Richard Rubino began college with an interest in dentistry, but ended up in quite a different part of the world of medicine. As the CFO of Medco Health Solutions, the country’s largest pharmacy-benefits manager, Rubino helps to provide prescription medications to approximately 65 million people. A $60 billion company, Medco designs, oversees, and administers employee prescription-drug programs for companies and insurers, among others. Its primary role is that of middleman, buying drugs from wholesalers and reselling them through mail-order services. Among its ancillary services is the Medco Research Institute, which is using technology to ensure that patients get the right drugs, remember to take them, and avoid adverse interactions — in part through a new set of services directed at physicians to help them prescribe drugs based on a patient’s personal genetics.
The 52-year-old Rubino, who worked for IBM and PricewaterhouseCoopers before joining Medco in 1993, hopes the efficiencies Medco has helped create internally will have larger implications for the health-care system as it strives to cut costs. “We have a 99% client-retention rate, and our clients stay with us because we’re sucking the waste out of the system,” he says. “We’re reforming health care on our own.”
Your net revenues were up 17% last year, with a nearly equal increase in net income. Is your business essentially recession-proof?
What we saw was, while more-expensive brand-name drugs were not being utilized as much as they had been, lower-cost generic drugs actually increased in utilization. That’s very important for our clients and patients because it saves them a lot of money. It’s also good for Medco, since currently we make about half of our profits dispensing generics through mail order. For every $100 million of a brand-name drug that goes generic, our clients save $50 million, and Medco makes an additional $10 million because there’s a much higher margin on generics.
How else do you make money?
We have specialty pharmacy: very, very expensive drugs, for diseases that include cancers, pulmonary arterial hypertension, multiple sclerosis, hemophilia, and rheumatoid arthritis. [Sixteen percent of Medco's revenues came from this segment last year.] But the majority of our revenue [62%] comes through the retail channel, where a member can go to any retail pharmacy and Medco reimburses that pharmacy for having dispensed that prescription. Alternatively, a consumer can go straight to Medco [for mail order], because you can get the convenience of a 90-day supply in your mailbox and you can save a lot of money.
Does Medco benefit more from one channel versus another?
We make much less per prescription on retail than we make from mail. But the interesting thing about retail is that we don’t have any invested capital: we don’t own the bricks and mortar or the inventory. So our return on invested capital [ROIC] in the retail environment is actually very high.
Medco added ROIC to its bonus performance metrics this past year. Is it something you focus heavily on?
It’s core to how I manage the business. ROIC was about 20% in 2008, it was more than 27% in 2009, and I’ve guided the investment community to well over 30% in 2010. For a company that has around a $17 billion balance sheet, that is quite a feat. One of the ways we’ve gotten there is by focusing on right-sizing our working capital. The largest single component [involved taking] several hundred million dollars out of our inventory balances [from] their high point in the middle of 2008. We were over $2 billion [in inventory] and now we’re in the $1.3 billion range. I would like to bring it down this year to $1.1 billion. [For more on working capital, see "Working It Out."]