This 2003 pharmacy benefit manager spinoff from Merck has done quite well for itself and its investors over the past 5 years. Pharmacy benefits managers like Medco basically make their money by negotiating discounts with drug makers for customers. Despite the success of the recent years, there are many problems with their middleman business model, including potential conflicts of interest resulting in breaches of fiduciary duty lawsuits, large clients’ desire to eliminate middleman and most threateningly to earnings, Government’s propensity to regulate businesses that fall within current public policy interests. Medco shares are now trading at a very rich multiple discounting potential problems, which are capable of halving this stock’s valuation.
P.S. I have recently received a response from Lowell Weiner, Medco's VP of Corporate Communications regarding my view of the company. In it, Weiner describes why Medco is so much more than a PBM.
[1]- ↑ Full text of L. Weiner's letter on StockValues.Org
