Medco's big bio bet
The company that manages your drug benefits also wants to get into your genes.
(Fortune Magazine) -- Which are the world's most innovative companies? There's Apple, of course, No. 1 on Fortune's 2008 survey of the World's Most Admired Companies and also tops among U.S. corporations in the innovation category. Nike, the sportswear maker that keeps churning out cool athletic gear, is another innovation stalwart, coming in at No. 2 on the U.S. innovators list. But No. 3 may surprise you: Medco Health Solutions, the New Jersey-based firm that manages drug benefits for companies and health-care plans.
Medco (MHS, Fortune 500)? Seriously? Nike (NKE, Fortune 500) and Apple (AAPL, Fortune 500) excel in design, they consistently churn out sleek new products, and their brands are sterling. Medco is hardly a household name, and its business - reducing drug costs for employers and health-care plans - couldn't be more prosaic. But a closer look at this Most Admired Company shows how important it is for even a middleman to take risks and find new ways of doing business - indeed, Medco's continued growth depends on it.
Medco, which was spun off from pharmaceutical giant Merck in 2003, makes money by negotiating discounts for customers and taking a cut from the spread. The huge volume of drugs that have gone generic in the recent past has helped profits soar: Medco's net income last year, for example, climbed 45%, to $912 million, while sales rose 5%, to $44.5 billion. But Medco CEO David B. Snow Jr. admits there are limits to riding the generics wave. "Innovation is going to be our competitive edge," he says.
Medco has already reinvented the way millions of people buy medicine, pushing mail-order delivery of drugs (now a $17.5-billion-a-year business for Medco) early on and getting doctors and pharmacies to accept electronic delivery of prescriptions. But those changes also enhanced Medco's core mission: making the delivery of drugs cheaper. The company's latest stab at innovation - an effort to mine genetic information to see how people will metabolize drugs - is far more unusual and, on the surface, less essential to its core business.
At first glance, it seems to be an unusual direction for Medco: The human genome was mapped only in 2003. And Medco isn't exactly known as a science company. "Until a couple years ago medical R&D wasn't a big part of Medco," says Rob Epstein, its chief medical officer. "We did research on applied questions - like what would happen if copayments go up - but that was it." When Snow joined the firm in 2003 he asked each group leader to propose a new growth opportunity. Epstein's pitch: Medco should research people's chemical reactions to different drugs.
Snow signed on in a big way and in 2006 forged a partnership with the Mayo Clinic, contributing the company's massive database of client information for the research efforts. Snow argues that such research is, in fact, key to Medco's mission of saving clients money. Its records showed, for example, that 22% of patients were hospitalized after receiving the wrong dosage of warfarin, a blood thinner. Using genetic information to determine how much of the drug to give different patients could save health-care providers about $1.1 billion a year. "Our clients know what we're doing," Snow says. "When we manage their patients' diseases, it draws better financial outcomes for them." (Snow says Medco asks patients to volunteer their information for research. Twenty-seven of Medco's corporate customers signed up for the warfarin study.)
Medco's innovations ultimately could translate into new revenue, says Steve Halper, an analyst at Thomas Weisel. "If pharmaceutical-benefits managers provide that type of long-term vision when they pitch customers, they'll get a positive response," he says. That's good for Medco, which faces a slew of competitors, including retailers such as CVS and upstarts promising to charge a flat fee for services rather than a cut of the cost savings they generate for customers. Snow thinks genetic research will become a standard practice in administering drugs. If that happens, it's likely that Medco's competitors will jump onboard. And Medco will have to look for the next big idea to stay ahead of the curve.
This is the first in an occasional series highlighting top performers of Fortune's World's Most Admired Companies survey. 
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