(MHS) Medco Health Solutions and United Drug Terminate Joint Venture

Following the termination of the pan-European joint venture between Medco Health Solutions (MHS) and Germany-based Celesio AG, Dublin-based United Drug Plc recently decided to exit from its UK homecare partnership with Medco.

As per the terms of the deal, Medco will own 100% interest in this project following the acquisition of United Drug’s 50% stake. The transaction is expected to be completed by November, 2011. However, the financial and other terms of the termination agreement remain disclosed.

The joint venture, which came into existence in 2009, focused on the pharmacy homecare market in UK by providing a high level of service to patients with chronic and complex conditions and supporting the National Health Service (NHS) initiatives. We expect this move to be a hindrance for Medco in achieving its goal of gaining traction in the European market.

However, Medco believes that UK business will continue to offer NHS a complete range of services, from prescription drug dispensing, home delivery to home nursing support for the administration of oral, inject able and infused agents.

Medco has been witnessing severe challenges over the past few months as it lost several contracts. This included the loss of PBM contract with its largest client, UnitedHealth (UNH), the Federal Employee Program (FEP) contract, the Medicare Part D business of Universal American and the biggest US public pension fund California Public Employees’ Retirement System (CalPERS), all to CVS Caremark (CVS). In August 2011, Medco also lost its PBM contract with Blue Cross and Blue Shield.

Despite undertaking various efforts, Medco was not able to successfully overcome these headwinds. In July this year, Medco announced that it will be acquired by Express Scripts (ESRX) for $29.1 billion in cash and stock (the biggest in the health care industry).

Although we expect the combined entity to pose a major challenge for its peers by becoming the largest PBM provider, we remain concerned about the uncertainty regarding the successful completion of the deal due to the potential anti-trust challenges from the Federal Trade Commission (FTC). Medco will suffer a major blow if the deal falls through.

We currently maintain long-term Neutral recommendations on Medco, in line with both CVS and Express Scripts. However, the upside potential of Medco is limited.

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