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Medco Gives Ground

Shares decline after a huge run.



looks like a company on growth hormones.

The giant pharmacy benefit manager blew past first-quarter estimates on Tuesday and once again raised its guidance for the full year. Record sales of generic drugs and rising mail-order activity, both of which boost profit margins, fueled the growth.

Medco's first-quarter net income jumped more than sixfold to $275 million, due in part to the absence of a year-ago charge. But even excluding special items, the company's operating profits more than doubled to $1.03 a share -- toppling the 73-cent analysts' consensus estimate. Revenue of $11.2 billion, up 5.6% from a year ago, came in slightly ahead of analyst targets as well.

Due to that strong performance, Medco has now raised its outlook for the entire year. The company expects to post full-year operating profits of $3.40 to $3.45 a share, with even the low end of that range now ahead of Wall Street estimates.

"Medco's record first quarter continues a consistent record of progressively stronger financial performance across every area of business," the company stated on Tuesday. "As a result of the strong performance, we are again raising our guidance for the year."

Still, after the stock surged last week following a similar performance by rival

Express Scripts


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, investors took profits Tuesday. Shares fell $1.59 to $76.43.

For its part, Medco explained that several "moderating factors" -- including lower margins on recent account renewals -- would temper results going forward.

Meanwhile, however, Medco set a number of records in the first quarter. The company's generic dispensing rate hit 58.2%, up 4.5% from a year ago, while mail-order volumes continued to rise as well. The company saw its profit per prescription hit new highs as a result.

Every major business line -- from the traditional PBM unit to the specialty pharmacy to the growing Medicare program -- contributed to that strength.

High Bar

Leerink Swann analyst Ann Hynes assumed that Medco would handily beat Wall Street expectations for the first quarter. She called earnings visibility high, with Medco raising its outlook substantially last quarter, and looked for profits to top the consensus estimate by a nickel.

Indeed, Hynes projected significant improvements in all key metrics for the company. She figured that Medco would post sizable growth, totaling more than 20%, in pretax profits on both an absolute and a per-claim basis. Moreover, she predicted that the 2007 selling season was going well, with the company already renewing more than 82% of expiring business and scoring $1.3 billion worth of new contracts to boot.

Medco has since landed another $240 million worth of new contracts, while retaining 96.4% of its existing accounts as it nears completion of the busy selling season.

Hynes pointed to Medco's transparent offerings -- increasingly popular with sophisticated clients -- as an important competitive advantage for the company. Ultimately, she said that Medco should enjoy strong earnings growth for several years to come.

"Higher generic utilization, lower drug cost and growth in mail and specialty distribution are the main drivers of profitability growth," Hynes explained on Monday. "Medco is a solid long-term investment opportunity. ... However, we prefer to remain on the sidelines at this time due to valuation."

Hynes has a market-perform rating on Medco's stock. A division of her firm provides consulting services to health-related companies.