Earnings Preview: Medco Health Solutions

OVERVIEW: The Franklin Lakes, N.J., company signed two key contracts during the quarter. In April, Medco renewed a contract with health insurer UnitedHealth Group Inc., one of its biggest clients. The agreement will run through the end of 2012, and Citi analyst Charles Boorady said it will bring Medco $10 billion in annual revenue--about 20 percent of its total over that period.

In June, Medco agreed to provide pharmacy services for insurer Coventry Health Care Inc.

BY THE NUMBERS: On average, analysts polled by Thomson Financial expect Medco to post a profit of 54 cents per share on $12.59 billion in revenue.

ANALYST TAKE: Jefferies analyst Arthur Henderson expects a strong quarter for Medco and its rival Express Scripts Inc. because of increasing use of mail-order pharmacies and growing prescriptions of generic drugs, which are more profitable for PBMs. He said both companies might raise their full-year forecasts.

WHAT'S AHEAD: Boorady said the most important aspect of Medco's report will be the effect of weak consumer confidence and economic difficulties on prescription growth.

Henderson sees the acquisition of Barr Pharmaceuticals by Teva Pharmaceutical Industries as a positive for pharmacy benefits managers because the larger company will have more funds to launch generic drugs "at risk"--or before their patents expire. He added that the combined company might also offer bigger discounts to Medco and Express Scripts.

Medco expects to earn between $2.27 and $2.31 per share this year.

STOCK PERFORMANCE: The stock rose 7.8 percent to end the quarter at $47.20. It ranged between $42.91 and $52 between April and June, and closed at $45.70 Monday.