The document provides an overview and analysis of MedcoHealth Solutions (MHS), a pharmacy benefits manager. It describes MHS's business model, growth opportunities in specialty pharmacy and generics, competitive landscape, and financial projections. The Penn State Investment Association team recommends benching MHS until after its November 1 earnings report, citing risks around contract renewals and a lawsuit.

1. Penn State Investment Association Healthcare MedcoHealth Solutions MHS (NYSE) Keith Fenderson AinsleyWoolridge Mike Mathis The Nittany Lion Fund, LLC. MHS expected to report Nov 1

2. Team Recommendation: Bench Top Three Reasons to Purchase:

4. International EPS contribution likely to begin in 2015

5. International Expansion into key European markets

7. PBM services include retail network pharmacy management and retail drug card programs; home delivery pharmacy services; specialty pharmacy services; patient care contact centers; benefit plan design and consultationserving HMOs, health insurers, third-party administrators, employers

8. CVS Caremark (CVS)

9. Pharmacy services operating in two segments, Pharmacy Services and Retail Pharmacy. The Pharmacy Service segment provides a range of prescription benefit management services, including mail order pharmacy services

10. Catalyst Health Solutions (CHSI)

12. $29 billion of drugs coming off patent in 2012 estimated $.60-$.65 EPS contribution in the year alone

13. Medco makes 5-10x more profit on generic drugs

14. Currently 5/10 top grossing drugs are biologics, and by 2016 that will increase to 9/10

15. Pending formal FDA approval process for biosimilars (generic biotech)

16. 46 biotech products ($42.3bb) coming off patent through 2020

17. Over 611 specialty compounds currently in phase II, III testing

18. 2010 prescription volumes up 6.5% to a record 957 million prescriptions, generic dispensing rate rose 3.5 to 71%

21. ~95% for ESRX, ~97-98% for CVS

22. $5.3 billion in net new sales in 2010, $1.5 net new sales at year end for 2011

23. Incredibly high barriers to entry in PBM industry due to scale, pricing power, high desired service level in long term customer relationships

24. Earnings growth from demographic, legislative, and generic shifts will be significantly compounded by mail order service and utilization

25. Worlds largest mail order pharmacy allows members to order longer three month prescriptions which results in substantially higher margins and higher adherence

26. Entrance into online OTC drug market

27. First and only Prescription Drug Provider to ever win 5 stars from Governmental Center for Medicare/Medicaid Services’

29. Focuses on specialty medicines expensive and difficult to administer, that are used to treat chronic and life-threatening diseases

30. Specialty pharma to be a significant driver of growth/ margin expansion

31. 17% of sales in 2010, 30% of sales in 2015

32. Clients look for a full value proposition when choosing benefits manager

33. Unparalleled proprietary services combined with bolt-on acquisitions

34. United BioSource acquisition “makes medicine smarter” by promoting medical treatment based on research evidence

35. Post-approval testing (Phase IV) for safety, economic cost-benefit evaluation, and outcomes research

36. UBC anticipates sales will have an annual growth rate of 20%

38. Closes the gap between scientific discovery and medical practice in order to make healthcare more precise

39. The Center for Therapeutic Resource - pharmacy specialists driving adherence

40. Poor drug adherence and mismanagement account for >$350b in waste/ yr

41. Omission gaps are not uncommon, TRC monitors prescription drug use in patients with chronic conditions and aims to close these gaps

42. Personalized medicine and genetic testing represents $10-15 billion market

43. Medco has positioned itself for market leading genomic research through its acquisition of DNA Direct

44. Pharmacogenetics improve care and lower overall healthcare costs

45. Creates less waste, greater dosing precision, reduced risk of adverse affects and higher probability of a successful therapy

47. Comparable Analysis

48. Five Year Summary

49. Projections

50. Growth Analysis & CAGRS

51. Discounted Cash Flow

52. One Year Stock Chart 7/22/10: Medco earnings missed analyst expectations by $0.02 3/18/11: Medco was sued by a member of CalPERS’ health plan alleging that CalPERS members had been paying too much for medications 11/2/10: Medco beat earnings and raised its full-year earnings estimate 8/16/10: Medco announced the purchase of United BioSource for $730MM

54. Medco likely not the target of federal investigations

55. Two large clients up for renewal: Federal Employee Program & UNH

56. Negotiations will begin with UNH this summer

57. FEP will likely decide renewal in May

58. Weaker than expected new business wins or client retention

59. Competitive pressure on profitability metrics

60. Competitors desperate to win contracts may bid irrational pricing

61. Difficulties surrounding the integration of recent acquisitions (e.g. UBC)

63. Debt & Correlation

64. Questions or Comments? MHS expected to report Nov 1

66. Potential for more adverse legislation traded down on Obama’s budget plan

67. Historically HMO’s have traded at 13-18x, currently at 10x

68. While we still think that there is more room for multiple expansion, we feel that we need to be prepared to make a move after earnings season

70. Most bullish on PBM’s for 2011 and Medco specifically (OW $78 PT)

71. CalPERS

72. Believes CalPERS has a marginal impact– itself was only $500mm sales

73. Only issue might be with Government contracts, and harder sell for new clients

74. Federal Employee Program- FEP (renewal decision expected in may)

75. FEP mail order contract .22-.31 in EPS

76. *Medco mail order business is twice as big as ESRX and CVS, more service offerings

77. United Health Group contract (End in 2012)

78. Potential for UNH to internalize contract over 2013-2015- Expectation priced in

79. $.24-$.27 of 2010 EPS (6-8%)

80. Worst case- $.60 overall potential impact of CalPERS, United, FEP, and some key renewals

81. See last slide