Medco is in good financial health
Question: As a shareholder in Medco Health Solutions Inc., I’m disappointed in its stock and wonder if things are going to get any better.
Answer: Being a profitable industry leader doesn’t make a healthcare company immune from competitive pressures.
The nation’s biggest stand-alone pharmacy benefit manager, providing drug benefits to about one-fifth of the U.S. population, is receiving a boost from the large number of patent expirations now taking place.
This helps it lower prescription costs by encouraging its members to switch to less expensive drugs such as generics. Also in its favor are the rise in mail-order pharmaceuticals and the prospect of more Americans qualifying for health insurance coverage.
On the other hand, the industrywide move toward greater cost containment is taking its toll, as large customers drive harder bargains and competitors cut prices to gain market share. There is also the threat of tougher regulation that could affect pricing and financial reporting requirements, in addition to the ongoing threat of litigation.
Because of such industry concerns, Medco Health Solutions (MHS) shares are down nearly 20% this year, after a 53% gain last year.
Medco, which is based in Franklin Lakes, N.J., has paid $730 million in cash to buy privately held research firm United BioSource Corp. of Bethesda, Md. The company studies the safety and effectiveness of drugs and medical devices after they win regulatory approval. United BioSource is expected to have $280 million in revenue this year.
The consensus Wall Street rating of discounted Medco shares is “buy,” according to Thomson Reuters, consisting of 14 “strong buys,” 14 “buys” and five “holds.”
Medco, which administered about 900 million prescriptions last year, is in excellent financial health, and that could facilitate acquisitions.
Earnings are expected to increase 19% this year and 17% next year. The five-year annualized return is projected to be 17%.
It is noteworthy that Medco’s biggest customer, UnitedHealth Group Inc., has the potential to bring its prescription benefit management in-house when its Medco contract expires in two years. Such industry shifts are a concern with other customers as well.