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Due in part to the aging population, the growing obesity problem, rising diabetes rates, and the drug benefits added to Medicare during Bush II, the $275 billion pharmacy industry has had an excellent run. In 2012, Americans filled more than 4 billion prescriptions at 62,000 retail, mail, and specialty pharmacies. And though many of the most popular drugs have come off patent, or scheduled to come off soon, profits continue to increase. Now with the coming Affordable Care Act in 2014, retail pharmacies will benefit handsomely with millions of new customers about to have health insurance for the first time.

The giant retail pharmacies are poised to benefit from the influx of newly insured customers, and profits should continue to rise in the coming years. But there is a segment in the retail pharmacy business that, for the most part, goes more unnoticed, and these are the specialty pharmacies and medical service providers, with a focus on specialized treatments and services, and strong pain management drugs. Unless one has had the unfortunate need for the services of one of these companies, there is little reason to know who they are. But as an investor one should be aware of them because these specialty pharmacies and home health care services have quietly carved out a profitable piece of the retail pharmaceutical market and should continue to see strong growth when the Affordable Care Act begins in 2014. Below are companies of various sizes that have excellent potential to grow and yield hearty gains for investors.

BIOSCRIP SHOWS BETTER-THAN-EXPECTED REVENUE THROUGH ACQUISITIONS

BioScrip Inc. (NASDAQ:BIOS) stock has nearly doubled in the last year as it has risen from its April 2012 lows of $6.14 to where it sits today at its 52-week high of $13.36 per share. This leading provider in comprehensive pharmaceutical and home care solutions has found a niche home health care services business by partnering with patients, physicians, health care providers, government agencies, and pharmaceutical manufacturers to provide access to infusible medications and management for chronic and other complex healthcare conditions. The company, through its subsidiaries, also offers a number of specialized services including home health care, skilled nursing, physical therapy, clinical respiratory care services, home health aide, and hospice services.

The company specializes in infusion therapies, including but not limited to inotropic therapy for late- stage heart failure, steroids, and Tysabri for multiple sclerosis, as well as heavily regulated and carefully monitored pain medications, administered in a patient's home, doctor's office or a clinic, in lieu of what would be high-cost hospital IV treatments. The company's infusion services are available in 46 states, with 40 specialty infusion pharmacies, and 33 nursing locations.

BioScrip has a market capitalization of $752 million, and has experienced a steady climb in value since July of 2012, and closed on Thursday April 11th at $13.25, $0.11 below its 52-week high. 2012 revenue was $662.6 million, up 19.5% from 2011, and the company expects revenue for 2013 to be between $830 million to $865 million, which represents a growth of 25% to 30%. The company sees an adjusted EBITDA for 2013 of $67.0 million to $73.0 million. On April 11th Feltl & Co began coverage on BioScrip, issuing a strong buy and giving the stock a target price of $15.00 per share. On April 9th Zacks upgraded the company from a neutral to an outperform rating, and issued a target price of $14.00 per share as it expects the company to keep its momentum going.

BioScrip, though still showing a loss, had higher-than-expected revenue in 2012, plus its recent acquisitions should help drive the company in the coming years. But what I like about the future of this company is that it is in a sector that will have a growing population of aging Americans, and the company should benefit heavily from the flood of new patients soon to be receiving health insurance. I agree with analysts and see BioScrip as a good buy.

EXPRESS SCRIPT CONTINUES TO GROW AS AFFORDABLE CARE NEARS

Though one rarely thinks of a $47.6 billion market capitalization company that manages more than a billion prescriptions each year as a specialty business, this is the case with Express Script (NASDAQ:ESRX). In many ways, its integrated pharmacy benefit management company ((NYSEMKT:PBM)) that services employers, health plans, unions, and government health programs, is a specialty business. ESRX basically carved its specialty niche as a third-party administrator that processes drug claims via its mail order business and contracted retail pharmacies, like CVS Caremark (NYSE:CVS) or Walgreen (WAG). And though the company has not joined in the bull run as the bigger named pharmacies and big box retailers, the company has ticked up almost 7% YTD. On April 9th the company rejected an unsolicited mini-tender offer from TRC Capital Corporation for 2 million shares, or .24% of the company at $55.75 per share, slightly below its current price of $57.63 per share.

