Medco Beats Marginally – Analyst Blog

Medco Health Solutions (MHS) reported fourth quarter earnings of 76 cents per share, surpassing both the Zacks Consensus Estimate of 75 cents and the year-ago period results of 59 cents. For full year 2009, the company’s earnings came in at $2.83, up 21.5% compared to $2.33 in 2008.

 

Medco, the largest pharmacy benefit manager (PBM) recorded an increase of 17.6% in revenues which came in at $15.2 billion primarily driven by contributions from significant new client wins as well as price inflation on brand-name drugs, partially offset by higher volumes of lower-priced generic drugs. For 2009, net revenues increased 16.7% to a record $59.8 billion.

 

Revenues from Medco’s specialty pharmacy segment, Accredo Health Group, increased 17.7% to $2.5 billion primarily due to a significant addition of new clients and organic growth.

 

During the reported quarter, the past trend of a rising acceptance of generic drugs (with higher margins for PBMs compared to branded drugs) has been maintained. The generic dispensing rate increased 3.4% year-over-year to 68.3%. In addition, both the mail-order and retail generic dispensing rates increased 240 basis points to 58.3% and 300 basis points to 70%, respectively.

 

Medco records more than 50% of revenues from retail products. For the reported quarter, out of $15.02 billion of net product revenues, retail products accounted for $9.30 billion with mail-order products accounting for the rest. Both retail and mail order products recorded an increase of 31.3% and 0.6%, respectively, compared to the same period last year.

 

Total prescription volume (227.4 million) recorded a 14.8% growth compared to the fourth quarter of 2008. While mail-order volume dropped 2.6% to 26 million, retail prescription volume increased 26.9% to 150.1 million. Increased retail volume from new clients’ sales has brought down the gross margin to 6.7% from 7.5% in the comparable period in 2008.

 

At the end of 2009, Medco had $2.5 billion of cash balance after paying about $580 million of short term debt. Cash flow from operating activities increased considerably during the period – $3.5 billion compared to $1.6 million at the end of 2008. With a strong cash balance, the company repurchased 3.7 million shares during the quarter for $231 million.

 

Medco also reiterated its outlook for 2010. The company expects earnings per share in the range of $3.28−$3.38, an increase of 16−19% compared to 2009. We have a “Neutral” recommendation on the stock.