Medco Probe Exposes Wall Street Split

Medco's (MHS Quote) immune system may not be as strong as some analysts think.

The giant pharmacy benefit manager, or PBM, has enjoyed two upgrades this month due to growing confidence in the company's health. Both Raymond James and Banc of America raised their ratings on the stock after seeing Medco win new business that will help offset the big federal contract it lost during an ongoing government probe of the company. But Banc of America went a step further by declaring that Medco has put its biggest regulatory headaches behind it.

"The company's highly publicized legal challenges have been dramatically reduced by high-profile settlements with a consortium of states attorneys general, as well as the non-monetary portion of the U.S. attorney's 'whistleblower' lawsuit," Banc of America analyst Robert Willoughby wrote when upgrading Medco to buy over the weekend. "With much of its regulatory difficulties resolved, our focus is on potential uses of more than $1 billion in cash reserves next year."

Medco listed just over $1 billion in cash on its most recent balance sheet. Willoughby believes the company may use some of that money to enhance shareholder value through stock buybacks and dividends.

But sources close to the Medco investigation suggest the company could soon need the cash for a government settlement that could reach as high as $1 billion or more instead.

Patrick Burns, a spokesman for Taxpayers Against Fraud, expressed little surprise at that figure. He, too, believes that Medco could end up spending far more than the $500 million mentioned as a maximum penalty by at least one analyst.

"I think $1 billion is certainly within the boundaries of what this case could, and probably should, settle for," he said.

Medco has denied any wrongdoing. But Jeff Simek, Medco's vice president of corporate communications, told TheStreet.com on Tuesday that the company "is always open to a negotiated settlement if it makes business sense." However, he added, the company has yet to be approached by the U.S. attorney's office with a potential deal.