Selling Medco as Walmart Guns for Pharmacy Benefit Managers

A reader noticed the weakness in MedcoHealth Solutions (MHS) - since I had cut this to a measly 10 share position I was not watching it very closely. But it was down from (split adjusted) $106 to $94 last week, with no rebounding. I had bought this stock as a 'safety play' [Two New Positions in the Healthcare Field], but once again news like this from Walmart shows nothing is really safe out there, and very little can you buy and hold for 5-10 years. The competitive landscape seems to change at light speed.

• Wal-Mart Stores Inc. is stepping into the lucrative pharmacy-benefits arena, in a move likely to shake up a field that has been dominated by just a handful of players.
• In a speech yesterday before 7,000 Wal-Mart store managers at a meeting in Kansas City, Mo., Chief Executive Lee Scott said Wal-Mart is initiating a pilot program to help "select employers ... manage how they process and pay prescription claims."
• Pharmacy-benefit managers, or PBMs, are the companies behind the cards that insured patients present at drugstores in order to fill their prescriptions. Most U.S. employers contract with PBMs to provide prescription-drug coverage to their workers, and in exchange, the PBMs promise to negotiate lower prices from retail pharmacies and obtain rebates from drug manufacturers. PBMs also may own their own mail-order pharmacies, and increasingly make much of their profits from big markups on generic drugs.
• A record number of blockbuster drugs are going generic, fueling strong profits and rising revenue among the PBMs. CVS Caremark Corp. is expected to report revenue of $76.13 billion for 2007, while Medco Health Solutions Inc. is expected to post revenue of $44.7 billion and Express Scripts Inc. $18.4 billion, according to Morgan Stanley. Combined, the three companies processed or filled 387 million prescriptions in the third quarter of 2007.
• Wal-Mart could take a chunk of that; the company is already the third-largest pharmacy in the U.S. in terms of sales, after CVS and Walgreen Co.
• "Our conversations with employee-benefit managers suggest they're open to alternative approaches, so there's room in the marketplace for a different type of offering," says David Veal, PBM analyst at Morgan Stanley. "As the U.S. economy gets tougher, employers are going to look for new ways to control costs, and Wal-Mart will find a receptive audience" for new solutions to high drug prices. But, he notes, Wal-Mart will still have convincing to do. "Traditionally, employers are risk-averse; they're hesitant to move just on price."

While any serious steps will take some time to work out, "perception is reality" and if perception is Walmart is gunning for your business, that can hurt the stock. So we can see a situation where investors overreact to the situation on the ground but that doesn't matter to us as investors - if we are in a stock that is unfairly taken down - well we still are sitting on a loss.

So at this point, I am exiting my tiny remaining position in MedcoHealth Solutions (MHS) by selling these last 10 shares. The stock served its purpose as it held up very well while the rest of the market was selling off, and since I sold when it was holding up, I locked in a decent profit. I'm trying to find some safe havens out there, but after watching the performances in this last selloff, nearly nothing is truly safe. [Even Altria is Getting Hit & Some Walmart Commentary]. I am still considering Altria (MO), although I'd prefer the Philip Morris International IPO... or even Walmart (WMT)  itself as people become poorer on an inflation adjusted basis. I'm going to wait until February to assess Walmart when it has its earnings but the relative strength in the stock has been quite impressive (granted it doesn't move up a lot, but it sure doesn't fall either) [What Safety Sectors are Working, What are Hoaxes?] What I really want to find is what can still do well as inflation attacks the bottom 80%. It seems like names like Walmart and McDonalds (MCD) are natural selections as people downshift to cheaper fare...

Disclosure: No positions

Comments

[bike 05673]

Every reason you give is why DMX is a company you should study!!!