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Catamaran shares may be poised for healthy rebound

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There's a second Canadian-born tech company entangled in the bitter Obamacare debate.

While CGI Group Inc. weathers the flak from the botched health care website launch, Catamaran Corp.'s investors are worried about the unintended consequences of U.S. medical insurance reform.

Known as a full-service pharmacy benefits manager (PBM), Catamaran helps administer prescription drug programs for companies and health plans. Fortune magazine named it the fastest growing company in the United States in 2011, when it was still called SXC Health Solutions, but in recent months the stock has hit a rough patch on concerns Obamacare may cost it a chunk of its business.

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"I think the investor reaction relative to financial impact has been overdone," said Michael Cherny, an analyst at ISI in New York, who believes the stock is undervalued.

Catamaran began life in Milton, Ont., in 1993. Since relocating to the Chicago area in 2006, the company has established itself as a dynamo in U.S. prescription drugs, thanks to its proprietary software for managing pharmaceutical plans. Catamaran rode a series of smart acquisitions to a $10-billion valuation, its stock rising 1,500 per cent since its expatriation.

In September, Catamaran lost a small piece of its business when client Walgreen Co. announced that it was offloading 160,000 of its employees to a private health exchange, basically giving them the money to buy their own coverage.

The effect on Catamaran's business was minimal, but investors worried that Obamacare might compel a wave of U.S. employers to abandon their own worker health insurance plans. Catamaran's share price fell almost 10 per cent the same day as the Walgreen announcement, then another 10 per cent over the following two weeks. The losses moderated somewhat, but the stock is still trading at more than $10 off the August peak, which broke through $60 for the first time.

"I believe there's significant confusion and certain inaccuracies on the impact of the PBM industry and to Catamaran specifically," CEO Mark Thierer said on the third-quarter earnings call two weeks ago. "We see great opportunities to participate in the expansion of health coverage in this country and ride the … tailwinds created by [Obamacare]."

The company is well positioned, he said, to capture the business of the newly insured. Most analysts seem to agree with him. Demographic trends certainly favour Catamaran. "Industry growth has been fuelled by the steady rise in pharmaceutical use as well as a U.S. population that is growing older and developing chronic conditions," Frank Morgan, an analyst at RBC Dominion Securities, said in a recent note.

Catamaran should be able to maintain a competitive edge within the industry through its transparent pricing model, which has won it market share among a diverse customer base, Mr. Morgan said. A proven record for shrewd acquisitions should sustain growth, while future revenue got a big lift recently through a 10-year contract worth more than $5-billion with Cigna Corp., the fourth-largest health insurer in the United States, Mr. Morgan said. He estimates that 25 per cent annual revenue growth is achievable.

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Part of the selloff of Catamaran's stock likely had to do with investors daunted by its rich valuation. "People look at the company and get worked up about the [price-earnings ratio]," said Robert McWhirter, president of Selective Asset Management Inc.

Even after Catamaran's slide, its stock trades at a forward multiple of about 20 times earnings, while its most comparable peer, Express Scripts Holding Co., trades at only about 13 times. But given the companies' respective prospects, that gap should be even higher, Mr. Cherny said. "Clearly, they're at very different points on the growth cycle, so there should be a disconnect on the multiples."

There is still plenty of room for Catamaran to grow, through industry expansion, through stealing market share, and through mergers and acquisitions. Alternatively, the company could make an attractive takeover target, Mr. McWhirter said.

"If you're Express Scripts and you see these guys eating your lunch, what's the easiest way to take care of that problem?"

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