Express Script revenue for 2012 was $93.86 billion, showing a net profit of $1.3 billion. The company's adjusted claims rose to 1.4 billion, up 86% from the previous year, and its EBITDA per adjusted claims was $3.87, up 9%. The company saw gross profits climb 123% to $7.5 billion; and its EBITDA was up 103% to $5.4 billion. Express script forecasts 2013 earnings per diluted share to be between $4.20 and $4.30, representing a 12% to 15% growth over 2012. The company also expects EBITDA per adjusted claims to grow 15% to 18% over 2012, while lowering general and administrative expenses by 8% to 10% below 2012.

The company completed its $19 billion acquisition of Medco Health Solutions in April of 2012 and was able to expand its product portfolio, which has already showed positive results as revenues soared 126.5% in the fourth quarter of 2012 to $27.4 billion. Adjusted earnings were $1.05 per share, in line with the Zacks Consensus Estimate, but an increase of 28.1% from the previous year's fourth quarter. On April 9th Zacks raised its rating on Express Script from an underperform to a neutral, with a target price of $60.00 per share.

Express Script is positioning itself as the leading PBM (pharmacy benefit management) and with the future influx of millions of newly insured customers less than a year away, I think this company is gearing itself up to be the premiere "middleman" when the Affordable Care Act is implemented. Though the company may be near all-time highs, I see a bright future for the company, as I do with most pharmacy stocks, and I expect Express Script's stock to continue to slowly and steadily rise.

$30 BILLION PAIN DRUG MARKET STILL IN NEED OF SPECIALITY PHARMACIES

$30 billion was spent on prescription pain medication last year, and 75% of all doctor visits were due to pain. Prescription pain medication is also the most regulated medicine in the industry. Unfortunately, thousands of people with chronic pain who require and actually need Schedule II pain drugs are caught in the crossfire as many pharmacies, both big box and independents, are reluctant to fill Schedule II drugs, Assured Pharmacy (APHY.OB), a small specialty pharmacy has found a niche as a retail pharmacy that caters exclusively to doctors that prescribe these highly regulated pain medicines to their patients. The key to the company's success has been its ability to operate under the strict compliance guidelines associated with these drugs. The company's goal is to branch out from its current retail stores into the top 25 major metro areas within the next four years. This is a small but growing company that has seen its stock rise over 140% YTD. The company's fully diluted market capitalization is roughly $23 million, and had gross revenues of over $14 million.

HOSPITALS NEED PHARMACISTS TOO

Though the stock hasn't enjoyed a run up this year, PharMerica Corp. (NYSE:PMC), is still up over 15% year- over-year. The company is an institutional pharmacy that services healthcare facilities providing pharmacy management services to hospitals, along with specialty infusion services to patients in skilled nursing facilities, assisted living facilities, hospitals, and in-home patients. The company operates 91 institutional pharmacies and 12 specialty infusion centers in 45 states.

PharMerica flies under the radar, but this company is well run and profitable. The company has a market capitalization of $424 million, and had revenues in 2012 of $1.83 billion, which was down 11.9% compared to 2011 where revenues were $2.08 billion. Net income for 2012 was $22.9 million, or $0.77 diluted earnings per share, compared with $23.4 million, or $0.79 diluted earnings per share for 2011. However, gross profit for 2012 was $300.2 million compared with $294.9 million in 2011. The reason for the lower revenue, but higher gross profit, is that in 2012, 83.3% of the drugs dispensed by the company were generic compared to 79.6% in 2011. Though the generic drug is cheaper, it does carry a higher gross profit.

With more generic drugs on the market the company estimates revenue for 2013 to continue to be lower, coming in between $1.56 billion and $1.69 billion, though it expects net income to rise to an estimated range between $37.3 million to $42 million, and adjusted diluted EPS between $1.39 per share to $1.55 per share. This company quietly goes about its business and makes money. And I think when 2014 hits, PharMerica will make even more money and the stock will have the run it deserves.

CONCLUSION

Though I make references to the Affordable Care Act often in the article, and I strongly believe that the retail pharmacy sector will reap big financial benefits from the millions of new customers, I also think that with or without Affordable Care, these companies profiled have found a segment in the pharmacy and healthcare sector that will propel them to future profits. I think by investing in any of the companies an investor would see strong gains in the years to come.

Due to the market capitalization, its sales volume, and customer base, I see Express Script as the least volatile of the companies profiled. I also see PharMerica and BioScrip as solid companies meeting a demand that will continue to grow as the population ages, but I do like PharMerica because it already is profitable and hasn't had a big rally yet.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Specialty Pharmacies: An Overlooked Segment In A Profitable Industry