Medco Health Solutions Inc. (MHS), the drug-benefits manager seeking to merge with rival Express Scripts Inc. (ESRX), said third-quarter profit beat analysts’ estimates on greater use of generic drugs. The shares rose 11 percent.
Earnings excluding certain items were $1.07 a share, topping the average estimate of $1.05 a share by 18 analysts. The Franklin Lakes, New Jersey-based company raised the lower end of its full-year adjusted earnings forecast to $4.08 a share from $4.02 a share, according to its statement today.
Medco said in July that it had agreed to be acquired by St. Louis-based Express Scripts for $29.1 billion. The deal would form the biggest U.S. pharmacy-benefits manager and requires approval from the Federal Trade Commission. Express Scripts said yesterday that its third-quarter profit increased 7.7 percent on greater use of generic drugs, while revenue rose 2.8 percent to $11.6 billion.
While earnings results are “largely immaterial to the stock,” Medco’s third-quarter performance highlights its “intact fundamentals and promising three-year outlook,” Arthur Henderson, an analyst at Jefferies & Co. in Nashville, Tennessee, said today in a note to investors. He reiterated a “Buy” rating on the shares.
Medco rose 11 percent to $52.13 at 4 p.m. in New York trading, the biggest gain since July 21. Express Scripts rose 13 percent to $43.66, the most since April 13, 2009.
The company also narrowed its guidance for full-year earnings, excluding merger expenses, to $3.65 to $3.69 a share from $3.59 to $3.69 a share.
Revenue increased 4.1 percent to $16.9 billion. Generic drugs accounted for 74 percent of the prescriptions Medco filled in the third quarter, up from 72 percent a year earlier. Mail- order drugs comprised 65 percent of prescriptions filled, up from 63 percent a year earlier.
“The generic wave for 2012 is forecasted to be strong, and our clients and members are expected to save approximately $6.5 billion in 2012 from increased generic utilization, which also has the effect of lowering our revenues due to the significant price difference in generics compared to brand-name drugs,” Chief Executive Officer David Snow said in the statement.
Net income decreased 4.3 percent to $355.4 million, or 90 cents a share, from $371.5 million, or 85 cents a share, a year earlier, the company said. Medco has been buying back shares, lifting the per-share results. Year-to-date, Medco repurchased 29.3 million shares at a cost of $1.79 billion, reflecting an average per-share cost of $60.93, the company said in the statement.
The company repurchased 6.3 million shares in the third quarter, Chief Financial Officer Richard Rubino said today during a conference call. The buyback was completed on July 15, before the merger was announced. Future buybacks have been suspended while the merger is pending.
Medco in May lost a $3 billion contract with the Blue Cross Blue Shield Association’s Federal Employee Program to CVS Caremark Corp. (CVS), and announced July 21 that it won’t renew an $11 billion contract with UnitedHealth Group Inc. (UNH) that expires in December 2012. In March, the company lost a contract with the California Public Employees’ Retirement System worth an estimated $500 million.
“Looking ahead, Medco faces some headwinds due to contract losses next year and the loss of the UnitedHealth contract in 2013, even though the upcoming generic cycle may offset these losses somewhat,” said Steven Halper, an analyst at Stifel Nicolaus & Co. in New York.
The UnitedHealth contract probably accounts for 15 percent to 20 percent of Medco’s revenue, Halper said today in a note to clients. He reiterated a “hold” rating on the stock.
Pharmacy-benefits managers act as middlemen for drugmakers, pharmacies and health-plan sponsors, negotiating prices and managing the use of drugs by patients. Their profits are tied to cutting their clients’ drug costs.
Express Scripts and Medco executives told a U.S. House subcommittee last month that the merger would preserve competition and lower costs while improving patient care. The acquisition also faces a Senate hearing in November.
The companies expect to close the deal in the first half of 2012, Snow said on today’s conference call.
“We would not have announced this combination if we were not confident in our ability to obtain the necessary regulatory approvals,” he said.
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