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Medco sees generic drug gains to 2020


FRANKLIN LAKES, N.J. (Reuters)—Medco Health Solutions Inc. projected earnings would rise as much as 17% next year despite challenges and painted a rosy picture for the next decade, sending shares up more than 10% on Tuesday.

The U.S. pharmacy benefit manager, which posted better-than-expected quarterly results, also hinted at a strong 2012, saying it would be the biggest year ever for contributions from higher-margin generic drugs introductions.

Medco CEO David Snow said generics would contribute to profits consistently through 2020, perhaps surprising some investors who thought the generic benefits would die down around 2015.

Medco had previously spooked investors about its prospects for next year when it said that it would gain less in 2011 from generic drug introductions, which are critical for pharmacy benefit managers.

"We knew it was a weak year for generics, but it was mostly in line with what the Street was looking for," Gabelli & Co. analyst Jeff Jonas said.

"They're going to be OK in 2011 and really accelerate beyond that," Mr. Jonas said. "That long-term sustainability is important."

Mr. Snow said 2012 "will reflect a very significant contribution from new generic introductions—in fact the highest of this decade and the highest in our history."

Medco told analysts on a conference call it had just finished a financial plan through 2020.

Outside of the generic contributions for 2011 and 2012, Mr. Snow said on the call, "all of the other years for the remainder of this decade deliver solid and continuous incremental growth to earnings per share each and every year."

In an interview, Mr. Snow said it was important to investors for them to understand that "generics as one of our many growth drivers has a much longer life than they otherwise thought."

Pharmacy benefit managers, or PBMs, administer drug benefits for employers and health plans and operate large mail-order pharmacies. They are benefiting from a wave of brand name medicines that will lose U.S. patent protection in the next few years and the desire of clients to cut costs.

Medco rivals Express Scripts Inc. and CVS Caremark Corp. were up 5.7% and 2.9% respectively after Medco's report.

Profit margin adds punch

Third-quarter net income rose nearly 11% to $371.5 million, or 85 cents per share, from $335.6 million, or 69 cents per share, a year earlier.

Excluding items, earnings of 91 cents per share topped the average analyst estimate by 3 cents, according to Thomson Reuters I/B/E/S.

Revenue rose 10% to $16.3 billion.

Medco shares had fallen 18% this year through Monday, sharply underperforming those of Express Scripts amid concerns over Medco's profit margins.

But Medco's gross margin improved from the second quarter. Chief Financial Officer Richard Rubino said the components of the quarterly gross margin were sustainable, pointing to the company's massive purchasing scale.

"Operating performance was better than we anticipated for the first time in three quarters," Sanford Bernstein analyst Helene Wolk said in a research note, noting that the gross margin of about 6.9% topped estimates.

Medco's prescription volume rose nearly 7% to 235.2 million. Its rate of dispensing generic drugs, which have higher profit margins for PBMs than pricier brand-name medicines, rose 3.9 percentage points to a record 71.6%.

The Franklin Lakes, N.J.-based company also keeps more profit when it dispenses generic drugs through its extensive mail-delivery pharmacy.

Medco projected 2010 earnings, excluding items, of $3.38 per share to $3.40 per share, representing 19% to 20% growth. It previously had given a range of $3.34 to $3.39. Analysts have been looking for $3.38.

For 2011, it projected earnings, excluding amortization of its 2003 spin-off, in a range of $3.80 per share to $3.93 per share. Analysts have looked for $3.93.

Starting next year, the company said it would begin excluding all intangible amortization for its non-GAAP profit measure. On that basis, Medco predicted 2011 earnings in the range of $3.99 per share to $4.12 per share, or an increase of 12% to 17%.

Medco shares rose $5.36 to $57.73 in afternoon trading on the New York Stock Exchange.