Medco Health Solutions (NYSE:MHS), the biggest U.S. drug-benefits manager, reported a 29 percent jump in profit to $228 million and raised its 2007 forecast after selling a higher proportion of generic copies of medicines. Revenue rose 1.2 percent to $10.9 billion. New lower-cost copies of drugs such as Pfizer's (NYSE:PFE) antidepressant Zoloft and Merck's cholesterol pill Zocor have better profit margins for Medco, which buys medicines for employers, unions and insurers. Sales have risen for the past seven quarters, and analysts expect new generics coming on the market to allow Medco to keep growing for several more years. The shift to generics doesn't appear to end for about another three to four years. The model doesn't have any inherent weaknesses.
Rising health-care costs have made drug-benefits managers an attractive option for insurers and other companies seeking access to lower-price medicines. Caremark Rx Inc. (CMX), the second- biggest U.S. benefits manager, has been the focus of a bidding war between smaller rival Express Scripts and CVS, the second-largest U.S. drugstore chain, since late last year. A combination of Express Scripts and Caremark would surpass Medco as the largest benefits manager by annual revenue.