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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.

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.

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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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It wasn't a great time to go looking for capital. The tech bubble had just burst, sending the shares of network giants like Nortel into free fall. Nonetheless, the SXC offering found its way to Toronto's Covington Capital, a venture capital firm that was prepared to take the long view. "From an investment strategy perspective," recounts Jeff Park, a former Covington partner who has since become SXC's CFO, "it had a good management team, with U.S. health care experience, strong reference clients and a growing annuity stream." Covington kicked the tires and bought a 35% stake for $6 million, as part of a $13-million round of financing. Park took a seat on the board.

By early this year, Covington-with $225 million in assets invested in a range of tech, pharmaceutical and health care firms-had sold most of its initial SXC stake for $85 million. It was a brilliantly timed divestiture that earned it Canada's Venture Capital & Private Equity Association's 2010 deal-of-the-year award. Thirteen-fold returns, after all, don't come along every day.

SXC's transformation dates back to a 2005 decision by CEO Gordon Glenn and SXC's board. As Jeff Park tells it, the company's technology was in wide use among PBMs, which were buying it on a per-transaction basis. By then, SXC had bought ComCoTec, and one of its executives, John Romza, was leading the combined company's technology division. PBM customers were constantly asking him to add new features, depending on each plan's needs. "Selling services that use those tools is a natural extension," he says.

The decision to morph into a full-service PBM generated some controversy internally, since it meant that SXC might end up competing with its own customers. "There was some concern, and rightly so," says Glenn. To quell unrest, the firm pledged to create internal firewalls so the new PBM division couldn't use proprietary data from its IT customers.

To oversee the transformation, the board reached deep into the PBM industry and hired Mark Thierer to step in as president and COO. Soon, he took over from Glenn, who retired to his home in Florida. Park, meanwhile, quit the board and moved to Chicago to take over as CFO.

Thierer is an all-American executive right out of central casting: The Iowa-born MBA is friendly, with a dash of brash-and he's highly motivated to kick his competitors' butts. He has spent more than 25 years in the health technology field, first with IBM and later in a variety of senior gigs at Caremark. In 2003, he left Caremark to join Allscripts, whose technology, among other things, helps physicians and health plan managers ensure that their patients are filling their prescriptions (unfilled scrips cost American drug companies $50 billion U.S. in foregone revenues every year).

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Thierer arrived at SXC just as a growing number of PBMs were being hit with lawsuits launched by independent pharmacists and plan sponsors. At issue was a lack of transparency in their pricing strategies. Typically, PBMs had negotiated bulk discounts from the drug companies, but didn't pass on all the savings to plan sponsors and their members. What's more, these firms often hid the true price of individual drugs, applying hefty markups on widely used generics to offset more costly or less popular brand names. Most PBMs also set up mail-order services to undercut bricks-and-mortar pharmacies with discounted dispensing fees that further boosted their margins.

As Thierer built the upstart PBM operation, he decided to let customers know exactly how much SXC was paying for individual drugs. The upshot: The sponsors could price their benefits packages more effectively and contain costs. "It was about providing clarity about what you buy and sell drugs for," he says.

By late 2007, however, Thierer and the board decided they weren't satisfied with the pace of change. They'd won a few clients, but wanted to accelerate the transformation. After all, SXC was still a tech shop; it needed to radically change its culture. The board did a "build or buy" analysis and opted for the latter. "It would get us there so much more quickly than building the PBM division brick by brick," says Thierer. "It was all about speed to market, and scale."

In February, 2008, SXC spent $143 million (U.S.) to acquire National Medical Health Card Systems (NMHC), a Long Island PBM that had been one of SXC's technology customers. Suddenly, they had a roster of 350 health plan clients, a pharmacy sales network and the heft they required to reinvent themselves. Before the deal, SXC's nascent PBM group had been handling drug benefits for about 1.5 million people. The NMHC deal added another 2.3 million virtually overnight. As Phil Reddon, a Covington managing partner who took over Jeff Park's place on the SXC board, says, the deal was "transformational."

Some SXC watchers, however, initially didn't pay much heed to the acquisition. It didn't involve large sums of cash or a well-known player. Indeed, the stock lost $1.64 on news of the announcement (it trades on both the TSX and Nasdaq). But that indifference was an advantage. Thierer's first order of business was to combine the two firms, a project that included no fewer than 19,000 integration tasks. To get it done, Thierer brought in a corporate SWAT team-about two dozen PBM veterans, many of whom he knew from his days at Caremark-and ordered them to floor it.

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.

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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."

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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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