Pharmacy Industry News: CVS and Medco are Both Buys
CVS and Medco are Both Buys
Medco Health Solutions shares endured a painful drop after the nation’s largest pharmacy-benefits manager (PBM) lost a major contract.
This morning, Medco (ticker: MHS) said its lucrative contract providing specialty pharmacy benefit coverage and mail-order service to Blue Cross Blue Shield Association will end next year. In its place, rival CVS Caremark (CVS) has signed a new three-year agreement with the organization to serve its federal employee program.
Investors cheered CVS, boosting shares 2.4% to $39.06 in midmorning trading, while punishing Medco, which fell 11.5% to $57.05.
However, we think both stocks could provide healthy returns.
The contract is a major victory for CVS, which already handles many aspects of Blue Cross’s government business; the new contract extends its relationship with Blue Cross to more than two decades.
Although details were not released, CVS’s aggressive pricing tactics reportedly helped win the contract. That said, CVS should still be able to realize a reasonable profit from the deal as it continues to cut costs.
This is also a victory for Per Lofberg, president of CVS’s pharmacy services segment since January 2010. Lofberg, Medco’s former chairman, was brought on board to stem CVS’s market-share losses following the integration of Caremark, which it acquired in 2007. Many on the Street have criticized the deal, calling it a drag on the stock.
Lofberg has streamlined the business and this new contract should quell some concerns about the integrated company. Standard & Poor’s Equity Research analyst Joseph Agnese argues that “After stabilizing the business in 2011, Lofberg should lead a recovery in growth within this segment in 2012.”
Trading at 12.4 times anticipated forward earnings, with a 1.3% yield, CVS shares don’t seem very pricey considering that earnings are expected to grow 11.6% this year, according to Thomson Reuters.
Barrons.com recommended shares last year (See Barron’s Take, “CVS, Walgreens Truce the Right Rx,” June 18, 2010), and the stock has risen 20% since that time.
Though banged up today, Medco deserves a second look. Although the Blue Cross contract provided $3 billion in annual-net revenues, it comprised less than 10% of Medco’s business, so the loss isn’t crippling: Medco provides drug benefits to about one fifth of the U.S. population, according to Morningstar analyst Matthew Coffina, which gives it an industry-leading advantage.
While analysts concede this is a setback, some spy a buying opportunity. Lazard Capital Markets analyst Tom Gallucci reiterated his Buy rating while lowering his price-target to $64, about 12% above current levels. Leerink Swann analyst David Larsen called today’s volatility a buying opportunity.
Macro trends also support the industry, which could help Medco. As J.P. Morgan analyst Lisa Gill wrote earlier this month, “the positive fundamental outlook for the PBM industry,” should work with Medco’s push toward generics and specialty pharmacy business to propel the stock.
Even if its growth prospects are diminished, Medco trades at a very reasonable multiple of 11.4 times expected-forward earnings and 17.3 times trailing earnings, which is near a five-year low. If we accept Medco’s “less than 10% of 2011 EPS” projection for the lost contract’s impact to earnings, it would suggest that earnings will rise 12% in FY12, based on figures provided by Thomson Financial.
At these levels Medco seems cheap enough to take a gamble, especially with its rich 31.6% return on equity, strong balance sheet and 1.3% yield.
Today’s news shows CVS making impressive strides in its struggling PBM business. And while Medco seems like a dicier bet, its cheap valuation suggests it’s a worthwhile investment.
Wolters Kluwer Health Completes Acquisition of Lexi-Comp, Inc.
Philadelphia, PA (May 27, 2011) – Wolters Kluwer Health today announced that it has completed the acquisition of Lexi-Comp, Inc., a leading provider of drug information and clinical content for pharmacists, clinicians, and hospitals internationally. The acquisition is the latest in a series of strategic acquisitions Wolters Kluwer Health has made in its Clinical Solutions business as part of the company’s strong focus on the point-of-care market.
Arvind Subramanian, President & CEO of Wolters Kluwer Health Clinical Solutions, said “This acquisition is very much aligned with our growth strategy of building out our strong portfolio of Clinical Decision Support (CDS) solutions to further our leadership position in the point-of-care market. This strategy will enable our customers to access leading clinical content, drug information for the retail and hospital pharmacies, and innovative mobile offerings.”
Lexi-Comp provides services and content to nearly 1,500 hospitals internationally, has more than 1,700 drug monographs and is particularly strong in the area of mobile content for pharmacists and clinicians. To support and supplement effective clinician-patient interactions, Lexi-Comp also provides patient medication leaflets in 19 languages. The company is headquartered near Cleveland, Ohio and has approximately 150 employees.
The intent to acquire Lexi-Comp was announced on April 27, 2011. Terms of the acquisition were not disclosed.
About Wolters Kluwer Health
Wolters Kluwer Health (Philadelphia, PA) is a leading global provider of information, business intelligence and point-of-care solutions for the healthcare industry. Serving more than 150 countries and territories worldwide, Wolters Kluwer Health’s customers include professionals, institutions and students in medicine, nursing, allied health and pharmacy. Major brands include traditional publishers of medical and drug reference tools, journals and textbooks, such as Lippincott Williams & Wilkins; and electronic information providers, such as Ovid®, UpToDate®, Medi-Span®, Facts & Comparisons®, Pharmacy OneSource® and ProVation® Medical.
Wolters Kluwer Health is part of Wolters Kluwer, a market-leading global information services company. Wolters Kluwer has 2010 annual revenues of €3.6 billion ($4.7 billion), employs approximately 19,000 people worldwide, and maintains operations in over 40 countries across Europe, North America, Asia Pacific, and Latin America.
