Medco 2nd-qtr profit grows, but investors worry that company is making less for each script

Medco 2Q profit rises, but stock hits 52-week low

NEW YORK — Pharmacy benefits manager Medco Health Solutions Inc. said Thursday its profit rose 14 percent in the second quarter, but its shares sank as investors were concerned about how much money the company is making for each prescription it fills.

Medco’s profit and revenue were about equal to Wall Street expectations, but in early trading the stock dropped more than 10 percent to an annual low of $47.76. By the afternoon, the stock had rebounded, although shares were down $3.83, or 7.2 percent, to $49.50.

The Franklin Lakes, N.J., company said new clients and higher drug prices helped lift its net income to $356.9 million, or 77 cents per share, in the June quarter. It earned from $312.1 million, or 64 cents per share, a year ago. Excluding one-time costs and gains, Medco earned 80 cents per share. Analysts expected 79 cents per share, according to Thomson Reuters.

Medco, the largest U.S. pharmacy benefits manager, handles prescription drug benefits for employers and health plan sponsors. At the beginning of the year, Medco started doing business with major new clients including retired Chrysler employees and the commercial insurance and workers’ compensation businesses of Coventry Health Care. The company said it has received $5 billion in revenue from its new clients.

Overall revenue rose 10 percent to $16.41 billion from $14.93 billion and topped the average analyst estimate of $16.21 billion. The company said drugmakers continued to raise prices on brand-name medications. Medco passed along those increases, which boosted its revenue.

Jefferies and Co. analyst Arthur Henderson said the main problem is the amount Medco earned on each prescription. Excluding the legal settlement and other one-time items, he said the company made $2.97 per prescription in the second quarter. That’s less than it made a year ago, and an increase of about 3 percent from the first quarter. Medco had said that total would grow at least 5 percent.

Medco also reduced its forecast for that metric, which is called earnings before interest, taxes, depreciation and amortization per adjusted prescription. The company thinks that figure will increase by the low single digits in 2010, down from a previous growth estimate of 5 to 10 percent.

Medco filled 27.5 million prescriptions through the mail. Mail order prescriptions are more profitable for Medco and cheaper for its clients. The company handled 238.4 million prescriptions during the quarter, up 6 percent from a year ago.

Medco said its new clients are doing more business through retail pharmacies than it had expected, and it will work to increase mail order prescriptions with those clients over the next few years, so Henderson said the high retail figure is not a problem.

“The core business is fine,” Henderson said. “The reality of it is, in this market environment, people are jumping on any little piece of uncertainty or bad news, and just pounding the stocks into the ground.”

Chief Financial Officer Rich Rubino said there was no specific reason that retail prescriptions were greater than expected.

“Retail volume is very difficult to predict,” he said. “We went through the details by client and by drug and it was pretty unremarkable, not just one client or one drug.”

Shares of Medco’s biggest rival, Express Scripts Inc., also skidded. They stock lost $2.22, or 4.9 percent, to $42.99.

The second-quarter profit include a charge of 6 cents per share related to Medco’s spinoff from Merck & Co. in 2003. Also included is a gain of 3 cents per share from the settlement of a class action lawsuit antitrust suit. Medco said the lawsuit was filed by companies who directly purchased an unidentified drug.

Looking ahead, Medco expects its annual profit will reach the high end of its previous forecast. It now expects to earn $3.34 to $3.39 per share excluding spinoff costs. Previously the company’s forecast was $3.28 to $3.38 per share. Analysts expect $3.37 per share.

prescriptions were filled at retail pharmacies than it previously expected.

Medco also said it has $1 billion in new business under contract for 2011. The company is about halfway done renewing contracts and signing new clients starting in 2011.