Recently, we reiterated our Neutral recommendation on
) with a target price of $74.00.
During the fourth quarter of fiscal 2011, Medco reported
adjusted EPS of $1.25, beating the Zacks Consensus Estimate of
$1.17 and 26.3% higher than the year-ago level. Increased sales
combined with 8.3% reduction in number of shares outstanding
contributed to the bottom-line improvement during the quarter.
Additionally, the introduction of generic Lipitor contributed
$0.03 to the fourth quarter EPS. For the full year, adjusted EPS
came in at $4.17, surpassing the Zacks Consensus Estimate of $4.10
and was up 17.5% year over year.
In fiscal 2011, Medco's top ten clients (based on revenues)
contributed approximately 46% to net revenues. Besides, the largest
client, UnitedHealth accounted for 17% of net revenues.
However, in July 2011, Medco failed to renew its pharmacy
benefit management (
) contract with UnitedHealth despite arduous negotiations. The
existing agreement is set to expire in December 2012.
The company also witnessed several other contract losses that
include the Federal Employee Program (
) contract in May 2011, the Medicare Part D business of Universal
American as well as the biggest US public pension fund California
Public Employees' Retirement System (CalPERS), all to
In August 2011, Medco also lost its PBM contract with Blue Cross
and Blue Shield. Despite undertaking various efforts, Medco was not
able to successfully overcome these hindrances.
In October, Medco again lost its pan-European joint venture with
Germany-based Celesio AG and Dublin-based United Drug. We consider
this to be a big setback for Medco in achieving its goal of gaining
traction in the European market.
Amidst several contract losses, in July 2011, Medco announced
that it would be acquired by
) for $29.1 billion in cash and stock. As per the terms of the
agreement, each shareholder of Medco will receive $28.80 in cash
and 0.81 shares of Express Scripts, representing a total value of
$71.36 per Medco share.
With the completion of the deal, Express Scripts Holding Company
will be formed wherein 59% of the holding would lie with the
shareholders of Express Scripts. On December 21, 2011, Medco
shareholders voted in favor of this merger.
Medco's proposed takeover by Express Scripts is the biggest in
the health care industry. Although we expect the combined entity to
pose a major challenge to its peers by becoming the largest PBM
provider, we remain concerned about the uncertainty related to the
successful completion of the deal based on the potential anti-trust
challenges from the Federal Trade Commission (
Recently, FTC issued a 'second request' to both Medco and
Express Scripts seeking additional information, also supported by
the American Antitrust Institute (AAI). FTC along with AAI is of
the view that the merger may create market concentration in the
entire economy, leading to an anti-competitive landscape.
In March 2012, both the companies extended their merger closing
date to early second quarter of 2012 from the original timeline of
March 12, 2012. Although Medco strongly anticipates successful
closing of the deal, the company will suffer a major blow if the
situation turns around.
However, during the quarter, Medco witnessed higher service
revenue growth fueled by United BioSource acquisition. In addition,
under the Specialty segment, Accredo's performance remains strong
primarily attributable to significant client additions and organic
growth across the business.
EXPRESS SCRIPTS (
): Free Stock Analysis Report
MEDCO HLTH SOL (
): Free Stock Analysis Report
To read this article on Zacks.com click here.