From: Reuters
Published April 29, 2008 11:08 AM

Medco profit beats, but shares fall on outlook

By Lewis Krauskopf

NEW YORK (Reuters) - Pharmacy benefit manager Medco Health Solutions Inc <MHS.N> on Tuesday reported higher-than-expected earnings, helped by the use of generic drugs and medicines delivered by mail, but failed to raise its full-year profit outlook, sending shares down 7 percent.

In sending the shares lower, investors shook off claims by some analysts that Medco was likely being conservative in its outlook.

"People were a little disappointed that the company didn't raise their guidance," Jefferies & Co analyst Arthur Henderson said.

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Shares of rival Express Scripts Inc <ESRX.O>, which was set to report earnings later on Tuesday, fell 3 percent on Medco's report.

After a strong run in 2007, Medco shares had outperformed the broader markets in 2008 before Tuesday and had climbed some 16 percent in April.

Henderson, who rates Medco stock a "buy," said a new debt offering that is driving up Medco's interest expense for 2008 was creating an earnings drag.

"The fact that they reaffirmed their guidance given that change is a very positive news event," Henderson said. "It means their core business is stronger. We saw that in the numbers."

First-quarter net income fell to $270.2 million, or 50 cents per share, from $274.8 million, or 47 cents per share, a year earlier, when Medco benefited from the short-term availability of a generic version of the Plavix blood-clot treatment.

Excluding amortization costs and an a non-recurring write-off, earnings of 56 cents were 3 cents ahead of the average estimate of analysts, according to Reuters Estimates.

Pharmacy benefit managers, which administer prescription drug benefits for employers and health plans and operate large mail-order pharmacies, have profited from low-cost generic versions of popular drugs.

Medco derives more than half its profit through delivering generics by mail. Like other PBMs, it can leverage low prices from generic manufacturers and capture more profit by dispensing the drugs itself.

The Franklin Lakes, New Jersey-based company's first-quarter revenue rose 16 percent to nearly $13 billion. Price inflation on brand-name drugs, gains from new clients and sales of diabetic supplies tied to its PolyMedica acquisition helped revenue.

Medco's adjusted volume of prescriptions handled rose 9 percent to 206.7 million. Mail-order prescription volume increased nearly 14 percent to a record 26.6 million.

The company said a record 63.3 percent of prescriptions handled were for generic drugs, up from 58.2 percent a year earlier.

Medco said it still expected 2008 earnings of $2.27 to $2.31 per share, excluding items, up as much as 27 percent over 2007.

"Based on the trends in mail and generic utilization, we believe the guidance remains conservative," JP Morgan analyst Lisa Gill said in a research note.

Medco shares fell $3.61 to $47.70 in morning trade on the New York Stock Exchange. They are now down about 5 percent for the year.

Express Scripts shares fell $2.54, or 3.5 percent, to $71.02 in morning Nasdaq trade, where they are off nearly 3 percent for 2008.

(Reporting by Lewis Krauskopf; Editing by Lisa Von Ahn)

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