Medco Health Solutions, Inc.

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 38.761,395.36 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 growth 2003-2002 2002-2001
• 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
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