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Medco Health Beats Estimates With Help From Generic Drugs

Medco Health Solutions, one of the largest U.S. managers of drug benefits, said that profit rose 29%, as higher rates of mail-delivered generic drugs drove better profit margins, and it lifted its full-year earnings forecast.

Fourth-quarter net income rose to $228.8 million, or 77 cents a share, from $176.8 million, or 57 cents a share, a year earlier.

Excluding 9 cents per share in amortization of intangible assets, earnings were 86 cents per share. That figure includes a 2 cent-per-share tax benefit that Medco said was anticipated
in its previously provided earnings forecast.

Analysts on average had expected 79 cents, according to Thomson Financial.

Revenue rose 1.2% to $10.9 billion.

Pharmacy benefit managers administer drug benefits for employers and health insurers and also operate large mail-order pharmacies.

Medco processed 187.5 million prescriptions, on an adjusted basis, down 3.6% from a year before but up 3.8% when accounting for an extra week in the year-ago period.

Rates of dispensing generic drugs by mail rose to 47.4% of mail-order prescriptions, up 5.3 percentage points from a year earlier. The increase helped drive overall gross margin to 6.3% from 5.3% a year earlier.

More than half of Medco's profits are derived from delivering generic drugs by mail, according to the company.

Medco can leverage low prices from generic manufacturers and capture more of the overall profits by dispensing the drugs itself, while Medco clients also seek greater use of lower-cost generics to cut their overall drug bills.

Medco forecast 2007 earnings per share of $3.31 to $3.40, excluding items, up from its prior view of $3.12 to $3.19. The new projection represents a growth rate of about 19% to 22%. On the same basis, Medco earned $2.78 per share for all of 2006.

About two-thirds of the higher forecast stems from improved fundamental performance, with share repurchases driving the rest, Chief Executive Officer David Snow said.

The company also said its board authorized it to repurchase $3 billion more of its shares over the next two years, bringing the total amount of share repurchases authorized to $5.5 billion.