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

Running a PBM is not like developing internal business software systems, because PBMs deal directly with patients and plan members. SXC created a new full-service platform through a division called InformedRx, which allows plan members to access personalized records-medication history, locations of nearby pharmacies and other medical information. It also created systems to allow plan sponsors to closely track costs related to drug claims, an enormously important feature at a time when insurers are struggling with escalating costs associated with an aging, and not particularly healthy, demographic.

Thierer's SWAT team spent nine months converting NMHC clients to SXC's IT system. They also had to integrate employees (which resulted in roughly 150 layoffs from NMHC, plus the company's entire executive team), and consolidate four call centres into two. "All told, we completed the integration two quarters early, and exceeded our market commitment on synergies by a very large margin, extracting nearly $40 million," he says. "It was a resounding success-we view merger integration as a core competency here."

It didn't take long for SXC to begin to win new plan sponsors, thanks to the NMHC sales network. These clients tended to be in the mid-market range, and included universities and state-run Medicare plans, which are legally required to recoup all the drug company rebates provided to the PBMs that manage their drug programs. Indeed, the larger PBMs avoid the state Medicare plans specifically for this reason, which left an enticing opening for SXC.

By late 2008, the stock markets-shaken by the fallout from the collapse of Lehman Brothers-had started to take notice of SXC's ballsy arrival. While the Big Three watched their shares plunge, SXC's stock hit a 52-week high in December, 2008-up 49% from the previous year, compared to a vertiginous 52% drop over the same period for the TSX/S&P Composite. The number of analysts covering the company has jumped from a handful to 22.

As it grows its PBM business, SXC has continued to press its technological advantage-the company's original strength. John Romza, the chief technology officer, runs a 180-person development shop, which includes the team of about 30 programmers and systems analysts who are still in Milton. SXC's spending on R&D is greater than the typical PBM, he says, which will continue to pay dividends as the U.S. health care system makes the difficult transition to electronic health records, prescriptions and other digital tools that can help contain costs. "Both in Canada and the U.S., the emphasis is on information technology and health care," Romza says. "We realize we're in a golden age right now."

Tom Liston, a research analyst with Versant Partners, a Toronto investment dealer, describes the company's customer growth as "still very robust because the technology is so scalable. They're able to hook people on very quickly." Earlier this year, SXC signed up its largest client to date, HealthSpring Inc., a 10-year-old Nashville firm that manages Medicare programs for several U.S. states, as well as a national pharmacare plan. That deal alone, which takes effect Jan. 1, 2011, will add $1 billion (U.S.) in revenue, bringing the company's top line to $3 billion (U.S.). More recently, it reeled in another large plan that will add $720 million (U.S.) to its revenue over three years.

Now, with cash flow of about $20 million (U.S.) per quarter, Thierer and Park are looking to consolidate the mid-sized PBM market. There are about 100 such companies out there (30 of which already use SXC's IT platform). Together, they account for 40% of the market, but with $1 billion or less in revenue, they're too small to attract the interest of the Big Three, which post revenues in the $25-billion to $60-billion (U.S.) range. "Buying a $1-billion company is just not something they're interested in," says Park. Adds Thierer: "I tell my team this is a once-in-a-lifetime opportunity."

If they sound like a bunch of guys in a hurry, there's good reason for that. Obamacare comes on stream in three years, and with it will come a bewilderingly complex system of health insurance exchanges and enhanced Medicaid programs. The reforms, Thierer says, "will offer 35 million people access to health care-and these people will need drug coverage."

Thierer is characteristically brash about his intentions. "Today, I wouldn't say we compete directly with the Big Three," he says. "Tomorrow, we will be in a spot where we'll be moving into their backyard."

This story originally appeared in the November, 2010 issue of Your Business magazine.

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