Higher profits on lower revenue is usually not a recipe for success, but for pharmacy benefit manager MedcoHealth Solutions
You see, PBMs make their money by saving their clients -- health insurers and employers -- money. Selling generic drugs results in less revenue due to their lower cost, but they result in more profits.
In the third quarter, generics made up 71.6% of the prescriptions dispensed, up 3.9 percentage points from the year-ago quarter.
The coming wave of generic drugs that will hit the market should only drive that number higher. Medco is looking for EPS growth of 12% to 17% next year and characterized 2012 as having the largest contribution from new generic introductions in the company's history.
Of course, the bullish news also helped its competitors -- Express Scripts
If PBM businesses really are so valuable, one has to wonder if more insurance companies that manage their own drug business in house might sell or spin them out to unleash the value for investors. Last year, WellPoint
But we're getting a little ahead of ourselves. For now investors should just enjoy the idea the Medco and its peers look like they have substantial growth left in them.
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Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. UnitedHealth and WellPoint are Motley Fool Inside Value recommendations. MedcoHealth Solutions and UnitedHealth are Motley Fool Stock Advisor picks. The Fool owns shares of UnitedHealth, on which Motley Fool Options has recommended a diagonal call position. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.