Medco's Far-From-Generic Quarter

Medco Health Solutions (NYSE: MHS) and its former parent, Merck (NYSE: MRK), were polar opposites this week. Merck announced that the FDA rejected its newest cholesterol-lowering drug, but reaffirmed guidance for the year. Medco reported a pretty strong quarter, and only reaffirmed guidance.

Both actions had the same effect on their stock price, though. Down. Down. Down.

The pharmacy benefit manager's earnings per share were up 6.4% year over year to $0.50, which is really impressive; the first quarter last year contained sales of generic versions of Sanofi-Aventis' (NYSE: SNY) and Bristol-Myers Squibb's (NYSE: BMY) Plavix that have since been removed from the market.

The increased income was driven by a 13.7% growth in mail-order prescription volume. Retail prescription volume increased a respectable 6.4% year over year. Generic drug dispensing rates, which are easier for the company to leverage, were up 510 basis points probably due to the new generics available, like Merck's osteoporosis drug, Fosamax, and Wyeth's (NYSE: WYE) heartburn medication, Protonix.

If things are looking so good, why did Medco's stock drop so precipitously? It appears investors were disappointed that the company didn't boost earnings guidance for the year. They're worried that a strong first quarter without a boost in guidance means weak quarters to come.

While that's certainly a possibility, it might be that management is being a little conservative. After guiding for 2008 earnings per share growth of 27% to 29% over 2007, who can blame management for being just a little cautious about upping guidance even more so early in the year?

With a continuing downturn of the economy, customers are likely to be more price conscious in the future -- they certainly can't stop taking their medication -- and that bodes well for Medco's mail-order prescription business, which usually results in lower costs for the customers.

Considering that rival Express Scripts (Nasdaq: ESRX) did raise guidance, I'm inclined to guess that Medco's lack of raised guidance is more likely due to caution from management than a slowdown in the pharmacy benefit management industry.