Medco's Plavix Puzzle

A generic sales halt could shade profit targets.
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Last month's happy surprise in the pharmacy sector -- the launch of generic Plavix -- has turned into a question mark.

A federal judge this week blocked Apotex, a private company in Canada, from selling the generic bloodthinner just weeks after it hit the market. The generic could remain unavailable until at least January, when Apotex and

Bristol-Myers Squibb

(BMY) - Get Report

-- which, along with

Sanofi

(SNY) - Get Report

, makes name-brand Plavix -- are scheduled to face off in court in a big patent dispute.

PBMs like

Medco

(MHS)

and

Caremark

(CMX)

have a stake in that fight as well. They enjoy fatter margins on generic drugs than they do on branded versions. Moreover, Plavix -- widely prescribed and easily distributed by mail -- represents a huge generic opportunity that has already been baked into some companies' estimates.

Still, at least one loyal PBM bull sees no reason to worry just yet.

"The silver lining is that the judge did not order a recall of the drug," JP Morgan analyst Lisa Gill wrote on Friday. "While on the surface this is not good news for the PBMs, we anticipate that there is six months of the generic Plavix (Clopidogrel) product in the channel. Therefore, we do not expect any impact to our current calendar 2006 estimates."

Gill, in turn, recommended that investors buy PBM stocks on any weakness in the shares. Medco, the first company to bank on generic Plavix, fell 1.4% to $62.46 on Friday. Meanwhile, Caremark slipped 1.2% to $57.24.

Gill's firm has overweight ratings on both stocks and business relationships with both companies.

Last month, Medco

rattled the market by predicting the imminent launch of generic Plavix. Just days later,

Drug Benefit News

reported, it began shipping the drug, with rivals Caremark and

ExpressScripts

(ESRX)

quickly doing the same.

The impact has been huge. In the short time since its launch,

The Wall Street Journal

reported on Friday, generic Plavix has captured nearly 75% of the market for the drug.

Giant PBMs have capitalized on the situation in two ways. They are paying less for the generic drug, of course. But they have also fattened their margins by supplying the drug through their own lucrative mail-order pharmacies.

Medco raised the high end of its full-year guidance as a result.

Nevertheless, Gill believes that Medco was relying on the generic to boost its profits by no more than a penny or two this year. Thus, she still feels confident that Medco can hit its targets -- and suggests that Caremark could do even better.

"Based on the legal uncertainty around Plavix and (Caremark's) historical conservatism, we don't believe there is any material contribution from Plavix in the 2006 guidance," Gill wrote on Friday. "Therefore, with potentially six months of product in the channel, the company could see earnings upside to current expectations."

The companies could face an unexpected risk down the road, however.

"The legal ramifications of Apotex's at-risk launch could affect PBMs,"

Drug Benefit News

stated. "In certain patent infringement cases ... companies that make, use or sell the drug in question could be guilty of infringement."

The stakes are clearly high. Last year,

The Wall Street Journal

reported, branded Plavix ranked as the No. 2 drug in the world -- trailing only the

Pfizer

(PFE) - Get Report

cholesterol-buster Lipitor -- with annual sales of $3.8 billion. Since the generic launch, the

Journal

added, sales of the drug have plunged 77%.