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Medco Wins Back Big Government Contract; Shares Rise

Medco Health Solutions, the top U.S. prescription benefit manager, has wrested a prized federal contract to handle mail order prescriptions for more than 4 million people back from a top rival.

News of the reclaimed contract pushed Medco shares to an all-time high Thursday and surprised analysts. Several sharply raised their profit forecasts for the Franklin Lakes-based company and boosted their stock ratings.

Medco said late Wednesday that it will handle both the mail order service and specialty prescription drug programs of the government-wide Service Benefit Plan, also called the Federal Employee Program. Specialty drugs are expensive medications for complex, chronic conditions and often have to be given as injections or infusions by a nurse.

The contract is one of Medco's largest. It will bring $2 billion in annual revenues and cover about 11 million prescriptions a year, running from January 2008 to the end of 2010.

"This represents a considerable win for Medco and leverages its industry-leading mail-order scale," analyst Constantine Davides of Susquehanna Financial wrote in a research note.

The contract covers just over 4 million federal employees, retirees and dependents out of a total of about 4.7 million, said Medco spokeswoman Jennifer Luddy.

"We had it for 16 years, up to the end of 2004," she said, when the program chose to go with rival Caremark.

Caremark is now part of CVS Caremark, created by drugstore operator CVS's recent acquisition of the pharmacy benefits manager.

Woonsocket, R.I.-based CVS Caremark separately was awarded a $4 billion contract to administer retail prescriptions _ those bought at pharmacies _ for people in the program.

Some analysts noted that splitting the two contracts was unusual, but Caremark had administered the program's retail plan since 1993, Davides noted. He wrote that Wall Street had largely expected CVS Caremark to keep both parts of the contract.

J.P. Morgan Securities Inc. analyst Lisa Gill boosted her earnings-per-share forecast for Medco by 12 cents on the news, to $4.20, and raised her target for the share price to $88 within six months, from $80 by February 2008.

"This outlook could prove conservative," she wrote.

Analysts upgrading the stock included Michael J. Baker of Raymond James and Ricky Goldwasser of UBS, who increased his price target to $91 per share from $78.

Medcoshares were trading higher in afternoon trading, after briefly rising to a new high of $80.90. CVS Caremark shares rose 72 cents to $37.97 in afternoon trading.