Medco confident of big 2012 profit rise

Chairman and CEO of Medco Inc. David Snow speaks during the Reuters Health Summit in New York May 10, 2011.

NEW YORK (Reuters) - Medco Health Solutions Inc's MHS.N chief executive said investors can expect at least 20 percent profit growth in 2012, fueled by a huge influx of generic versions of widely used medicines.

The Lipitor cholesterol treatment and Plavix blood thinner headline a "big year" of generic introductions, which are particularly profitable for the company that manages prescription drug benefits, CEO David Snow told the Reuters Health Summit on Tuesday.

"I would say for now we're comfortable with people thinking it's in that 20-plus percent range," Snow said, when asked about projections for earnings per share growth next year.

Analysts on average are currently expecting Medco to increase earnings per share by 22 percent in 2012, according to Thomson Reuters I/B/E/S.

Snow noted the company has been posting compound annual earnings growth of more than 21 percent. The CEO said it presents a challenge to keep up that pace as Medco grows larger. In November, Medco set a goal of earnings per share rising on average between 16 and 20 percent a year from 2003, when it went public, through 2020.

Snow also said Medco would be keen to buy another pharmacy benefits manager of significant scale. Another top priority for acquisitions includes firms that conduct safety and effectiveness studies for already-marketed medicines.

Medco shares closed up 1.9 percent at $64.26 on the New York Stock Exchange.

Pharmacy benefit managers, or PBMs, administer drug benefits for employers and health plans and also run extensive mail-order pharmacies. They profit particularly from low-cost generic medicines, where they use leverage to drive bargains.

"At our mail service ... we don't make money on branded drugs at all," Snow said. "We price it to break even. We make our money on generics."

Snow expects Lipitor to make a big contribution to earnings once it goes generic, expected on November 30. Medco projects an added profit of 3 cents per share for the five weeks in 2011 from Lipitor, the world's biggest-selling prescription drug sold by Pfizer Inc (PFE.N). That rate would equate to about a 30 cent-per-share benefit in 2012.

Sanofi (SASY.PA) and Bristol-Myers Squibb's (BMY.N) $9 billion-a-year seller Plavix is set to go off patent next year as is Forest Laboratories' (FRX.N) antidepressant Lexapro.

"Plavix is big. And because of the rebating practices in that particular category, it's a big drug for us," Snow said.

"It came out briefly several years ago -- the at-risk launch -- and it was significant for us, very significant," he noted, referring to sale of a generic Plavix by Canada's Apotex that was later ruled illegal and pulled from the market.

In the near term, Wall Street is closely watching the fate of Medco's contract with insurer UnitedHealth Group (UNH.N), which represents 17 percent of revenue and high single-digit percentages in earnings. Some analysts expect UnitedHealth to move more of its drug benefit services in-house.

"The question is, is there a way to optimize what United wants to accomplish levering some of the world-class capabilities of Medco or in fact do they optimize value of their asset better if they do it 100 percent alone?" he said.

Regardless, Snow said he believes the potential loss of the contract, which is set to lapse in January 2013, is already factored in to Medco's stock price.

He also expressed confidence Medco was well-positioned to retain its big federal employee contract, known as FEP.

Looking beyond the generic wave, Snow sees its new United BioSource business driving growth. It specializes in safety and effectiveness studies on medicines after they reach the market -- an increasingly important area as regulators and insurers seek to compare drugs to determine what to pay for them.

"That's been growing incredibly well since we pulled that asset in and we're excited about that space," he said. "If I was to look at acquisitions, that's a place I would continue to look."

Snow is also interested in acquiring another PBM.

"If the industry is consolidating, we are clearly in a position to be a consolidator. But we would be picky," Snow said, noting that the recently sold Walgreen (WAG.N) drug benefit unit was too small for Medco.

Snow believes other health insurers will follow WellPoint Inc (WLP.N) in looking to sell their drug benefit units.

"Any captive PBM that exists today is a possibility," Snow said "It's not about whether, it's about when."

Snow said the company wants to maintain flexibility so does not foresee paying a dividend any time soon.

"Right now through 2020 if we can maintain the kind of growth rate we think we can maintain I prefer to give the cash back through stock buyback versus dividend," Snow said.

Although the 56-year-old Snow has run the company for more than eight years, he remains "very engaged."

"I do love the Medco platform to do something meaningful when it comes to healthcare reform, and that's something I'm passionate about," Snow said. "So as long as I'm enjoying myself I see myself sticking around as long as the board will have me."

(Reporting by Lewis Krauskopf and Bill Berkrot, editing by Matthew Lewis)