Medco Health Solutions (NYSE: MHS) is one of the nation's biggest pharmacy benefit managers (PBMs). Medco provides services through a network of retail pharmacies and its own mail-order pharmacy. Pharmacy benefit managers like Medco generate profits by consolidating buyers to obtain discounts with pharmaceutical manufacturers, distributors, and retail pharmacies, and work with clients to design customized pharmacy benefit plans. By acquiring Accredo in 2005, Medco became one of the largest providers of specialty pharmacy services in the United States as well.
Medco provides clinically-driven pharmacy services designed to improve the quality of care and lower total healthcare costs for private and public employers, health plans, labor unions and government agencies of all sizes, and for individuals served by Medicare Part D Prescription Drug Plans. During the fiscal year ended December 26, 2009, the Company administered 695 million prescriptions.
Medco is one of the national Prescription Drug Plans (PDP) named by the Centers for Medicare and Medicaid Services to administer prescription drug plan benefits for the Medicare-eligible population at large.
Medco's revenue comes primarily from contracting with clients to provide prescription drugs to their members through mail order and Medco's retail network. The PBM client will pay for the drugs dispensed to their members at a discount to average wholesale price plus a dispensing fee. Some clients may also pay center administrative fees attached to services. Increasing these fees is part of the way Medco has been able to increase its rebates to customers.
Second Quarter 2010 Results
During the second quarter of 2010, Medco reported GAAP diluted earnings per share (EPS) increased 20.3 percent to a record $0.77 from $0.64. Diluted EPS, excluding $0.06 in amortization of intangible assets from the 2003 spin-off, increased 20.3 percent to a record $0.83 from $0.69 in the second quarter of 2009. Total net revenues increased 9.9 percent to a record $16.4 billion. Specialty pharmacy revenues increased 18.1 percent to a record $2.8 billion. Mail-order prescriptions increased 6.2 percent to a record 27.5 million. Generic dispensing rate increased 3.3 percentage points to a record 70.6 percent
Antibiotics should only be taken on triscrippeon. What antibiotic do you need? There are hundreds to chose from and only a few of them will work on any given problem. You could be taking antibiotics for ever that have no effect!Far worse if you do not take a complete course at the right dose you can foster immunity to the antibiotic.In vietnam prostitutes took small doses of antibiotic thinking it would stop them getting VD. It did not. They still got VD but it became tolerant of the antibiotic. GIs got VD from them and doctors prescribed the antibiotic which then instead of killing it actually helped it to flourish. A number of strains of VD were thereby created that actually flourished on antibiotics and for a long time were almost incureable.
In January 2010, the Company completed the acquisition of DNA Direct Inc. In April 2008, Medco acquired a majority interest in Europa Apotheek Venlo B.V. (Europa Apotheek), which provides mail-order pharmacy services in Germany. In 2009, Medco formed a joint venture with United Drug plc, a pan-European healthcare provider, to provide home-based pharmacy care services in the United Kingdom for patients covered by the country’s National Health Service.
An estimated $69 billion's worth of branded drug sales will lose patent expiration over the next five years. This is in addition to the nearly $13.6 billion in branded drugs that lost patent protection in 2006, including Zocor (Merck (MRK)), Zoloft (Pfizer (PFE)) and Pravachol (Bristol-Myers Squibb Company (BMY)). Generic drug utilization is an important part of Medco's business because generic versions of medications have a cheaper base price to begin with; Medco also has more bargaining power with the drug manufacturers.
However, as much as Medco stands to profit from generic drug utilization, CVS/Caremark and other retail pharmacies are likely to see an even greater benefit, since they buy generic drugs directly from the manufacturers.
The Biotech/pharmaceutical industry is one of the fastest growing segments of the PBMs' potential business. These new drugs are more specialized to a patient's needs, but are also more expensive to make and administer because they require a specialist. By acquiring Accredo Health in 2005, Medco significantly expanded the offerings that were at the time wrapped up in the rest of its operations. Now, Accredo Health Group, as part of Medco, is responsible for processing specialty drug orders and dispensing them along with necessary supplies for administering the drugs to patients or the patients' physician.
