Soft Guidance Hammers Medco

To be sure, Prudential analyst David Shove saw plenty to like about Express Scripts' latest performance. By filling prescriptions at fewer sites, he noted, the company had managed to save a lot of money on processing fees and related costs during the third period. The company also enjoyed big savings on generic drugs, he added, which could prove to be a positive sign for the industry as a whole.

"According to Express Scripts, generic pricing competition appears to be heating up," wrote Shove, who has a neutral rating on the company's stock. This development "is welcome news and hints at further cost trend moderation in 2006. Considering the new drug patent expirations on the horizon, the drug cost savings could be quite dramatic."

Going forward, Shove sees Express Scripts capitalizing on growing opportunities in the Medicare and specialty pharmacy businesses as well.

If anything, however, Shove feels that Medco is better positioned than most. The company won approval this fall to offer drug coverage in all 34 regions established under the new Medicare Part D program.

Gregg Haddad of First Analysis recently suggested during an interview with the Wall Street Transcript that PBMs in general should enjoy significant Medicare-related growth. Haddad expects some of those benefits to start showing up in PBM results next year, with a material boost coming the year after that.

Moreover, he indicated, that expansion will come at a particularly opportune time for the industry.

"The Medicare population essentially is the only insured population left that is not covered today by a pharmaceutical benefit management function," he explained to the Wall Street Transcript. "This is, from our perspective, the most significant remaining population for the PBMs and managed care companies to serve. The Medicare Modernization Act created a new opportunity, and we think that those companies will pursue it strongly and benefit from it."