreneur sit up and take notice. As Mark Thierer, chief executive of SXC Health Solutions Inc., tells it, his health care IT company has ridden a 3,400% increase in revenues and a 10-fold jump in profits over the past five years-two of which were recessionary.

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A decade ago, SXC was an obscure and barely profitable software concern in Milton, Ontario, with just $17 million in sales. Today, it's a player to be reckoned with in the U.S. health care market. It's a pharmacy benefits manager (PBM), handling drug claims on behalf of health plans-a sector that racks up $290 billion (U.S.) in annual revenues. (That's considerably larger than Canada's entire manufacturing sector.) Last year, SXC had $2 billion (U.S.) in revenue and operating income of $115 million (U.S.); its market cap exceeds $2.3 billion. Plus, it has $350 million (U.S.) in the bank and not a cent of debt. Rags-to-riches sagas don't get better than this one.

To pull it off, however, SXC had to completely reinvent itself. In the mid-2000s, the company supplied IT services to some of the same companies against which it's now competing. But over the past three years, SXC has leveraged its technological prowess, a key strategic acquisition and some savvy hiring decisions to become a full-service PBM in its own right.

Now based in suburban Chicago (with a 30-person programming shop back in Milton), SXC is looking to buy up other mid-sized PBMs, which it defines as having around $1 billion in revenue. Thierer, himself a PBM veteran who took over the top job in 2008, says the 950-employee firm is determined to profit from President Barack Obama's health reforms, which will take effect in 2014. Obama-care, as it's been nicknamed, will offer medical and drug plans to 35 million uninsured Americans-a kind of big-bang moment looming on the horizon.

SXC's transformation, in many ways, was a classic Trojan horse play: taking what it had gleaned about its customers' strengths and weaknesses to develop a more cost-effective way of doing business. But the firm's rise has been anything but linear, and the company has undergone a series of major course corrections since it was founded in 1993. Indeed, the present version of SXC bears almost no resemblance to its corporate ancestor. The road from Milton to Chicago was a winding one indeed.

PBMs are one of the many exotic corporate creatures native to the $2.2-trillion (U.S.) American health care system (along with HMOs, PPOs and high-deductible health plans). Their sole purpose is to administer the torrent of prescription drug orders generated by the U.S. health system, on behalf of corporations, unions, pension plans and insurance companies.



In broad strokes, PBMs buy drugs in bulk from the pharma companies at deep discounts, then adjudicate claims and fill prescriptions for plan members, often by mail order. CVS Caremark - one of the so-called Big Three, along with Medco Health Solutions and Express Scripts, which serve giants like General Motors and CalPERS - even owns its own chain of pharmacies. These companies make money in two ways: by contracting out their services to client plans, and by holding on to some of the rebates and discounts they negotiate with their pharmaceutical suppliers. As one SXC executive observes, "It's a pretty easy business model. We get paid when people take pills."

When Malcolm Rigby and Stephen Hall, a pair of Milton entrepreneurs, set up Systems Xcellence in 1993, the PBM sector was in its infancy, and they initially didn't know a thing about it. Their goal was to build IT systems for the Canadian banking industry. They bagged some early contracts and soon engineered a reverse takeover to raise equity on the Toronto Stock Exchange. In 1995, Rigby and Hall stumbled, almost by accident, into the drug space when their firm won a contract with the B.C. government to build a pharmacy transactions tracking system for the health ministry. That lucrative deal led to an even bigger one, with a large Arizona-based PBM that wanted to outsource the vetting and processing of drug claims.

In 1998, the board of SXC, as the company would later be renamed, recruited Gordon Glenn, a seasoned tech executive based in Florida, to step in as CEO. The firm, Glenn recalls, had about $8 million in revenue, 100 employees and was losing money. As Glenn pushed further into the PBM market, he realized that some customers wanted to simply license their software, while others wanted SXC to process all their transactions on a fee-for-service basis. Glenn moved to Toronto and began a daily commute to Milton, about 45 kilometres west. "We went where our customers wanted to go," he says. So did he.

By 2001, Glenn had turned around the firm and was eyeing a Chicago rival, ComCoTec. It specialized in processing drug claims for PBMs, and its client roster would help SXC double in size. Glenn brought in a merchant bank to beat the bushes for investors.

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