Biotech Values

[DewDiligence]

Generic Substitution Boosts Medco 2008 Profit

http://www.reuters.com/article/marketsNews/idINN2334478120090224

›Tue Feb 24, 2009 11:17am EST
By Lewis Krauskopf and Bill Berkrot

NEW YORK, Feb 24 (Reuters) - Medco Health Solutions Inc (MHS) reported a 32 percent rise in fourth-quarter earnings on Tuesday, helped by an increase in more-profitable generic drug sales and home delivery prescriptions.

The pharmacy benefit manager also stood by its 2009 profit outlook, and its shares rose as much as 4.1 percent before paring most of those gains.

"Guidance for the year was maintained," said William Blair & Co analyst John Kreger. "In this environment, that's a victory."

Net income rose to $274.4 million, or 54 cents per share, from $207.6 million, or 38 cents per share, a year earlier.

Excluding items, Medco had a profit of 59 cents, topping the analysts' average forecast by a penny, according to Reuters Estimates.

"Medco reported solid fourth-quarter results," JPMorgan analyst Lisa Gill wrote in a note to clients. "Prescription volume was above our expectation, which was reassuring given the concern over the impact of the economic environment."

There has been fear that patients hit hard by the recession would stop filling prescriptions or attempt to stretch medication by splitting pills or taking them less often than prescribed. But the difficult economy has helped Medco's prescription volume.

"What you find is the people know they need to take the drugs, but they become much more careful purchasers of those drugs and they gravitate to our mail service from retail and they gravitate to generic from brands to save money, which all works extremely well for us and our clients," Chief Executive David Snow said in an interview.

The company's total adjusted volume of prescriptions handled rose 4.3 percent to 198.1 million. Mail-order volume jumped 9.4 percent to a record 26.7 million.

Medco's rate of dispensing generic drugs rose 3.5 percentage points to 64.9 percent. [This compares with 68% at the Caremark division of CVS.]

Pharmacy benefit managers, or PBMs, administer prescription drug benefits for employers and health plans and operate large mail-order pharmacies.

Medco says it derives more than half its profit from delivering generic drugs by mail. Like other PBMs, it can take advantage of low prices from generic manufacturers and capture more profit by dispensing the drugs itself.

The Franklin Lakes, New Jersey-based company said it continued to expect 2009 earnings per share, excluding items, of $2.67 to $2.77, representing growth of 15 percent to 19 percent.

Fourth-quarter revenue rose about 14 percent to $13 billion, exceeding Wall Street estimates of $12.72 billion.

Medco said it had closed the year with more than $938 million in cash on its balance sheet, up 21 percent from 2007.

"Given the tight credit markets and uncertain economic times, we are creating our own liquidity, which will continue to fuel long-term shareholder returns," Chief Financial Officer Richard Rubino said in a statement.‹