Medco Remains at Neutral - Analyst Blog
May 13 2011 - 12:30PM
Zacks
Recently, we
reiterated our Neutral recommendation on
Medco
Health (MHS) with a target price of
$67.00.
Medco
reported an adjusted EPS of 91 cents in the first quarter of fiscal
2011, beating both the Zacks Consensus Estimate of 88 cents and the
year-ago EPS of 76 cents.
Revenues
increased 4.3% year over year to $17.0 billion in the quarter
primarily driven by contributions from significant client wins as
well as higher prices charged on branded drugs, partially offset by
higher volumes of lower-priced generic drugs. However, revenues
marginally missed the Zacks Consensus Estimate of $17.1
billion.
The United
BioSource (UBC) acquisition in September 2010 combined with the
expansion of client base at Medicare Part D services resulted in a
stupendous 57.5% increase in Medco’s service revenues. In the
reported quarter, Medicare Part D revenues increased by over 16%
year over year.
Contributions from Accredo
Health Group also helped boost the company’s Specialty business
segment’s sales. During the first quarter of fiscal 2011 Accredo
reported revenues of $3.1 billion, up 14.9% year over
year.
Although
gross margin in this segment witnessed a contraction of 50 basis
points (bps) compared to the year-ago quarter, we are optimistic
about the meaningful growth across a wide range of Accredo's
products based on improved product and channel mix along with new
client wins in the coming quarters.
Moreover,
increased opportunity for Medco lies in the form of introduction of
generics over the next few years. The company is confident of
achieving operating profit growth in 2012. Although the PBM
industry remains highly competitive, we are encouraged by Medco’s
client renewals. The company’s 2011 client retention rate was
99%.
In addition,
Medco is opting for several strategic acquisitions which are
encouraging. Viewing higher demand for genomic services Medco had
acquired DNA Direct, which provides guidance and decision support
to payors, physicians and patients on several issues related to
genomic medicine. Medco has also launched four new clinical
programs for neurology and cancer in the pharmacogenomics
segment.
We believe
both the segments of Medco Health Services -- PBM and Specialty
Pharmacy segment -- have a positive outlook for the upcoming
quarters. Medco has also launched four new clinical programs for
neurology and cancer in the pharmacogenomics segment.
However we
are concerned about the uncertainty regarding the extension of
Medco’s contract with UnitedHealth
(UNH) Medco’s largest client.
UnitedHealth accounted for 17% of net revenues in fiscal 2010. The
current contract will extend up to December 2012.
Although Medco
is confident about the renewal, the company will suffer a major
blow if tthat does not happen.
Moreover,
following CVS
Caremark’s (CVS) acquisition of Medicare
Part D business of Universal
American (UAM), the latter’s contract
with Medco was terminated (effective 2012).
CVS CAREMARK CP (CVS): Free Stock Analysis Report
MEDCO HLTH SOL (MHS): Free Stock Analysis Report
UNIVL AMERICAN (UAM): Free Stock Analysis Report
UNITEDHEALTH GP (UNH): Free Stock Analysis Report
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