Catamaran stock jumps after Cigna deal announced

Shares of Catamaran Corp. continued climbing Tuesday, as analysts lauded a new agreement the pharmacy benefits manager reached to work with health insurer Cigna Corp.

THE SPARK: Cigna, the fourth-largest U.S. health insurer based on enrollment, said Monday that it agreed to a 10-year partnership with the pharmacy benefits manager. Catamaran will provide process drug claims, manage inventory and fill orders for Cigna's home-delivery pharmacy, among other tasks.

Catamaran had worked with Medicare Advantage provider HealthSpring, which Cigna acquired last year.

THE BIG PICTURE: Pharmacy benefit managers, or PBMs, run prescription drug plans for employers, government agencies and other clients. Catamaran also provides health care information technology services.

Shares of Catamaran, based in Lisle, Ill., had dipped below $50 last month, a move analysts attributed to the possible demise of its relationship with Cigna, which was evaluating its PBM options.

THE ANALYSIS: Cowen and Co. analyst Charles Rhyee said it appears Catamaran did not overreach to win the deal, as some analysts had feared.

"We believe this deal removes a significant overhang for the shares and presents the most favorable outcome for (Catamaran)," Rhyee wrote in a research note.

The new agreement should add as much as $5.5 billion in additional revenue for Catamaran beyond the more than $3 billion it already receives through its HealthSpring work, BMO Capital Markets analyst Jennifer Lynch said in a separate note.

"Cigna's deliberation process was thorough, taking into consideration an expansive range of options," Lynch wrote. "Emerging successfully from this bidding process should allay concerns around Catamaran's ability to compete for large business."

Citi analyst George Hill said the deal also is good for the PBM industry because it clearly establishes Catamaran as No. 3 — behind Express Scripts Holding Co. and CVS Caremark Corp. — and that should provide a more stable competitive environment and rational pricing.

SHARE ACTION: Up nearly 13 percent, or $6.27, to $54.93 Tuesday morning while broader trading indexes fell less than 1 percent. Shares of Bloomfield, Conn.-based Cigna climbed 53 cents to $69.53.