With the largest specialty pharmacy segment by revenue versus other pharmacy benefits managers, Over the coming years, Medco stands to profit as higher-margin and difficult-to administer specialty drugs become increasingly popular versus traditional drugs.
When Wal-Mart Stores (WMT) announced its $4 prescription plan, there was worry about how this new competitor would affect the other companies in the prescription market, including pharmacy benefits managers. However, the long-term effect will probably be less than expected for a few reasons. First, most of Walmart's prescriptions come from drugs that have long been found in generic form, such as amoxicillin. Drugs that recently lost patent protection and those to do so soon are not included. Second, Walmart doesn't have a specialty pharmacy segment. Finally, because the $4 mostly helps the uninsured, Pharmacy benefits managers are further protected: the plan doesn't decrease the cost of drugs to the insurer or plan provider.
However, Walmart's move does raise an important question for Medco about the role and viability of remaining a stand-alone PBM. Especially in consideration of the CVS/Caremark merger, Medco's strength and market position as strictly a PBM seems threatened by companies which are both PBMs and drug retailers. Still, being a standalone has not hurt Medco's business--in fact, in the case of the Caremark merger, it may lead to a few more contracts as CVS' retail competition looks for an outlet.
In an already super-competitive market, pharmacy benefits management companies like Medco Health Solutions are subject to additional pressure on two fronts. First, clients are demanding greater transparency from companies about business models and costs of drugs, as well as more rebates. Some of the mistrust comes from the assumption that if PBMs don't show clients information, then they must be short-changing them. Thus far, MedcoHealth has done a sufficient job of making disclosures without hurting their business model by offering plans that are more transparent and by passing more rebates to the client in exchange for higher administrative fees.
On a second front, several states have recently attempted to pass legislature to put further constraints on PBM practices. (Thus far, it has only passed in Maine and Washington D.C., but this is small consolation. In the future, the government, employers, and health plans are likely to continue pushing for better benefits and lower costs from PBMs.)
In the next few years, Medco stands to profit from several trends in the health care and prescription drug markets, especially as a result of the aging population in the U.S.
According to the Kaiser Family Foundation, there is a direct correlation between prescription drug utilization and spending, age, and the prevalence of chronic and other serious health problems. It is estimated that on average, older individuals tend to use three times more prescription drugs than do younger individuals. Thus, the high level of chronic illness among America's aging baby boomers should drive further expansion for mail-order dispensing and specialty pharmaceuticals, which should boost margins.
Medicare-eligible patients usually use more prescription drugs than non-Medicare populations do, and since the U.S. Census Bureau is forecasting that the U.S. population over the age of 65 is expected to increase approximately 3% per year for the next thirty years, prescription drug utilization is likely to increase. Medco is in a good position to capitalize on this, as it is one of the few companies contracted to offer plans for Medicare patients.
Health Care inflation, particularly as it relates to prescription drugs, continues to be a concern for payers, providers, and patients. The Centers for Medicare and Medicaid Services projects that prescription drugs costs will increase about 8.2% per year for the next eight years. Because PBMs have a history of reducing prescription drug costs by up to 25%, plan sponsors will likely continue to turn to PBM services designed to lessen drug expenses and improve patient outcomes.
Although Medco is one of a small number of PBMs that are publicly traded, there exist a large number of PBMs. In addition to several independent PBMs like Medco, a sizeable number of PBMs are owned by other types of businesses, including managed care organizations like WellPoint, Coventry Health Care (CVH), and UnitedHealth Group (UNH). Drug retailers like CVS are also in the PBM business, which already had a fairly sizable PBM prior to joining with Caremark.
Soon after CVS revealed its intention to bid for Caremark, Express Scripts also made a bid for it. Medco elected to watch the bids play out, as it stood to profit either way. Since CVS has become the apparent victor, its retail pharmacy competitors have agreed to give Medco better pricing in return for better volume from their customers. (This stems from non-CVS retail chains’ fears that the combination of CVS and Caremark would tilt the retail scales in favor of CVS stores.) Medco CEO Snow also said Medco believes they can take advantage of disruptions related to merger integration to pick up some incremental business.