UPDATE 4-Medco Health profit beats, but shares sink

* Q2 EPS ex-items 83 cents vs 79-cent Street view

* Sees FY EPS $3.34-$3.39 vs pvs range of $3.28-$3.38

* Worries about profit margins

* Sees lower boost to 2011 earnings from new generics

* Shares fall 6.4 percent; Express Scripts down 7.6 pct
(Adds shares of drug wholesalers)

By Lewis Krauskopf

NEW YORK, July 22 (BestGrowthStock) – Medco Health Solutions Inc
(MHS.N: ) posted a higher-than-expected second-quarter profit (Read more your timing to make a profit.) on
Thursday, but its shares fell more than 6 percent as analysts
questioned the strength of the results and also cited pressures
on profit margins.

Medco also projected it would gain less in 2011 than this
year from generic drug introductions, which are a crucial
profit driver for pharmacy benefit managers.

Although Medco offered a slightly more bullish full-year
profit forecast, it expected profit per prescription to rise in
the low single digits, compared with its prior projection of a
5 percent to 10 percent increase.

“They’re adding a lot of new business, but it just appears
to be lower margin business,” ThinkEquity analyst Glenn Garmont

He said comments by Medco executives during a conference
call failed to assuage investor concern over pricing pressures
in the industry, which also weighed on Medco earlier this

Medco Chief Financial Officer Rich Rubino said in an
interview the company’s gross profit margin in 2010 would be
stable with last year and some investors may be selling shares
to lock in profits.

“I think the Street was looking for a strong catalyst to
move the stock up,” Rubino said. “Instead they saw what’s
probably a pretty decent quarter. Maybe in some respects the
margins weren’t as strong as they like and, as a result, they
did what they had to do from a stock ownership perspective.

“I’m not terribly concerned about that over the long

The shares of rival Express Scripts Inc (ESRX.O: ) fell 7.6
percent after Medco’s report.

The shares of U.S. pharmaceutical wholesalers, which
benefit from generics, also slumped after Medco’s comments
projecting a weaker year for generics in 2011.
AmerisourceBergen Corp (ABC.N: ) was down 6.8 percent, McKesson
Corp (MCK.N: ) dropped 2.9 percent and Cardinal Health Inc
(CAH.N: ) declined 4.2 percent.

Pharmacy benefit managers, or PBMs, administer drug
benefits for employers and health plans and operate large
mail-order pharmacies. They are benefiting from a wave of brand
name medicines that will lose U.S. patent protection in the
next few years and the desire of clients to cut costs.

Medco’s quarterly net income rose to $356.9 million, or 77
cents per share, from $312.1 million, or 64 cents per share, a
year earlier.

Excluding items, earnings of 83 cents per share topped the
analysts’ average estimate by 4 cents, according to Thomson
Reuters I/B/E/S.

The results included a 3 cent benefit from a legal
settlement — taking the shine off the earnings beat for some

“While the results looked good on the surface, the quality
was not great given the benefit from the legal settlement and
nonoperating items,” JPMorgan analyst Lisa Gill said in a
research note.

Gill, however, said the sell-off of Medco shares was
unwarranted and that the company can still increase profit by
15 percent to 20 percent next year, despite it being a lighter
year for generics.

Revenue rose about 10 percent to $16.41 billion. Analysts
looked for $16.21 billion.

Medco has won more than $5 billion in new business this
year and reported $1 billion in new business for next year.
Some of its new business has high retail prescription volumes,
which pressure profit margins because they are less profitable
than prescriptions delivered by mail, Medco said.

Stifel Nicolaus analyst Steven Halper said Medco has
historically been able to convert such business to mail and
called the stock drop an overreaction.

“While it wasn’t the highest quality earnings result, the
near-term and long-term growth outlook for the company is still
pretty good,” Halper said. “This company is still going to grow
20 percent or so for the next couple of years.”

Medco’s prescription volume rose 6 percent to 238.4
million. Its rate of dispensing generic drugs, which have
higher profit margins for PBMs than more pricey brand name
drugs, rose 3.3 percentage points to a record 70.6 percent.

Revenues in Medco’s specialty pharmacy unit, which includes
infused drugs, grew 18.1 percent to a record $2.8 billion.

Medco’s EBITDA (earnings before interest, taxes,
depreciation and amortization) per prescription fell 0.3
percent in the quarter.

The trends in profitability per prescription show “they are
either adding low margin business, which isn’t a good thing, or
they’re giving away more than they expected on renewal pricing,
which isn’t a good thing,” ThinkEquity’s Garmont said.

Medco projected full-year earnings, excluding items, at
$3.34 to $3.39 per share, representing growth of 18 percent to
20 percent over 2009. That compared with its previous range of
$3.28 to $3.38. Analysts have been looking for $3.37.

Medco shares were down $3.39, or 6.4 percent, at $49.94 in
afternoon trading on the New York Stock Exchange.

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(Reporting by Lewis Krauskopf; editing by Lisa Von Ahn and
Andre Grenon)

UPDATE 4-Medco Health profit beats, but shares sink