Medco's Woes Go Beyond Spitzer Probe

"That ham-fisted maneuver did not work," he says. "Instead, it telegraphed the fear the company has of Associate U.S. Attorney Jim Sheehan. It is a well-placed fear."

Even so, Burns portrayed a second court order as more "fascinating." The federal government won the right to depose former Medco employee Susan Elliott after pointing out that she had changed her testimony after discussions with company lawyers. Smith explained Medco's position on Tuesday.

"A review of the law shows that a privilege absolutely exists between a former employee and counsel for the company regarding communications pertaining to the employee's prior employment," she said.

Looking ahead, however, Burns believes that Elliott's new deposition could prove "quite revealing" and poses real concerns for the company.

But analysts remain unshaken. They said nothing about Medco's legal setbacks as they rushed instead to calm the market about Spitzer-related concerns.

Indeed, at least two analysts pointed to the Sheehan probe as a source of reassurance on Tuesday. They noted that Sheehan has already investigated the company extensively without ever raising price-rigging concerns like those now being voiced by Spitzer. As a result, they felt comfortable downplaying any potential new threat to the sector overall.

"PBMs have been the source of significant scrutiny over the years by a variety of sources," wrote Merrill Lynch analyst Thomas Gallucci. And "while such scrutiny has created share-price volatility in the past, the industry's business practices have not been materially impacted as a result of these examinations so far."

J.P. Morgan analyst Lisa Gill offered a similar view. Both analysts also portrayed Spitzer's probe of Express Scripts (ESRX Quote - Cramer on ESRX - Stock Picks), the PBM for New York state employees, as company-specific and apparently unrelated to the bid-rigging investigation.

Gallucci even recommends buying Express Scripts despite that probe. Barclays Capital analyst Koren Volk likes Medco.

Early this month, Volk published a "litigation update" about Medco's exposure. The analyst noted that Medco has already settled a number of state-level probes and calculates any federal penalty at no more than $500 million.

Still, Volk does blame Sheehan's investigation for the loss of Medco's lucrative contract with the federal government. And Burns expects further defeats going forward.

"Jim Sheehan has a habit of winning, and Medco has been playing a series of losing hands in court," Burns says. "It's worth mentioning that the biggest losing hand was played by Medco right at the start -- failing to settle" the case.

The company's stock, which peaked near $38 in May, rose 40 cents at midday Wednesday to $31.20.