California Public Employees’ Retirement System’s (CalPERS) decision to cease all discussions on the renewal of pharmacy benefit management (PBM) contract comes as a setback for Medco Health Solutions (MHS). However, Medco does not expect this non-renewal to any way impact its results significantly. The company will continue to provide services under the present contract till December 2011.
This decision was taken in the backdrop of certain investigations regarding Medco. Earlier, this month, the CalPERS announced that it would heartily cooperate with the California Attorney General’s Office and US Securities and Exchange Commission (SEC) for their investigations.
This investigation comes on the back of an allegation that Medco had paid former CalPERS board member, Al Villalobos more than $4 million as consultancy fees for this business. Investigations are also being carried out on alleged improper conduct by former CalPERS CEO Fred Buenrostro and some former Board Members.
While non-renewal of the CalPERS contract is a setback for Medco, uncertainty remains about renewal of its contracts with its largest client, UnitedHealth (UNH), which accounted for 17% of net revenues in fiscal 2010. Under the current agreement with UnitedHealth, Medco provides PBM services till December 2012. The company expects to begin discussions regarding the renewal in summer and does not expect any decision prior to fall.
Although Medco is confident about the renewal, the company will suffer a major blow if the situation turns around. Medco is currently into discussions regarding the renewal of Federal Employee Program (FEP), with a decision expected soon.
Moreover, with the decision of CVS Caremark (CVS) to acquire the Medicare Part D business of Universal American (UAM), the latter’s contract with Medco was terminated (from 2012). Although the termination of the business will not have any material impact on Medco’s financial results as the business is one of low-margin, investors will pay greater attention on any update regarding the renewal of UnitedHealth contract.
We are currently ‘Neutral’ on Medco which also corresponds to a Zacks #3 Rank (short term).
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