IBJNews

Medco may seek acquisition with biggest contract imperiled

Back to TopCommentsE-mailPrintBookmark and Share

Medco Health Solutions Inc., the pharmacy benefits manager with major operations in Indiana that has lost $3.5 billion in contracts since March, may seek acquisitions to make up for lost revenue if its biggest remaining client fails to re-sign this year.

The $11 billion contract with UnitedHealth Group Inc., representing about 17 percent of Medco’s business, expires after 2012. The insurer is reviewing the agreement and will decide whether to renew this year, UnitedHealth CEO Stephen Hemsley said on June 1. The Minnetonka, Minn.-based company is leaning toward terminating the contract and handling the work with its in-house unit, said Ana Gupte, an analyst at Sanford C. Bernstein & Co. in New York.

If so, Franklin Lakes, N.J.-based Medco will likely seek acquisitions to help make up for the lost sales by looking to purchase another pharmacy manager or diversifying beyond its core business of buying, dispensing and overseeing prescriptions for companies, analysts said.

“This is an industry where scale matters, and the loss of UnitedHealth will increase the pressure on Medco executives to fill in the revenue gap it creates,” said Helene Wolk, an analyst also at Sanford Bernstein, in a telephone interview. A potential target may be Cigna Corp.’s pharmacy unit, which the insurer tried to sell two years ago, she said.

Medco operates a $140 million automated pharmacy and distribution center in Whitestown in Boone County, and it plans to employ more than 1,400 people there by 2012. The company studies drug data, genetic testing and medical-claims data at the facility. A company spokesman said Tuesday morning that current employment in Indiana was about 430.

The loss of UnitedHealth, with its 20 million members, may drop Medco from the biggest pharmacy benefit manager by revenue to the smallest, behind Woonsocket, R.I.-based CVS Caremark Corp. and Express Scripts Inc., of St. Louis, Wolk said.

Medco shares declined $1.02, or 1.8 percent, to $56.77 each on Monday. The shares have dropped 12 percent since May 26, the day before the company announced the loss of a $3 billion contract covering 4 million U.S. government workers and 9.8 million mail-order prescriptions. Medco in March lost the renewal of a $500 million contract with the California Public Employees Retirement System.

The federal-employee contract, lost to CVS, represents less than 10 percent of Medco’s estimated earnings and won’t affect 2011 results, Jennifer Luddy, a company spokeswoman, said.

Medco is “confident in our differentiated services and competitive positioning in the marketplace,” Luddy said in an e-mail. “Our 2011 client retention rate remains at over 99 percent, a result of our focus on superior client service and the value that we consistently deliver through our advanced clinical pharmacy model.”

While Luddy declined to comment specifically on whether Medco may seek acquisitions to make up for lost contracts, she said “we are open to and explore opportunities that make strategic sense.”

UnitedHealth’s contract generates about 8 percent of Medco’s earnings per share, Bernstein’s Wolk said.

“We expect UnitedHealth is unlikely to renew that contract for 2013, bringing some or even all PBM activity in-house,” Gupte, also from Bernstein, wrote in a June 2 note to clients.

UnitedHealth has a unit that manages pharmacy benefits; taking that business in-house may increase its size by 67 percent, Bernstein’s Wolk said. Investments made in the pharmacy unit, called Optum Rx, are sufficient to handle the Medco business, UnitedHealth’s Hemsley said April 21 during an earnings conference call.

“I don’t know how the signals could be any clearer,” said Art Henderson, an analyst at Jefferies & Co. in Nashville, Tenn. “United wants to take the business in-house and Medco will have to be very competitive in price to maintain any of it.”

To make up for revenue losses, Medco may look to diversify beyond pharmacy benefits management, as it did Aug. 16 when it agreed to buy United BioSource Corp. for $730 million, said Ross Muken, an analyst at Deutsche Bank in New York.

United BioSource, which tests drugs and devices after they are approved by regulators, “was a completely new offering,” Muken said. “I think certainly things like that will be highly interesting.”

Competition intensified among pharmacy benefits managers after Express Scripts moved forward with integrating Indianapolis-based WellPoint Inc.’s pharmacy benefits unit with 25 million members. CVS, in the past year, grabbed a contract with Capital Blue Cross of Pennsylvania from Express Scripts and the federal workers plan from Medco.

“Historically, Medco has never been a fan of just buying market share,” Eugene Goldenberg, an analyst at BB&T Capital Markets in New York, said. “But over the last six to nine months, we have seen management’s tone change” toward acquiring another pharmacy benefits manager.

