Dear Mr. Berko:

I bought 200 shares of Accredo Health at $14 a share in 2003 when I began using the company’s services to save money for my Crohn’s disease medications. As you know, it is being bought out by Medco Health. What would you think of my purchasing 200 shares of Medco?

H.W., Mount Clemens, Mich.

Dear H.W.:

Medco Health Solutions Inc. (MHS-$53.30) was spun off by Merck & Co. Inc. in 2003 and now is the largest pharmacy benefits manager in the country, with $35 billion in 2004 revenues and 70 million customers. MHS negotiates pharmacy discounts and rebates for its clients and processed 500 million prescriptions last year. It’s doing so well that this year’s earnings may grow by 40 percent to $2.40 a share.

Medco is hellbent for leather, and most of the suits on the Street believe its business model is impervious to higher prices and the economic cycle. Andrew Costanza of Value Line thinks the stock’s price will explode to the mid-$80s, First Call has a “strong buy” on the stock, Wachovia gives it an “outperform” rating and the company recently debuted on Fortune’s “America’s Most-Admired Companies” list. Everything is going swimmingly for MHS and the suits are having a love fest with this company.

However, some knowledgeable civilians tell me that MHS isn’t what it purports to be. Though Medco supposedly shifts a portion of prescription costs from the employer to the employee, it often charges the hapless schnook a lot more than Walgreen’s, CVS or Albertson’s for the same medication. And the company has the chutzpah to tell the employee to mail their prescription to Dallas, wait for it to be filled at a higher price and expect it back 10 days later by snail mail. Then, too frequently, Medco (in order to save a few bucks) may send you a generic that doesn’t work.

I suspect that MHS’s earnings growth will slow a bit. The Federal Employee Program, which accounted for 13 million prescriptions in 2004, will stop using Medco, and I suspect that other organizations may follow suit. Last year Medco was charged with defrauding its customers (overcharging), then settled the charges with a paltry payment of $30 million. A lot of good that did, because Medco still overcharges the unsuspecting, who have no idea that they can buy the same prescription at Walgreen’s for half the cost. It seems there’s enough payola involved to allow this continued rip-off and certainly enough payola to encourage state and federal politicians to allow it to continue.

MHS’s acquisition of Accredo Health Inc. (ACDO-$45.18), a $1.5 billion company, makes good sense. ACDO is basically in the same business but specializes in high-cost drugs for chronic and life-threatening diseases. Still, I’m wary of this acquisition, because I believe the ACDO people are as honest as the world is round. Accredo sells higher-margin pharmaceuticals and last year earned only $78 million on $1.6 billion in revenues. However, MHS with $3.2 billion in revenues earned $485 million, or six times as much money. Some suggest that the cultural differences between the management of these two firms may be as different as cheese and chalk. I hope that the ACDO folks will be able to resist Medco’s corrupting influence. You’ll know soon if the cost of your monthly prescriptions for Crohn’s disease doubles or triples.

I’m delighted that you earned a nice profit on Accredo and I’m required to tell you that some of our more aggressively managed accounts owned shares, too. They also have asked if we are going to use the proceeds to purchase MHS and our answer is a resounding “No!”

Medco’s performance since 2000 has been quite impressive. Revenues have more than doubled, earnings have more than doubled and the share price ran from $20 to over $48. But I suspect that the company has much less bounce to the ounce today than it had a few years back.

Medco’s actions probably will cause the Department of Defense to cancel its account and some of the Blues soon might move their pharmacy programs to other suppliers. There’s a rumor that the company’s largest client (UnitedHealth Group Inc., which accounted for 22 percent of 2004 revenues) may pull its business, too. And a recent suit in the Eastern District of Pennsylvania alleges that MHS shortchanged pill counts and bribed some health plans to win state benefit contracts.

We trust MHS about as much as a laboratory rat would trust a research biologist. Don’t buy it.

I think Express Scripts Inc. (ESRX-$85.60) and Caremark Rx Inc. (CMX-$40.59), which are in the same business, can easily go head-to-head with MHS and make good bucks without ripping off their customers.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.