Cramer: Once a Screaming Buy, Now Scale Back
*An earlier version of this story erroneously said that HealthSpring accounts for about 39% of Catamaran's earnings, whereas it actually accounts for 10%.
When the facts change, you need to reevaluate your opinions, said Cramer. And the Mad Money host has done some serious reevaluation.
"Back in December of last year, I told you to buy SXC Health Solutions, which I said was the fastest growing pharmacy benefit manager or PBM out there," Cramer explained.
"One of the reasons I got behind SXC was that it was a consolidator. It would buy up smaller PBMs to grow the business and give itself more scale. To me this seemed like a terrific story."
It was a terrific story. The stock gained about 75% since Cramer made the call. But a whole lot has changed since then.
For starters, SXC Health no longer exists!
Back in April the company announced it would acquire Catalyst Health, another medium sized PBM, in a $4.4 billion cash and stock deal, and when the merger closed in July, SXC Health Solutions ceased to exist.
"They changed the name to Catamaran, and the ticker symbol to CTRX," Cramer explained.
Not only has the name changed but the merger was transformational – and that demands a reevaluation of the underlying story.
"Because Catamaran, the stock artist formerly known as SXCI, still has a terrific story. It remains the fastest growing pharmacy benefit manager in the business," Cramer said.
"And thanks to the merger, the company now has the scale and the purchasing power to compete against an Express Scripts or a CVS Caremark, and they can dominate the smaller middle market players."
There are other reasons to like Catamaran.
The company makes a lot more money selling generic drugs than they do from selling high-priced branded ones. "So when a bunch of branded drugs go off patent, the margins at Catamaran should soar," said Cramer.
And at the moment, we're right smack in the middle of a huge wave of patent expirations for generic drugs that should last through 2014, with tens of billions worth of branded pharmaceuticals going generic each year.
Wait there's more - also, now that Catamaran is much bigger it can achieve greater economies of scale.
Plus, Catamaran can grab market share.
As Express Scripts digests its acquisition with former rival Medco, a number of Medco clients are expected to leave, and Catamaran has a good chance of poaching some of them.
Those are all the positive catalysts – unfortunately there are a few negative catalysts too.
"That has to do with HealthSpring, Catamaran's largest client. The company's contract with HealthSpring will run until 2014, but we'll find out whether or not it's being renewed in the first quarter of next year."
And according to Cramer there's some reason to worry it might not be renewed.
The risk is that Cigna will decide to drop the contract entirely.
"If they cancel, Catamaran will get paid for the balance of the contract, but they'll ultimately have to replace the lost business and the stock could get crushed."
What's the bottom line?
"I still like Catamaran, as a fast growing pharmacy benefit manager but unfortunately, the risk from Cigna means that the stock is speculative. I say you can buy a small position in Catamaran on a pullback, but hold off on buying a lot until we find out about the Cigna contract sometime in the first quarter."
"And if you bought it on my recommendation, you now have a 75% gain, and I think you're simply being greedy if you don't ring the register on some of your position. Some, but not all."
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