The number of potential targets dwindled after Hartford, Conn.-based Aetna Inc. gave a 12-year, $9.5 billion contract to CVS last July and UnitedHealth began investing in its pharmacy benefits unit.

Among those left on the market is Philadelphia-based Cigna’s pharmacy benefits unit with 6.2 million members as of March 31; Prime Therapeutics LLC in St. Paul, Minn., with about 17 million members; and MedImpact Healthcare Systems Inc. in San Diego with about 32 million participants, said Jefferies’s Henderson. Of the three, Cigna offers the most profitable business, he said.

Asked about a potential sale, Lindsay Shearer, a Cigna spokeswoman, said the insurer sees “pharmacy as a key component of Cigna’s integrated approach to health care.”

“The business has delivered strong results for us,” Shearer said in an e-mail. “At the same time, we are always evaluating opportunities to maximize its value for our customers and shareholders.”

Prime Therapeutics said it has been approached by potential buyers though it isn’t looking to sell the business. “We are very pleased with where we stand as an important player in the PBM market,” said Matt Yordy, senior vice president for business development.

Taylor Heringer, a spokeswoman for MedImpact, didn’t respond to requests for comment.

ADVERTISEMENT

  • rx's
    PS - most doctors will do it with a phone call.
  • Medco
    I'm on medicare, had med-co the first year but their prices increased enough that I had to switch. In re: having to get new prescription orders - that is not unusual.
  • No Surprise
    I have to use Medco under Indiana's ICHIA health plan, and I wish I didn't. Customer service is poor, they will not transfer scripts from your old pharmacy (you must get new ones - which often requires paying for an unneeded office visit), and it takes them 2 weeks to do something that Walgreens can do in 15 minutes.

    Post a comment to this story

    COMMENTS POLICY
    We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
     
    You are legally responsible for what you post and your anonymity is not guaranteed.
     
    Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in IBJ editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
     
    No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
     
    We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.
     

    Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

    Sponsored by
    ADVERTISEMENT

    facebook - twitter on Facebook & Twitter

    Follow on TwitterFollow IBJ on Facebook:
    Follow on TwitterFollow IBJ's Tweets on these topics:
     
    Subscribe to IBJ
    1. I think the poster was being sarcastic and only posting or making fun of what is usually posted on here about anything being built in BR or d'town for that matter.

    2. Great news IRL fans: TURBO the IMS sanctioned movie about slugs running the Indy 500 has caught the Securities and Exchange Commission because Dreamworks had to take a $132MILLION write down...because the movie was such a flop. See, the Indy/IMS magic soiled another pair of drawers. Bwahahahahahaha! How's CARTOWN doing? HAHAHAHA...Indy is for losers.

    3. So disappointed in WIBC. This is the last straw to lose a good local morning program. I used to be able to rely on WIBC to give me good local information, news, weather and traffic on my 45 minute commute.Two incidents when I needed local, accurate information regarding severe weather were the first signs I could not now rely on WIBC. I work weekend 12 hour nights for a downtown hospital. This past winter when we had the worst snowfall in my 50 years of life, I came home on a Sunday morning, went to sleep (because I was to go back in Sunday night for another 12 hour shift), and woke up around 1 p.m. to a house with no electricity. I keep an old battery powered radio around and turned on WIBC to see what was going on with the winter storm and the roads and the power outage. Sigh. Only policital stuff. Not even a break in to update on the winter storm warning. The second weather incident occurred when I was driving home during a severe thunderstorm a few months ago. I had already gotten a call from my husband that a tornado warning was just southwest of where I had been. I turned to WIBC to find out what direction the storm was headed so I could figure out a route home, only to find Rush on the air, and again, no breaking away from this stupidity to give me information. Thank God for my phone, which gave me the warning that I was driving in an area where a tornado was seen. Thanks for nothing WIBC. Good luck to you, Steve! We need more of you and not the politics of hatred that WIBC wants to shove at us. Good thing I have Satellite radio.

    4. I read the retail roundup article and tried Burritos and Beers tonight. I'm glad I did, for the food was great. Fresh authentic Mexican food. Great seasoning on the carne asada. A must try!!! Thanks for sharing.

    5. John, unfortunately CTRWD wants to put the tank(s) right next to a nature preserve and at the southern entrance to Carmel off of Keystone. Not exactly the kind of message you want to send to residents and visitors (come see our tanks as you enter our city and we build stuff in nature preserves...

    ADVERTISEMENT