Pharmacy benefit manager Medco Health Solutions Inc posted a higher-than-expected quarterly profit, helped by a greater percentage of more profitable generic drugs dispensed even with no new important generics hitting the market during the period.
Medco also raised the low end of its projected 2011 profit range by 3 cents and played down the impact of the Calpers controversy in which it has been embroiled, and its shares rose more than 2 percent.
Last month, Medco received a subpoena from US securities regulators involving a probe into a former Calpers board member that Medco paid as a consultant to help secure a lucrative contract with the California Employees' Retirement System. The company, on a conference call with analysts and investors, said the Calpers issue has not been a significant business distraction. It said it had two significant client renewals and 2 fairly significant client wins since the Calpers controversy came to light. "I thought they did a very good job of indicating on the call that that issue is not an issue," said Jefferies & Co analyst Arthur Henderson. "They put some encouraging commentary around the Calpers noise."
Medco said it was providing information to US securities regulators and the California attorney general and was "working to put it behind us." First-quarter net income rose to $333.1 million, or 80 cents per share, from $320.5 million, or 67 cents per share, a year ago.
Excluding amortisation of intangibles, earnings were 91 cents per share, topping analysts' average estimate by 3 cents, according to Thomson Reuters I/B/E/S. The company expects sequential earnings growth in each quarter of 2011 and sees a 3 cents per share benefit in December just from the availability of generic Lipitor. Pfizer Inc's cholesterol fighter Lipitor, the world's biggest-selling prescription drug, is set to lose US patent protection in November.
2012 is expected to be a banner year for Medco and its rivals as several multibillion-drugs begin facing competition from cheap generics. Pharmacy benefit managers, or PBMs, administer drug benefits for employers and health plans. Generic drugs are highly profitable for PBMs, especially those delivered through their extensive mail-order pharmacies, as they carry a far higher profit margin than expensive branded medicines.
"While we expect Medco's results will be reassuring to investors, we believe much of the focus will remain on 2012 expectations," Sanford Bernstein analyst Helene Wolk said in a research note.
Revenue for the quarter increased 4 percent to $17.02 billion. Medco's rate of dispensing generic drugs rose to 73.1 percent in the quarter, up 3.4 percentage points from a year earlier. Its total prescription volume was 244.3 million, an increase of 2.1 percent, while generic mail-order prescription volume jumped 9.3 percent to a record 17.7 million. The company forecast full-year profit, excluding one-time items, of $4.02 to $4.12 per share, lifting the bottom of the range from $3.99 previously. Analysts are looking for $4.06.
"We are pleased with our number of early new-named client wins and renewals," Chief Executive David Snow said. "Our 2011 client retention rate remains at over 99 percent." Investors are also focused on an upcoming decision on which company will land the lucrative Federal Employee Plan contract, which could be decided in the second quarter.