Medco Health Solutions Inc.'s fourth-quarter net income rose 12 percent, as gains from generic prescriptions and the pharmacy benefits manager's specialty business helped offset costs from its pending acquisition by Express Scripts Inc.
A new generic version of the cholesterol fighter Lipitor added about 3 cents per share to the Franklin Lakes, N.J., company's earnings. Lipitor, the world's top selling drug, lost its patent protection late in the fourth quarter.
Medco said Tuesday that its generic dispensing rate climbed 2.5 percentage points in the quarter to 74.7 percent of total prescription volume. Generic drugs are less expensive than their brand-name counterparts, so they can hurt revenue for pharmacy benefits managers, or PBMs, but improve profit margins.
Overall, Medco reported net income of $424.4 million, or $1.08 per share, in the quarter ended Dec. 31. That compares to $378.5 million, or 88 cents per share, in the final quarter of 2010.
Revenue also climbed 12 percent to almost $19 billion. The latest quarter had an extra week compared with the 2010 quarter.
Adjusted earnings excluding costs tied to the Express Scripts deal and other expenses amounted to $1.25 per share.
The performance topped Wall Street expectations. Analysts surveyed by FactSet expected, on average, earnings of $1.17 per share on $17.38 billion in revenue.
PBMs process mail-order prescriptions and handle bills for prescriptions filled at retail pharmacies, acting as middlemen between employers offering prescription drug benefits and drugmakers. They use purchasing power to negotiate lower drug prices and make their money by reducing costs for health plan sponsors and members.
Medco's adjusted prescriptions — which count 90-day mail order prescriptions as three 30-day prescriptions — rose 7.7 percent in the quarter to 263.1 million.
Revenue from Medco's Accredo specialty pharmacy business climbed 28 percent to $3.8 billion on growth in multiple sclerosis, rheumatoid arthritis, oncology and hepatitis prescriptions. Accredo distributes drugs that require special handling, including treatments for chronic illnesses.
BMO Capital Markets analyst Dave Shove said in a research note Medco's prescription volumes came in better than he expected across all categories.
The company also reported $43.6 million in expenses related to Express Scripts in the fourth quarter, mostly due to legal fees and employee retention-related expenses.
Last July, St. Louis-based Express Scripts announced a $29.1 billion deal to buy Medco, a combination that would create a company that handles the prescriptions of about 135 million people, or more than one in three Americans.
Shareholders from both companies have approved the deal, and Medco said Tuesday it remains confident the acquisition will close in the first half of this year.
Medco agreed to the deal after reporting a string of major contract losses. But Chairman and CEO David B. Snow Jr. told analysts Tuesday the latest quarterly results show that his company will combine with Express Scripts from a position of strength.
For the full year, Medco reported net income of $1.46 billion, or $3.62 per share, on about $70.1 billion in revenue.
Medco expects 2012 revenue to fall about 16 percent to $58.9 billion, which matches analyst forecasts. Starting this year, Medco no longer handles prescription drug benefits for the California Public Employees' Retirement System, MemberHealth LLC, Bravo Health, and the mail-order prescription benefit of the Federal Employees Health Benefits Program.
The company also expects generic drugs to reduce revenue by about $6.5 billion.
Medco shares fell 56 cents to $63.43 in trading Tuesday afternoon, while broad market indexes rose slightly.