Medco is in good fi­nan­cial health

Los Angeles Times - - Business - An­drew Leckey

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.

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