FRANKLIN LAKES, N.J. (Reuters)—Medco Health Solutions Inc. posted a higher-than-expected quarterly profit on Thursday, dispensing a greater percentage of more profitable generic drugs even though no new important generics were introduced during the period.

The pharmacy benefit manager also raised the low end of its projected 2011 profit range by 3 cents and played down the impact of a pension fund controversy, and its shares rose 2%.

Last month, Medco received a subpoena from U.S. securities regulators involving a probe into a former CalPERS board member whom Medco paid as a consultant to help secure a lucrative contract with the California Employees' Retirement System.

The company, on a conference call with analysts and investors, said the CalPERS issue has not been a significant business distraction. It said it had two significant client renewals and two fairly significant client wins since the CalPERS controversy came to light.

"I thought they did a very good job of indicating on the call that that issue is not an issue," said Jefferies & Co. analyst Arthur Henderson. "They put some encouraging commentary around the CalPERS noise."

Medco said it was providing information to U.S. securities regulators and the California attorney general and was "working to put it behind us."

First-quarter net income rose to $333.1 million, or 80 cents per share, from $320.5 million, or 67 cents per share, a year ago.

Excluding amortization of intangibles, earnings were 91 cents per share, topping analysts' average estimate by 3 cents, according to Thomson Reuters I/B/E/S.

The company expects sequential earnings growth in each quarter of 2011 and sees a 3-cents-per-share benefit in December just from the availability of generic Lipitor.

Pfizer Inc.'s cholesterol fighter Lipitor, the world's biggest-selling prescription drug, is set to lose U.S. patent protection in November.

2012 is expected to be a banner year for Medco and its rivals as several multibillion-dollar drugs begin facing competition from cheaper generics.

"If you look at the list (of new generics) for 2012, it's what I call a who's who of drugs," said Chief Financial Officer Richard Rubino, naming the blood thinner Plavix—second in sales only to Lipitor—the antidepressant Lexapro, asthma treatment Singulair, diabetes drug Actos and blood pressure medicine Diovan.

"I think we have many strong quarters ahead of us," Mr. Rubino told Reuters in a telephone interview.

Pharmacy benefit managers, or PBMs, administer drug benefits for employers and health plans. Generic drugs, especially those delivered through their extensive mail-order pharmacies, are highly profitable for PBMs as they carry a far higher profit margin than expensive branded medicines.

Revenue for the quarter increased 4% to $17.02 billion.

Medco's rate of dispensing generic drugs rose to 73.1% in the quarter, up 3.4 percentage points from a year earlier. Its total prescription volume was 244.3 million, an increase of 2.1%, while generic mail-order prescription volume jumped 9.3% to a record 17.7 million.

The company forecast full-year profit, excluding one-time items, of $4.02 to $4.12 per share, lifting the bottom of the range from $3.99 previously. Analysts are looking for $4.06.

"We are pleased with our number of early new-named client wins and renewals," Chief Executive David Snow said. "Our 2011 client retention rate remains at over 99%."

Investors are also focused on an upcoming decision on which company will land the lucrative Federal Employee Plan contract, which could be decided in the current quarter.

"We still feel as if we have a very competitive offering there," Snow said.

Mr. Henderson said the CalPERS controversy that has depressed valuation and the positive first-quarter results and outlook makes Medco an attractive stock going forward.

"There's probably more strength to come," Mr. Henderson said. "If what they're suggesting plays out as far as selling season goes, I think there's a lot more upside in the name."

Medco shares were up 2% to $60.10 in afternoon trading on the New York Stock Exchange.