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Medco Health Solutions, Inc .

Medco Health Solutions, Inc. Yuqian (Annie) Zhang Piotr Chorzewski Nov. 18 th , 2004. Basic Facts. Split from Merck in August 2002 Share Price on August 21 st $25.57 36 shares x $38.76=$1,395.36 on Nov. 16 th 2004 Gain 51.58% P/E: 22.81 EPS: 1.7. Industry.

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Medco Health Solutions, Inc .

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  1. Medco Health Solutions, Inc. Yuqian (Annie) Zhang Piotr Chorzewski Nov. 18th, 2004

  2. Basic Facts • Split from Merck in August 2002 • Share Price on August 21st $25.57 • 36 shares x $38.76=$1,395.36 on Nov. 16th 2004 • Gain 51.58% • P/E: 22.81 • EPS: 1.7

  3. Industry • Prescription Benefit Management • Customers base • Competitive environment • Business model • Industry controversy & litigations

  4. Stock performance

  5. Profitability

  6. Basic financial comparison - EPS

  7. Basic comparison – Gross Margin

  8. Basic comparison – Operating Margin

  9. SWOT Analysis • Strength • Top one in terms of absolute volume of mail orders • More than total of three largest competitors in 2003 • Mail order service typically reduces prescription drug costs by 8-10 percent • Weakness • Overall low growth with huge contract losses Sales growth2003-20022002-2001 Caremark 33% 21% Express Script 8% 42% Medco 4% 13.4% • Low profit margin • Impact from Merck

  10. SWOT Analysis • Opportunities • Aging population • Growing demand for generic and mail pharmacy • Threat • Competition from other PBM companies and retail pharmacies • Increasing prescription drug cost • Ongoing government probe of the company as well as the other PBMs

  11. Valuation-DCF Sales in $M Growth rate EBIT in $M EBIT margin Free cash flow Discount rate 8.9 9.8 10.7 Target price(constant growth) 41.9 35.7 30.9

  12. P/E=14 P/E=18 P/E=22 P/E=26 Valuation-Multiples Projected EPS

  13. Sensitivity analysis

  14. Recommendation-sell • Sell 36 shares of Medco at the market • Contingency plan if any interests in the industry • Monitor the progress of the legal issues in the industry in the near future • Perform valuation of other PBMs such as Caremark if do have confidence in the industry

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