Medco Health Solutions (MHS) and Germany based Celesio AG terminated their pan-European joint venture, which came into existence in June 2010. Effective September 30, 2011, Medco will act as the 100% ownerof this project after the acquisitionof Celecio's 50% stake. However, the financial and other terms of the termination agreement were not disclosed.
We expect this move to be a hindrance for Medco in achieving its goal of gaining traction in the European market. Projecting huge potential of the international market, especially Europe, Medco expected this joint venture to largely benefit from a significant surge of generic drugs projected to hit the market over the next five years.
The joint venture was designed to offer Medco’s technology enabled advanced clinical solutions, specialty and mail order pharmacy services to the 29 European countries. However, costs associated with the deal led to an 8% drop in Celesio’s profit during its first quarter of fiscal 2011.
Medco has been witnessing severe challenges over the past few months as it lost several contracts. This included loss of the PBM contract with its largest client, UnitedHealth (UNH), the Federal Employee Program (FEP) contract, the Medicare Part D business of Universal American and the biggest US public pension fund California Public Employees’ Retirement System (CalPERS), all to CVS Caremark (CVS). In August 2011, Medco also lost its PBM contract with Blue Cross and Blue Shield.
Despite undertaking various efforts, Medco was not able to successfully overcome these hindrances. In July this year,Medco announced that it will be acquired by Express Scripts (ESRX) for $29.1 billion in cash and stock (the biggest in the health care industry).
Although we expect the combined entity to pose a major challenge for its peers by becoming the largest PBM provider, we remain concerned about the uncertainty related to the successful completion of the deal due to the potential anti-trust challenges from the Federal Trade Commission (FTC). Medco will suffer a major blow if the deal falls through.
Medco, CVS and Express Scripts retain short-term Zacks #3 Rank (Hold) that corresponds with our long-term ‘Neutral’ recommendations on the stocks. However, the upside potential of Medco is limited.
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