Medco Remains at Neutral - Analyst Blog
November 11 2011 - 12:34PM
Zacks
Recently, we reiterated our Neutral recommendation on
Medco Health (MHS) with a target price of
$56.00.
During the third quarter of fiscal 2011, Medco reported adjusted
EPS of $1.07, beating the Zacks Consensus Estimate by 2 cents and
12.6% higher than the year-ago quarter level.
Revenues increased 4.1% year over year to $17.0 billion in the
quarter, in line with the Zacks Consensus Estimate. The increase in
revenue was primarily driven by contributions from significant
client wins coupled with higher prices charged for branded drugs,
partially offset by higher volumes of lower-priced generic
drugs.
In fiscal 2010, Medco’s top ten clients (based on revenues)
contributed approximately 47% to net revenues. Its largest client,
UnitedHealth (UNH) accounted for 17% of net
revenues. However, in July 2011, Medco failed to renew its PBM
contract with UnitedHealth despite arduous negotiations. The
existing agreement is set to expire in December 2012.
The company also witnessed several other contract losses that
include the Federal Employee Program (FEP) contract in May 2011,
the Medicare Part D business of Universal American as well as the
biggest US public pension fund California Public Employees’
Retirement System (CalPERS), all to CVS Caremark
(CVS).
In August this year, Medco also lost its PBM contract with Blue
Cross and Blue Shield. Despite undertaking various efforts, Medco
was not able to successfully overcome these hindrances.
In July 2011, Medco announced that it would be acquired by
Express Scripts (ESRX) for $29.1 billion in cash
and stock. With the completion of the deal, Express Scripts Holding
Company will be formed wherein 59% of the stake would lie with the
shareholders of Express Scripts.
Although we expect the combined entity to pose a major
challenge to its peersby becoming the largest PBM provider, we
remain concerned about the uncertainty regarding the successful
completion of the deal based on the potential anti-trust challenges
from the Federal Trade Commission (FTC). Recently, FTC requested
both Medco and Express Script to submit additional information
regarding the pending acquisition deal. Although Medco expects to
close the deal by the first half of 2012, the company will suffer a
major blow if the situation turns around.
However, during the quarter, Medco witnessed higher service
revenue growth fueled by United BioSource acquisition. In addition,
under the specialty segment, Accredo's performance remains strong
primarily due to significant client additions and organic growth
across the business.
CVS CAREMARK CP (CVS): Free Stock Analysis Report
EXPRESS SCRIPTS (ESRX): Free Stock Analysis Report
MEDCO HLTH SOL (MHS): Free Stock Analysis Report
UNITEDHEALTH GP (UNH): Free Stock Analysis Report
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