The deal comes only two weeks after Express Scripts Inc closed its $29 billion acquisition of Medco Health Solutions, creating the clear leader in the pharmacy benefit management (PBM) sector.

SXC, in buying Catalyst, will double the number of prescription claims it handles, becoming the fourth-largest PBM in the country and giving it more heft to compete with Express Scripts in attracting employers, health insurers and other customers.

"The landscape has changed with the Medco/Express Scripts transaction," Jefferies & Co analyst Brian Tanquilut said. "It is forcing some consolidation for other players to remain competitive. If you want to play offense in the PBM space, you need to be price-competitive."

SXC Chief Executive Mark Thierer said the combined company would be able to expand its reach to larger clients.

"With our increased size, we will strengthen our leadership position among middle-market PBMs and be very well-positioned to compete against the nation's largest PBMs," Thierer, who will head the combined company, told analysts on a conference call.

PBMs are supposed to cut the cost of medicines for their employer and health plan clients, in large part by encouraging more use of generic drugs. The sector's importance has grown since the new U.S. healthcare law heightened focus on reducing costs throughout the healthcare system.

In an interview with Reuters, Thierer said SXC would stand apart from its bigger rivals by giving potential large clients the ability to customize by picking from a menu of services, such as specialty pharmacy care, mail-delivery drugs and various clinical programs.

"It's actually a radical departure from how people buy pharmacy in this marketplace," said Thierer, who earlier in his career worked for 10 years at Caremark before the PBM was bought by drugstore chain CVS. "I grew up in this industry. That's all those guys have sold for years is a bundled offering."

At $81.02 a share, the cash-and-stock offer represents a nearly 28 percent premium to Catalyst's Tuesday closing price.

SXC said the deal would substantially add to earnings in 2013. The combined company is expected to have $13 billion in revenue, it said. SXC posted $5 billion in revenue last year.

U.S.-listed shares of SXC were up 8.2 percent at $86.84 in afternoon trading on the Nasdaq.

Because SXC stock is a component of the offer, Catalyst shares jumped above the offer price, rising 31.4 percent to $83.47.

GAINING SCALE

SXC had already been growing through smaller acquisitions. Last year alone, it struck three deals in the PBM sector, including buying privately held HealthTrans LLC for $250 million.

The combined company, which will be headquartered in Lisle, Illinois, will cover about 25 million members and handle about 200 million prescriptions.

SXC will rank behind Express Scripts, CVS Caremark Corp and the pharmacy benefit unit of insurer UnitedHealth Group Inc in prescription claims handled, according to Jefferies' Tanquilut.

Its larger size will allow it to gain more leverage in negotiating buying drugs from pharmaceutical companies, Tanquilut said.

"SXC saw that Medco/Express will have better buying power as a larger entity," the analyst said. "Scale is the driver of the PBM business."

While SXC has catered more to health insurer clients, Catalyst's customers have tended to be state contracts and corporations, Tanquilut said.

Under terms of the deal, Catalyst shareholders will receive $28 in cash and 0.6606 SXC share for each Catalyst share.

The acquisition is expected to close in the second half of 2012. SXC expects $125 million in annual cost savings and other synergies over the first 18 to 24 months after closing.

Catalyst has been using SXC's technology platform for its claims processing, allowing for a likely smooth integration between the companies, analysts said.

"In terms of the integration, the transaction risk is relatively low," Paradigm Capital analyst Gabriel Leung said.

Some analysts said the deal could benefit the companies' larger rivals in the short term, because SXC and Catalyst will be less likely to win new business as they focus on integration.

"These two small-cap PBMs have been taking share ... for a number of selling seasons," BMO Capital Markets analyst Dave Shove said in a research note. "This merger could reduce some competitive pressure on CVS and Express Scripts as the new SXC integration process diverts some mindshare."

SXC expects to finance the deal with $1.7 billion in debt.

In the interview, Thierer said the PBM industry remained fragmented and competitive despite the recent high-profile deals. SXC will still look to buy smaller PBMs that use its technology platforms, he said, and the company structured the Catalyst deal to maintain flexibility in striking other deals.

"You'll see continued consolidation, and we'll be driving it in the middle market," Thierer said. "The notion of reloading and doing more acquisitions, we were thoughtful about that and we plan to do that."

On closing, SXC shareholders are expected to own about 65 percent of the combined company, with Catalyst shareholders owning the rest.

J.P. Morgan was the lead financial adviser for SXC, while Goldman Sachs was the lead financial adviser for Catalyst.

(Reporting by Lewis Krauskopf in New York; Additional reporting by Aftab Ahmed and Bhaswati Mukhopadhyay in Bangalore; editing by John Wallace and Matthew Lewis)

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