MHS Medcohealth Solutions Common Stock

Medco Health Solutions (MHS) and its subsidiary United BioSource Corporation (UBC) have entered into a multi-year agreement with leading pharmaceutical company Sanofi-Aventis (SNY). Under the agreement, Medco would provide real-world evidence assessments during the product’s development by Sanofi-Aventis. Financial terms of the deal were not disclosed.

Following this agreement, Sanofi-Aventis would be better placed to identify patients with huge unmet medical needs. Furthermore, the companies will strive to trace out patients on whom the drugs are most effective and also generate real-world comparative effectiveness data. This is significant as some products that hold promise in early research does not deliver expected results when applied.

Medco Health has been recording increase in revenues from services primarily driven by the UBC acquisition. The acquisition provides encouraging results for the company with more than 100 of its clients, representing 40 million lives, ready to be part of the Medco research consortium.

UBC caters to pharmaceutical and biotechnology companies and guides them regarding safety, effectiveness and affordable use of medicines. The company also conducts several studies for its clients, which include risk evaluation and mitigation studies (REMS), cost-benefit and cost-effectiveness evaluations among others.

The agreement with Sanofi-Aventis is a positive development for Medco, which lost some contracts in the recent past. In May 2011, Medco lost its Federal Employee Program (FEP) contract to CVS Caremark (CVS), effective from January 2012. This was a big blow to Medco’s PBM business as it generated nearly $3 billion in annual revenues (including approximately 9.8 million mail order prescriptions) or about 4.5% of the company's total sales in 2010. Medco also lost a California Public Employees’ Retirement System (CalPERS) contract to CVS earlier this month.

Recommendation

During the last reported quarter, Medco witnessed higher service revenue growth fueled by the acquisition of UBC. In addition, under the specialty segment, Accredo's performance remains strong primarily due to significant addition of new clients and organic growth across the business.

The company has a strong balance sheet that augurs well for further acquisitions. Medco also has adopted several strategies in the recent past to increase its footprint in the European market, which holds immense potential. Moreover, increased opportunity lies in the form of introduction of generics over the next few years.

We are currently Neutral on Medco which also corresponds to the Zacks #3 Rank (Hold) in the short-term.

 
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