Medco to Acquire Consulting Firm - Analyst Blog

Recently, Medco Health Solution (MHS), through its subsidiary, United BioSource Corporation decided to acquire London-based Total Healthcare Group (THG), a consultancy firm catering to clients in the biopharmaceutical industry. Terms of the deal were not disclosed. The combined company will be led by Total Healthcare's Robert Hollamby, who has been appointed senior vice president at United BioSource.

Earlier, in August, Medco had acquired United BioSource for $730 million. Excluding one-time items and amortization, this acquisition is expected to become accretive in 2011 while it will dilute 2010 EPS by $0.02. United BioSource caters to pharmaceutical and biotechnology companies and guides them regarding safety, effectiveness and affordable use of medicines.

The company also conducts several studies for its clients, which include risk evaluation and mitigation studies (REMS), cost-benefit and cost-effectiveness evaluations and budget-impact modeling among others. The two companies together will be well placed to cater to the entire biopharmaceutical industry.

While these acquisitions are an attempt by Medco to diversify in the consulting areas, its pharmacy benefit management (PBM) industry has favorable dynamics. An aging population coupled with the associated higher incidence of chronic disease continues to drive demand and add to the escalating cost of new drug therapies.

Poor management of chronic and complex diseases can lead to $350 billion of excess total healthcare costs. As a result, we expect the outlook for the PBM industry to remain positive. Medco, being the nation's largest mail-order pharmacy operation, is therefore well positioned to benefit from both favorable demographic trends and increasing acceptance of more efficient mail order and internet-related distribution channels.

Recommendation

Encouraged by a robust cash balance, Medco targets suitable acquisitions. The company has adopted several strategies in the recent past to increase its footprint in the European market, which holds immense potential. Moreover, increased opportunity for Medco lies in the form of introduction of generics over the next few years.

Although the PBM industry remains highly competitive, especially in the current backdrop of economic uncertainty, we are encouraged by Medco's client renewals for both 2010 and 2011. Its client retention rate is maintained at over 99%.

We maintain our Neutral recommendation on the stock