Medco Gets a Dose of Selling

Shares dipped Tuesday after the pharmacy benefit manager announced a stronger profit. Some pros are worried about price competition

Medco Health Solutions (MHS) had a sharply stronger profit during recent months from selling prescription drugs to client groups. But investors may have used the company's announcement of first quarter results May 1 as a chance to take profits in the shares after their recent gains.

The Franklin Lakes, N.J. pharmacy benefit manager says there has been growing use of generics and services such as mail-in orders. The company had net income of $274.8 million during the quarter ended March 31, up 100% compared to the same period last year. "Each of our key strategic growth drivers advanced significantly, led by the record availability and acceptance of generic medicines," Medco CEO David B. Snow Jr. said in a press release May 1.

The company's first-quarter 2007 net revenues rose 5.6% year over year to nearly $11.2 billion during the March quarter.

Ironically, investors have worried in recent months about the potential that lower prices on prescription drugs might have on pharmacy benefit management services companies, whose customers can range from insurance companies to unions. Some have been consolidating in an effort to adapt. Retail drugstore giant CVS Corp. CVS bought Nashville's Caremark Rx CMX in a $26.5 billion deal that closed in late March. CVS made its first offer in November, but had to battle a counter-bid from the St. Louis-based Express Scripts ESRX) announced on Dec. 18.

As the two wrangled, Medco could have picked up a disproportionate share of contract wins. Medco said it was negotiating better terms with non-CVS retailers that were concerned about a CVS-Caremark combination, Morningstar pointed out on March 8.

Medco on May 1 moved its forecast on earnings per share in 2007 to between $3.02 and $3.07, up from the previous range of $2.94 to $3.01 per share.

Some didn't see much changing in 2008. "Given sell-side pricing pressure from 11 large-account contract renewals, we now see tough EPS comparisons in the secomnd half and in the first half of 2008," Standard & Poor's equity analyst Phillip M. Seligman said in a research note May 1. The analyst raised his 2007 earnings per share estimate on Medco by 5 cents to $3.45, but reiterated a 2008 estimate for $4.00 EPS. Noting the stock price's recent rise, Seligman downgraded Medco to hold from buy. (S&P, like, is owned by The McGraw-Hill Companies.)

Investors sold the stock 7.5% to $72.15 per share on the New York Stock Exchange May 1. But Medco shares remain up sharply from their low of the year at $47.08 per share on Nov. 24.

It remains to be seen what happens longer-term. Morningstar expects the government, employers, and health plans to continue to push for better benefits and lower costs from pharmacy benefit managers. "Managed-care customers may increasingly bring PBM services in-house," analyst Brandon Troegle, CFA said in a research note March 8. "Additionally, we remain concerned about heightened price competition as the PBMs try to increase revenue and gain more scale in a maturing industry."

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