Gene Marcial's Stock Picks June 16, 2009, 10:05PM EST

Marcial: Could Medco Make an Acquisition Soon?

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BW's Gene Marcial

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aging population helps medco

On the other hand, Aetna spokesman Fred Laberge told BusinessWeek that Aetna's PBM business is "an important component of its integrated value proposition, and we are exploring options that may provide value to our customers and shareholders." However, he adds, Aetna's policy is not to comment on rumors or speculation.

Cigna spokesman Chris Curran told BusinessWeek the company constantly reviews its options and keeps in mind the best interests of shareholders and customers. The business has delivered strong results for Cigna, he adds.

"If we are going to go down the path of [a sale]," says Curran, "it would be important that we do not dilute our ability to offer integrated clinical programs in the marketplace, because that is part of our competitive advantage." Internally, he adds, "we are evaluating strategic plans that work for our shareholders and the company."

ThinkEquity's Garmont figures that Medco, exclusive of an acquisition, should earn $2.73 a share in 2009 on revenues of $61.4 billion, and $3.23 in 2010 on $65.6 billion, up from 2008's $2.33 on $51.2 billion.

"A large acquisition might well be on the horizon" for Medco, figures analyst Andre J. Costanza of independent research firm Value Line (VALU), who gives the stock the outfit's highest ranking based on its timeliness benchmark. He also rates the shares as an "above average" selection for safety and financial strength. Industry trends and an aging population are in Medco's corner, he says. He predicts the stock could double in three to five years.

benefiting from patent expirations

Analyst Phillip M. Seligman of Standard & Poor's (MHP), who rates Medco a buy, says the company's healthy cash flow provides financial flexibility during tough times. The weak economy, he adds, continues to put pressure on overall drug usage. At the same time, however, that weakness also is spurring the increased use of generics and boosting prescription orders by mail, which save consumers money while helping the profit margins of PBM providers.

Medco and its peers, notes Seligman, should benefit from the pending patent losses of additional brand-name drugs by major pharmaceutical companies. And he says proposed revisions to health-care reform now being debated, including an accelerated approval process for generic drugs, are mostly favorable to PBMs.

What's favoring Medco is the continuing bright outlook for the fundamentals of the PBM sector, as health plans of companies, governments, and employers all seek to control and bring down the high cost of drugs and health services. Savvy investors may find Medco shares a prescription for profit as these trends play out.

Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.