Medco Health 1Q profit, sales top Wall Street estimates
TRENTON, N.J.—Medco Health Solutions Inc. reported a slight drop in its first-quarter profit, as start-up costs for attracting new clients to the prescription drug benefits manager offset a jump in sales of high-profit generic and mail order drugs.
Net income slipped 1.7 percent to $270.2 million, or 50 cents per share, from $274.8 million, or 47 cents per share, a year ago, when a generic version of blood thinner Plavix -- the No. 2-selling drug in the world last year -- was briefly on the market.
Excluding amortization costs, for the gradual write-down of the value of contracts Medco got when it was spun off by former parent Merck & Co. in 2003, earnings per share totaled 55 cents in the latest period, up from 52 cents last year.
Revenue grew 16 percent to $12.96 billion from $11.16 billion, as price inflation on brand-name drugs and higher volumes associated with new clients offset higher generic dispensing rates. Generic drug sales contribute less to overall revenue but boost profit margins.
Analysts surveyed by Thomson Financial expected profit before one-time items of 53 cents per share on revenue of $12.26 billion.
Medco shares fell $2.19, or 4.3 percent, to $49.12 Tuesday.
"This was a great quarter for Medco, regardless of what the stock does," Chief Executive David B. Snow Jr. said in an interview.
Snow speculated investors were disappointed that after raising its 2008 adjusted profit forecast by 5 percent a quarter ago, this time Medco stuck to that forecast -- between $2.27 and $2.31 per share -- rather than boosting it again. Analysts were expecting $2.30 on average.
That "perceived loss of momentum" should be viewed as a temporary weakness at worst, Banc of America Securities analyst Robert Willoughby wrote in a research report that concluded, "All the news at (Medco) is good, in our view."
The Franklin Lakes, N.J.-based company said mail-order prescription volume increased 13.7 percent to 26.6 million, while retail prescription volume increased 6.4 percent to 127.2 million.
The high prescription volume "crushed our forecast, which bodes well for the remainder of the year, as new business start-up costs subside," Willoughby wrote.
Citigroup analyst Charles Boorady called the quarter's results solid, particularly the 30 percent jump, to $1.9 billion, in sales of specialty drugs -- very expensive medicines, sometimes made from living cells, taken for complex chronic conditions.
Sales of generic drugs jumped 5 percent to a record 63.3 percent of total sales, partly due to introduction of a generic version of popular osteoporosis drug Fosamax.
"As we enter a recession, patients are more sensitive to price and moving toward generics. That's great for us," Snow said in a call with analysts.
Snow noted that client retention rates were at a "historically high" 98 percent, and Medco has completed 95 percent of the $14.4 billion in contract renewals up this year.
Medco hired about 3,000 new employees at the end of last year to handle new business starting in 2008, which helped push up its operating costs by 16 percent, to $12.06 billion.
New projects in Sweden and Germany give Medco a start to its planned international expansion, Snow said.
He said much of Europe is well behind the United States in preventing patients' drug-to-drug interactions, presenting an opening for Medco's expertise and technology.
"They're now doing what happened here 20 years ago," he said.
------
AP Business Writer Jennifer Malloy in New York and Associated Press Writer Brad Haynes in Trenton contributed to this report.
------
On the Net:
Medco Health Solutions Inc.: http://www.medcohealth.com
