Medco Health Solutions, Inc. Yuqian (Annie) Zhang Piotr Chorzewski Nov. 18th, 2004 07/11/2018

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 07/11/2018

Prescription Benefit Management Customers base Competitive environment Industry Prescription Benefit Management Customers base Competitive environment Business model Industry controversy & litigations Prescription Benefit Management – the main goal is to help control drug expanses of its clients. To deliver Drugs to customers of its customers for a low price. Customers Blue Cross/Blue Shield plans; managed care organizations; insurance carriers; third-party benefit plan administrators; employers; federal, state and local government agencies, and union-sponsored benefit plans. One can’t say that it is highly competitive environment in which Medco operates. There are three main players Medco Health Solutions Experess Script Caremark There are also smaller Internet Pharmacies. However Medco is strong in this market segment. Medco claims to developed the nation’s largest Internet pharmacy. 07/11/2018

Stock performance 07/11/2018

Profitability PBM Revenue Medco Caremark Express Script Retail Revenue 22,661.1 4,522.1 9,037.25 Mail Revenue 11,252 4,487.8 3,988.14 Services Revenue 351.4 57.4 72.9 Total 34,264.5 9,067.3 13,089.26 Gross Margin 4.4% 8.47% 4.7% Operating Profit Margin 2.41% 5.85% 3.38% 07/11/2018

Basic financial comparison - EPS 07/11/2018

Basic comparison – Gross Margin 07/11/2018

Basic comparison – Operating Margin 07/11/2018

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 Strength: Mail order service typically reduces prescription drug costs by 8-10 percent. Medco mail orders growth: 2003-2002 7% , 2002 –2001 18.8% , in 2003, took 33% of total revenue Caremark mail orders growth: 2003 –2002 31% , 2002-2001 22%, in 2003, took 49% of total revenue Express Script mail orders growth: 2003-2002 10%, 2002-2001 47%, in 2003, took 30% of total PBM revenue Mail penetration in Q3 2004 Caremark 20.9%, Express Script 23.3%, Medco; 40.1% Weakness: In mid-2004, contract losses exceed $2B including big clients such as Independence Blue Cross, Texas Retirement, and state of Ohio. Starting from Q1,05, loses its largest mail customer Federal Employees. Although the company announced new business 1.2B for 2005, the net result is still negative. 07/11/2018

SWOT Analysis Opportunities Threat 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 Opportunities: Medco proactively educates physicians and patients about generic drugs as quality, low cost alternatives. Generics First program facilitates the switch from brand name drugs to genetic ones. High volume of purchase directly from drug manufacturers enables Medco to sell generic drugs at substantially lower prices for customers while increasing its margin. Threats: MHS has lost retail business to competitors, although mail orders keep growing, the overall growth is slow. Medco took a hit Tuesday over concerns that problems in the broader insurance sector -- which is targeted by New York Attorney General Eliot Spitzer for alleged bid-rigging -- could prove contagious. Most analysts downplayed the exposure for health benefit companies, especially PBMs PBMs have increasingly become targets of government investigators who suspect them of unfairly profiting at their customers' expense, Medco: government settlement that could reach as high as $1 billion PBMs originally relied on processing fees from their customers to generate profits. But over the years, she said, PBMs have come to depend on suppliers -- who offer rebates and other incentives -- for most of their earnings. Because PBMs often conceal these sums as competitive information, she said, their customers have been unable to nail down the reasons for their climbing drug costs. “PBMs have been the source of significant scrutiny over the years by a variety of sources," wrote Merrill Lynch analyst Thomas Gallucci. And "while such scrutiny has created share-price volatility in the past, the industry's business practices have not been materially impacted as a result of these examinations so far." The government has accused Medco of defrauding government customers in multiple ways. Consumers care price and quality, while it is hard for PBM to differentiate themselves in terms of service quality in this industry, lower price is the only way, while with the increasing drug cost, already low margin, volume is key point. Whoever achieve the higher volume growth will win in the long term, consolidation will be favourable to increase market share. 07/11/2018

Valuation-DCF Discount rate 8.9 9.8 10.7 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 07/11/2018

Valuation-Multiples Projected EPS P/E=14 P/E=18 P/E=22 P/E=26 07/11/2018

Sensitivity analysis 07/11/2018

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 07/11/2018