Forward-looking Statements
This press release contains forward-looking statements. These statements may be identified by words such as “expect”, “should”, “could”, “shall”, “will” and similar expressions. Wolters Kluwer cautions that such forward-looking statements are qualified by certain risks and uncertainties that could cause actual results and events to differ materially from what is contemplated by the forward-looking statements. Factors which could cause actual results to differ from these forward-looking statements may include, without limitation, general economic conditions; conditions in the markets in which Wolters Kluwer is engaged; behavior of customers, suppliers, and competitors; technological developments; the implementation and execution of new ICT systems or outsourcing; and legal, tax, and regulatory rules affecting Wolters Kluwer’s businesses, as well as risks related to mergers, acquisitions, and divestments. In addition, financial risks such as currency movements, interest rate fluctuations, liquidity, and credit risks could influence future results. The foregoing list of factors should not be construed as exhaustive. Wolters Kluwer disclaims any intention or obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Pharmaceutical industry yields to pressure from San Francisco to fund a drug take-back program
Starting as soon as August, San Franciscans will be able to dispose of their unused medicines for free at 16 independent pharmacies and five police stations throughout the city. The pharmaceutical industry is funding the pilot program with $110,000, after facing city plans that threatened to extend producer responsibility to pharmaceuticals.
The program has funding for at least 12 to 18 months after which officials hope it will be become permanent. All household medication can be brought to police stations, and participating pharmacies will collect everything else except controlled substances.
Disposing of pharmaceuticals has been a chronic problem in San Francisco without a sustainable solution. Currently, no pharmacy accepts unused or expired drugs. For decades, officials told people to simply flush their unused drugs or throw them in the trash.
Especially in the past decade, scientists have started to measure the toxic effects of pharmaceuticals in the waterways and groundwater. Continuous exposure to low levels of pharmaceutical residue can threaten wildlife like fish and frogs. Minor residue has been found even in tap water, as Associated Press revealed in 2008 in an investigative report. No comprehensive studies have been published about long-term effects of low levels of pharmaceuticals consumed in drinking water, but officials now advise that no unused pharmaceuticals be disposed down the drain or in the trash.
San Francisco supervisor Ross Mirkarimi, who led the negotiations with the pharmaceutical industry to fund the pilot program, said that the scope of the problem with pharmaceutical waste in the Bay Area waterways is not fully known.
“What we do know is that our infrastructure is not designed to filter waste,” said Mirkarimi.
Most European countries have take-back programs for unused or expired medications. In the United States, the medical waste disposal is primarily regulated at state level. One problem is that a federal law states that only law-enforcement officers may collect controlled substances. Colorado, for example, is piloting a program with eleven take-back boxes around the state and Washtenaw County in Michigan has eleven pharmacies accepting unused medication. Teleosis, a nonprofit organization for greener health care, lists take-back programs nationwide.
The pharmaceutical companies have been reluctant to take responsibility for the disposal of their products. When Mirkarimi initiated an ordinance to extend producer responsibility to pharmaceuticals, the companies called for a more “collaborative” approach rather than an ordinance to require them to develop and implement their own collection program. After negotiations, PhRMA, the trade association for pharmaceutical companies, donated $100,000, and Genentech gave $10,000 toward the pilot program.
Big chains like Walgreens and Safeway decided not to participate. Mirkarimi said he was neither disappointed nor surprised.
“They need to understand what it means to become corporate partners and they’ve got a long way to go,” Mirkarimi said. He said the decision will reflect poorly on the big chains. “I think people will start to ask the obvious question: ‘Why are Safeway and Walgreens not providing this service either free or at very low cost?’”
Walgreens said customers can already buy specially designed envelopes for $3.99 to return unused medication for incineration.
“We also believe that there are legal risks if we participated in the initiative and that it could violate federal drug enforcement rules regarding the collection of controlled substances,” wrote Walgreens spokesman Robert Elfinger in an email. The pharmacy participates in local take-back events organized by Bay Area law-enforcement organizations.
Apart from Walgreens, at least Safeway’s and Kaiser’s pharacies sell similar envelopes. San Francisco residents can pick up these envelopes for free at three locations. This SF Environment initiative will be discontinued when the envelopes run out because they are too expensive ($3.75 each).
“The envelopes are really expensive for the city to provide free but we also don’t think that pharmaceutical disposal should be something that people should have to pay for,” said Caitlin Sanders, a Residential Toxics Reduction associate at San Francisco’s Department of the Environment.
The pilot program is still in the works. SF Environment does not want to reveal the take-back locations because not all pharmacies have signed the official paperwork. Nine of the city’s 11 districts have independent pharmacies and in each of them at least one pharmacy is participating in the program. SF Environment chose the participating police stations to cover the outlying areas. The program is expected to launch in August.
Sanders said she hopes that the pilot is a success and that the companies will renew the funding voluntarily. If not, supervisor Mirkarimi will consider pushing forward with the legislation to extend the producers’ responsibility. “That would depend on how well the pilot program works, what kind of relationship — positive or not — we develop with the pharmaceutical industry, and if federal law evolves by that time,” he said.
Having a place to take unused medication does not mean that people actually will do it. Even in countries with effective take-back programs, pharmaceutical waste ends in the wrong place, especially liquid waste that is too often flushed into the sewage system. That’s why about $50,000 of the pilot program funding is going to outreach and education about the program.
Mirkarimi has also proposed an ordinance to require all small businesses selling prescription drugs to publicly display materials explaining how to safely and lawfully dispose of unused drugs. The ordinance passed the public safety committee but hasn’t yet been heard in front of the full Board of Supervisors.