Generics Boost Medco

Margins get a lift but revenue is hit.
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Medco

(MHS)

beat third-quarter earnings targets but missed on revenue, as rising generic sales took a chunk out of the top line.

The Franklin Lakes, N.J., mail-order pharmacy also boosted guidance for 2006 and 2007 and said it would buy back $1 billion in stock.

Medco made $186 million, or 62 cents a share, for the quarter ended Sept. 30, up from the year-ago $157 million, or 54 cents a share.

Excluding amortization of intangibles tied to the company's public offering, Medco made 71 cents a share, 2 cents ahead of the Thomson Financial target.

Revenue rose 12% from a year ago to $10.46 billion, shy of the $10.66 billion Thomson consensus estimate.

Higher generic dispensing rates, which benefit clients and members and contributed to higher gross margins, resulted in a reduction of approximately $530 million in net revenues in the third quarter of 2006 compared to the third quarter of 2005.

Higher generic mail dispensing rates for the quarter are attributable primarily to the availability of generic alternatives for such chronic medications as Zocor and Zoloft, two products included in the nearly $45 billion in brand-name drug patent expirations expected to occur beginning in 2006 through 2010, Medco said.

"Medco's strong financial performance for the quarter clearly demonstrates that our business strategies are producing the desired results," said CEO David B. Snow Jr.

"Furthermore, as is evident from our 2007 earnings guidance, we plan to build on this success, driven by contributions from all of our key drivers -- the most important being growth in generics followed by growth in mail-order, specialty, Medicare Part D and net-new business.

"To date, Medco has won more than $1.2 billion in new-named business for 2007 on top of $3.7 billion in 2006," Snow continued.

The news comes as one of Medco's rivals in the pharmacy benefit business,

Caremark

(CMX)

, plans a big merger with drug-store chain

CVS

(CVS) - Get Report

.

Medco said it expects to make $2.69 to $2.72 for the year, compared with the $2.68 Wall Street analyst estimate, and $3.12 to $3.19 for 2007, compared with $3.13.

Medco repurchased 1.225 million shares at a cost of $71.8 million in the third quarter as part of a standing $1.5 billion stock repurchase program.

Today's $1 billion plan adds to that authority.