Medco Ponies Up to States

The entire PBM sector is under fire for allegedly engaging in business practices that cost -- rather than saved -- customers money. But Wall Street has nevertheless embraced the highly profitable industry.

To be sure, the latest settlements will barely dent Medco's earnings. Granted, the special charges are expected to knock a nickel -- or 10% -- from Medco's first-quarter profits. But the company's full-year guidance remains intact.

Analysts saw plenty to celebrate.

"The $29.3 million monetary component is modest relative to Medco's projected cash flow," noted Banc of America analyst Robert Willoughby, who has a neutral rating on Medco's shares. And "as part of the settlements, Medco does not have to admit to any inappropriate business conduct, which should help lift not only Medco's stock but those of other PBMs as well."

But the sector failed to rally. Medco's largest peer, Caremark (CMX), actually slid 8 cents to $34.52 on Monday. And Medco itself spiked just briefly before settling in with a modest jump of 19 cents to $35.22.

Apparently, the federal lawsuit -- which some believe cost Medco its big government contract -- continues to weigh on the company.

"We view today's agreements very positively, as they remove part of the large legal overhang on the company," wrote J.P. Morgan analyst Lisa Gill, who also has a neutral rating on Medco's stock. "However, we believe the ultimate resolution of the [federal] investigation -- including all monetary aspects -- will prove a more significant catalyst for Medco shares."

>To order reprints of this article, click here: Reprints