Medco Health Solutions (MHS) reported second quarter earnings of 69 cents which is 23.2% higher from the year-ago period and exceeds Zacks Consensus Estimate by 4 cents. MHS, the largest pharmacy benefit manager (PBM) recorded an increase of 16.9% revenue to $14 billion from $12.77 billion in the second quarter last year.

The primary reasons for the growth were new client addition and higher prices of branded drugs, partially offset by (lower by $620 million) higher volume of generic drugs (low priced) and higher client price discount. At the end of the second quarter, MHS had $2.1 billion of cash balance, which the company expects to touch $3 billion by the end of this year.
MHS records more than 50% revenue from retail products. For the second quarter, out of $14.73 billion of net product revenue, $9.1 billion comes from retail products, and the remaining contribution from mail-order products.

These segments recorded an increase of 27.6% and 2.7%, respectively, compared to the same period last year. Increased retail sales brought down the gross margin to 6.8% from 7.3% in the comparable period while more-profitable mail-order volume dropped by 1.5%.

Revenues from MHS’ specialty pharmacy segment, Accredo Health Group, increased 20.3% to $2.38 billion primarily due to significant addition of new clients and organic growth of the segment.

Based on the robust performance of all the segments, MHS has raised the 2009 earnings guidance. The company revised its earnings guidance to $2.76 – $2.81 (earlier $2.67-$2.77), an increase of 18-21% compared to the year ago period. The strong growth and the positive outlook is more significant in the current scenario where rising unemployment has left many people out of the insurance bracket forcing some PBM’s to lower their outlook.

In another major development, MHS won the business for managing pharmacy benefits for Chrysler’s union retirees from its rival CVS Caremark Corp (CVS). Though MHS is the leading player in the PBM segment, it will face tough challenges once Express Scripts (ESRX) completes its $4.68 billion acquisition of health insurer WellPoint Inc. (WLP), making the combined entity another major player.
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