Caseridge Capital Corporation

Caseridge Capital Corporation

1 First Canadian Place,

100 King Street West, Suite 5700
Toronto, Ontario M5X 1C7
T 416-915-4142 F 416-915-3177

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THE ADAMOU RANT FOR MAY 5, 2010

 The Adamou Rant
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Canadian Venture Capital and the Successful “Sideways Company”
A Brief History of SXC Health Solutions Group Inc. (SXCI; TSX: SXC).

In the world of venture capital investments, there are winners, losers and then there are those that are
stuck in the middle. The exits on the “home runs” and the “strike outs” are relatively straight forward,
and for good or for naught they are eventually removed from the portfolio. Over time the remaining
companies accumulate and dealing with these so-called “sideways” performers poses a challenge for
both entrepreneurs and venture capitalists. In the venture capital world the path to liquidity for many of
these cases is a “bullet clause” in the purchase agreement that places an enormous amount of pressure on
the company to unburden themselves of their former partners or face some dire consequences.

These bullet liquidity events convert these sideways companies into depreciating assets whose value
declines as this deadline approaches. Prospective investors are aware of these clauses and they back off
from any potential transaction knowing that trouble is brewing on the horizon. Vulture investors
meanwhile are attracted to them, and they come forth with their “stink bids” in their search for desperate
sellers. These low-ball offers demoralize both the founders and their venture partners and further scare
off credible investors.

Is there an answer to this challenge? I believe that there is, and the answer is to be found once again in
the understanding that the Canadian public equity markets are a necessary component of any venture
investment strategy. This means that venture investors should look to put in place a more “public
friendly” structure from the get-go so to better access the broader public markets should their patience
wear thin at the mid-point of their five year investment horizon. They should also consider expanding
their relationship network to include a broader array of investment bankers and institutional fund
managers.

Let’s consider as a case study the experience of SXC Health Solutions Group Inc. I was involved with
SXC as a venture investor in the mid-1990s at which point (if memory serves) the fund that employed me
invested $1.5MM into the then privately-held company at about $0.75 per share.
May 5, 2010

By 1997, some two and a half years later, we were not particularly satisfied with the performance of this
still struggling company. While we were unwilling to participate in this second round we decided to
restructure our investment so that we could better facilitate a financing through a “go-public” transaction
in the form of a reverse take-over of a publicly listed shell. This allowed SXC to raise an additional
$10MM via MDS Health Ventures and the Canadian Medical Discoveries Fund. This financing was led by
Canaccord Capital as the sole underwriter and it breathed new life into what we (at the time) considered
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to be a sub-par performer. The proceeds from this round funded a few acquisitions and a restructuring of
the company’s operations along with some changes to the management team. It was priced somewhere
near the $0.90 per share range.

By 2001 the break out required to convert this sideways performer into a “home run” had yet to arrive.
The Company needed another financing round for yet more acquisitions and a further round of
consolidating cost reductions. I was involved in this round from the sell side with Taurus Capital
Markets Inc. (who co-led the issue along with Sprott Securities Inc, now Cormark Securities). The critical
component in the success of this round was the participation of another venture fund, this time
Caseridge Capital Corporation 100 King Street West, Suite 5700, Toronto, M5X 1C7
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Covington Capital Corp. Covington took the lead and they worked with us through the due diligence
process to commit $6MM to the transaction. This order was large enough to Canadian Venture Capital
and the Successful “Sideways Company”

Four years later SXC was starting to come onto its own and they were making some headway into their
markets. In 2005 they came back to the public markets, and I was now involved as a smaller member of a
larger underwriting syndicate on a $20MM cross-border issue. The acquisitions from the previous
rounds were consolidating well and by this time the role of the venture capitalists, whose value in the
earlier rounds was critical to the success of those issues, was no longer necessary. This was in effect the
first “true” public offering of securities by SXC – some 10 years after the initial investment. It was priced
at $2.50 per share.

Things really started to take off after this. In the five years that followed SXC raised some $300MM in
additional capital via the broader public markets. Today, with $1.5BB in revenue and a market

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capitalization of over $2BB, it is a world leader in the pharmacy benefit and health care information
technology sectors with a stock price of almost $70 per share. It took over 10 years to take the company
from that first round in 1995 to the first non-venture round in 2005 and during this time there were a
number of restructurings and false starts. For most of this period, SXC was a “sideways” performer that,
were it not for the high level of collaboration between the venture funds and the public markets, would
have no doubt disappeared before achieving any measure of success. It took the combined efforts of the
entire spectrum of Canadian financing sources and market participants to make it happen. And it did.

There’s a lesson in this for all of us.

F: 416-915-3177
Adam E. Adamou
adamou@caseridge.com

P: 416-915-4142
Caseridge Capital Corporation |

adamou@caseridge.com P: 416-915-4142 F: 416-915-3177 2

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Note that the opinions in this report are solely those of the author. The information in this report is gathered from various information
provides that we believe to be reliable. Material errors or omissions are unintentional, and corrections may be forwarded to the author for
correction in a subsequent report. This report is intended only for sophisticated and accredited investors, the recommendations made should
not be acted upon by investors without proper advice and consultation with their investment advisor. Caseridge is not a member of the
Investment Industry Regulatory Organization of Canada (IIROC) or of the Toronto Stock Exchange. Caseridge is registered as an Exempt
Market Dealer in Ontario.

This message and any attached or linked material, is for information purposes only, and does not constitute an opinion, advice or a
recommendation regarding any securities referred to therein. Information in this message or any attached or linked material relating to an
May 5, 2010

offering of securities should be read in conjunction with the prospectus or other offering document for those securities. Caseridge Capital
provides corporate finance advisory services in the areas of new issues, private placements, mergers, acquisitions, valuations and strategic
advisory services.

Caseridge does not directly or indirectly own shares in the companies named in this report, however independently managed mutual funds or
other investment vehicles that may be owned by the author or by Caseridge employees may take positions in companies named in this
report.
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