MedcoHealth: Apple’s Appeal, Google’s Growth?
The health care industry has been shaking in its scrubs ever since President Obama decided on a sweeping overhaul. Wall Street, apparently just as scared, has responded by selling the sector’s stocks. But while everyone has been wondering how big a hit these companies would take, Cramer has said that one group among them could be spared – the cost cutters. That’s why he’s bullish on MedcoHealth Solutions.
This pharmacy benefit manager uses its bargaining power to get its customers lower drug prices and then pockets the difference. The big money is made when brand-name drugs go off patent. For every $100 million worth of branded drugs that go generic, Medco’s clients save $45 million and the company earns $9 million. That makes for some exciting prospects between 2008 and 2015, which should see $104.7 billion worth of drugs lose patent protection. The potential payout for Medco? $9.4 billion.
Medco also cuts costs with its Therapeutic Resource Centers, which keep doctors and patients in line with accepted treatment protocols, specifically for chronic and complex diseases. Considering that these diseases are responsible for 96% of drug spending and 75% of all health-care costs, billions of dollars are lost when those protocols are ignored. Thanks to Medco, some of that waste is being reduced.
From an investor’s standpoint, Medco has another thing going for it: growth. Cramer put it on par with Google and Apple. The company’s long-term growth rate is 18.5%, but the stock is trading at just 14 times 2010 earnings. That’s incredibly cheap, and it’s not a stretch to assume that money managers would pay 18.5 times those earnings – one times the growth rate – for MHS. Such a move would push this $46 stock to $56 for a nice $10 gain.
But will Medco truly survive Obama’s reforms? Cramer invited Medco Chairman and CEO David Snow onto Mad Money to find out. Watch the video for that answer, as well as Snow’s take on the root-cause problems is health care, besting Wal-Mart and a possible CVS Caremark breakup.
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