Pharmacy benefit managers clearly have a more potent formula for making money than they do for staying out of trouble.

By now, all three major PBMs have managed to beat fourth-quarter earnings expectations and raise hopes for the current year.

Express Scripts

(ESRX)

delivered the latest pleasant surprise on Thursday, when it topped fourth-quarter profit estimates by a penny and predicted that it would beat first-quarter expectations by even more. The company's stock jumped 6.6% to $82.30 -- setting a new 52-week high -- on the positive update.

Still, these money-making PBMs carry with them the risk of serious side effects. Just this week, for example,

Medco

(MHS)

disclosed a new federal subpoena.

Caremark

(CMX)

could also face another probe of its own. And Express Scripts has regulatory headaches as well.

Last summer, Express Scripts came under fire by New York Attorney General Eliot Spitzer for allegedly bilking state customers in an effort to maximize profits. Spitzer is simply the most prominent of the 27 attorneys general investigating the company's business practices.

To be fair, Express Scripts denies any wrongdoing. In its latest regulatory filing, however, it also reminds investors that it can offer no reassurance that any legal losses will not be material.

Major Complications

Meanwhile, Caremark faces a similar multistate probe in addition to a whistleblower lawsuit seeking an estimated $100 million in damages. Moreover, as first reported by

TheStreet.com

last month, the federal government has shown some interest in pursuing reimbursement from Caremark for unpaid Medicaid claims. Because Medicaid spends so much money on prescription drugs, the stakes in that case could prove to be especially high.

Medco, which ranks as the nation's largest PBM, already faces a full-blown federal probe -- and a second could be gathering steam. In a regulatory filing this week, Medco disclosed that it recently fielded a subpoena from the Department of Health and Human Services Office of Inspector General. Medco said the OIG is seeking information related to a whistleblower complaint that was filed in September 2003 and remains under seal. The complaint, Medco said, accuses the company of defrauding Medicare and Medicaid by failing to pass along rebates owed to the government programs. Medco said the complaint also suggests that the company has engaged in illegal kickbacks.

For its part, Medco continues to stand by its business practices. But, like Express Scripts, it can offer no promise of safety to investors.

"The U.S. Attorney's Office has not indicated whether it intends to intervene in the matter," Medco stated of the second whistleblower suit. "Accordingly, the company is not in a position to evaluate the complaint or speculate on the timing of any related proceedings in the matter."

The same cannot be said about another whistleblower lawsuit, however. By now, federal prosecutors have spent years building a sweeping case against Medco that accuses the company of defrauding government customers by improperly switching, shorting and canceling their prescriptions. So far, relations between the two parties have been tense, and a settlement has yet to be forthcoming.

Thus, both sides continue to prepare for trial.

"The company continues to believe that its business practices comply in all material respects with applicable laws and regulations, and it will continue to vigorously defend itself," Medco states in its latest regulatory filing. But "the U.S. Attorney's Office seeks, among other things, to impose monetary damages and fines that could have a material adverse impact on the company's results of operations and financial conditions."

Some industry sources have estimated that penalties in this particular case could top $1 billion.

Strong Earnings

For now, however, earnings continue to power the stocks.

Shares of Caremark jumped 3.8% to $39.72 following Thursday's update from Express Scripts. Medco's shares climbed 1.8% to $46.25.

To be sure, Express Scripts offered plenty to celebrate. Fourth-quarter profits rocketed from 86 cents a share to $1.07 a share, allowing the company to beat expectations for the second quarter in a row. Net income surged 24% to $80.9 million, and revenue jumped 13% to $3.9 billion.

Looking ahead, Express Scripts promised even better things to come.

"While it is too early in the year to revisit full-year 2005 earnings guidance," the company said, "the first quarter is progressing well, and the company expects that diluted earnings per share for the first quarter of 2005 will not be below the $1.07 reported for the fourth quarter."

Analysts, on average, were expecting 3 cents less. But the company expressed increased confidence in the future, following its latest results.

It also attempted to distinguish itself from the rest of the PBM pack.

"Our business model is built around the alignment of interests with our clients and members in making the use of prescription drugs safer and more affordable," said Express Scripts CEO Barrett Toan. "This value proposition has differentiated us from the competition, solidified our position as an industry leader and provided for a consistent track record of growth."