Earnings Preview: Medco Health Solutions

NEW YORK - Medco Health Solutions Inc., the largest U.S. pharmacy benefits manager, is scheduled to report its third-quarter results Tuesday morning. The following is a summary of key developments and analyst commentary for the period.

OVERVIEW: Medco, of Franklin Lakes, N.J., makes money by designing benefits packages for plan sponsors and members. Profits have improved despite the recession because companies are looking for ways to cut their health care costs. Demand for low-cost generic drugs and mail order prescriptions, which are strongly profitable for Medco, has increased.

Strong sales of pricey specialty drugs has also helped Medco in recent quarters. The recession has affected demand for brand-name drugs, but pharmaceutical companies have gotten more aggressive in raising their prices of late, because many top-selling drugs will lose patent protection starting in 2011.

A year ago, the company earned 58 cents per share on revenue of $12.56 billion.

BY THE NUMBERS: Analysts polled by Thomson Reuters expect a profit of 72 cents per share and $14.68 billion in revenue.

ANALYST TAKE: Deutsche Bank analyst Ross Muken said he expects continued growth in generic sales, mail order prescription filling and specialty drug revenue.

"Medco remains the best organic growth story in the space," he wrote in a note to clients.

WHAT'S AHEAD: Three months ago, Medco raised its profit forecast to a range of $2.76 to $2.81 per share. Analysts currently expect $2.80 per share, on average.

The company said it will provide guidance for 2010, and analysts will be evaluating Medco's success at winning over new clients.

"The PBMs had a spectacular fiscal 2009 selling season, particularly for Medco, which had its best year for new business wins," Muken wrote. "This trend has continued into 2010, as more clients become convinced about the PBM value proposition." The analyst added that he does not think Medco or rival Express Scripts are facing too much pressure to cut prices.

STOCK PERFORMANCE: Medco shares jumped 21 percent during the third quarter, closing at $55.31. The stock set an annual high of $58.16 on Oct. 23 and closed at $56.12 Friday.

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