Exclusive: Medco CEO in market for PBM divestitures

FT. LAUDERDALE (Reuters) - The top executive of pharmacy benefit manager Medco Health Solutions Inc MHS.N said on Thursday that WellPoint Inc's (WLP.N) decision last year to divest its in-house PBM presaged a wave of similar sales by other health insurers -- and that his company was in the market as a buyer.

"I would absolutely make an acquisition of an in-house PBM with my capital," Medco Chief Executive David Snow told Reuters in an exclusive interview on the sidelines of the Business Council's semiannual meeting here.

Medco, which will report fourth-quarter earnings later this month, reported $2 billion in cash on its balance sheet at the end of the third quarter, giving it a significant M&A war chest.

"I have always said it's not about whether health plans will ultimately unload their in-house PBMs, it's about when," Snow said.

"So the WellPoint transaction should be no surprise to anyone. Whether others are ready now, I don't know. But I think at some point in time they will be because you need significant scale in order to be good at what you do in this space."

Snow said that Medco, based in Franklin Lakes, New Jersey, spends an average of $200 million each year on capital equipment, buying the tools and technology -- including robotics -- needed in the PBM business.

"A health plan where 85 percent of the premium goes to the medical side, not the drug side, isn't investing anywhere near that kind of money," he said.

PBMs like Medco and rivals Express Scripts Inc (ESRX.O) and CVS Caremark Corp (CVS.N) administer prescription drug benefits for employers and health plans and operate large mail-order pharmacies.

They also encourage greater use of inexpensive generic drugs and stand to benefit from a wave of big-selling brand name medicines that will lose U.S. patent protection in the next few years.

Snow expressed confidence that Medco would continue to win share from both its big rivals.

Three months ago, CVS shocked investors when it said the PBM lost out on about $4.8 billion in contracts heading into 2010, leading to the departure of the unit's president.

"In 2010, we are doing extremely well," Snow said. "In the last three years now, we've won over $21 billion worth of business ... the trend continues with very, very strong organic sales -- the strongest in the industry by far."

Snow said that while the push to overhaul U.S. healthcare appears to have reverted to square one in Washington, he was confident legislators would produce something between now and the fall midterm elections to "show they have made a difference in healthcare and they're intent on delivering something to the American public."

He said congressional passage of legislation easing the approval of a new wave of generic biotech medicines would be one way for U.S. lawmakers to show their commitment to reform while cutting costs.

"I think this is one of those little steps that is meaningful and that Congress can get done," he said.

PBMs like Medco encourage patients to use generic drugs rather than brand names because it saves money for the employers and health plans that hire them and because the PBMs often enjoy bigger profits on the generics.

(Reporting by James B. Kelleher; Editing by Phil Berlowitz)