Medco Reports Strong First-Quarter Results; Record EPS, Mail-Order Volume, Generic Dispensing Rates

FRANKLIN LAKES, N.J., April 29 /PRNewswire-FirstCall/ -- Driven by record mail-order volume, generics performance, and a spectacular sales year, Medco Health Solutions, Inc. (NYSE: MHS) today reported an increase of 6.4 percent in first-quarter 2008 GAAP diluted earnings per share to $0.50, compared to $0.47 for the first quarter of 2007. Excluding $0.05 per share in amortization of intangible assets that existed when Medco became a publicly traded company, first-quarter 2008 diluted earnings per share increased 5.8 percent to $0.55 from $0.52 in first-quarter 2007.

"With record-setting performance across our core growth drivers, including particular strength from mail-order volumes, generics and specialty, as well as continuing strong new business growth and renewals, Medco remains on track to achieve its 27 to 29 percent earnings per share growth expectations for 2008. Our 2008 annualized new-named sales grew to $5.1 billion from the previously reported $4.9 billion and retention rates remained at a historically high 98 percent. Additionally, 2008 net-new sales climbed to $4.6 billion, up significantly from the previous $4.0 billion," said David B. Snow Jr., Medco chairman and CEO.

"The recently announced new and aligned agreement with UnitedHealth Group through the end of 2012 provides opportunities for both Medco and UnitedHealth Group, advancing our relationship with this important client. Also, our recently announced international initiatives in Sweden and Germany provide long-term opportunities that extend our technological and operational expertise beyond the United States. These initiatives are part of a broader, multifaceted growth strategy that holds great promise for the future," Snow said.

Richard J. Rubino, chief financial officer, added: "Our strong first-quarter 2008 EPS growth is particularly satisfying in light of the first-quarter 2007 benefit from the short-term availability of generic Plavix(R), which made first-quarter 2007 the strongest quarter in 2007. In the first quarter of 2008 we successfully installed significant new accounts such as FEP, State of New York, and HIP of Greater New York, and incurred related start-up costs amounting to approximately $8 million or $0.01 per share. Also, our first-quarter demonstrated a strong growth rate despite a non-recurring interest rate swap write-off associated with our March 2008 senior notes issuance, amounting to $9.8 million, or $0.01 per share."

First-Quarter Financial and Operational Results

Medco reported record net revenues of nearly $13.0 billion, a 16.2 percent increase from first-quarter 2007. Net revenues increased primarily as a result of price inflation on brand-name drugs, and higher volumes associated with significant new client wins, partially offset by higher generic dispensing rates. Diabetic supplies associated with our PolyMedica acquisition also contributed to the net revenues growth.

The record generic dispensing rates, which benefit clients and members and contribute to higher gross margins, reduced net revenues by approximately $750 million compared to the first quarter of 2007.

Total prescription volume, adjusting for the difference in days supply between mail-order and retail, increased 9.1 percent from the first quarter of 2007 to 206.7 million prescriptions. Mail-order prescription volume increased 13.7 percent to 26.6 million. Retail prescription volume increased 6.4 percent to 127.2 million. Adjusted mail-order prescriptions as a percentage of total adjusted prescriptions increased 1.5 percentage points, reaching 38.4 percent. (Please see Table 6 for the calculation of adjusted prescription volume).

Total gross margin of 6.9 percent remained consistent with the first quarter of 2007, which benefited from the short-term supply of generic Plavix. For the first quarter of 2008, record-level mail-order prescription volume and generic dispensing rates, partially offset by the start-up costs from the significant new client installations, contributed to sustaining the margin percentage at a rate comparable to the strong first quarter of 2007. (Please see Table 5 for generic dispensing rate information).

Total selling, general and administrative expense increased 32.2 percent to $328.4 million from the first quarter of 2007. The increase reflects the fourth-quarter 2007 acquisitions of PolyMedica and Critical Care Systems, and employee-related costs associated with enterprise-wide business growth, including client and product support activities.

Earnings Before Interest Income/Expense, Taxes, Depreciation and Amortization (EBITDA) for the quarter increased $45.1 million, or 8.0 percent, to $611.9 million compared to the same period last year. EBITDA per adjusted prescription decreased 1.0 percent to $2.96, compared to $2.99 in the first quarter of 2007, reflecting the Plavix benefit in first-quarter 2007 and the new client start-up costs. Sequentially, EBITDA per adjusted prescription increased 16.5 percent from $2.54 in the fourth quarter of 2007, which included $38 million in fourth-quarter start-up costs and expenses. (Please refer to Table 6 for a reconciliation of EBITDA to reported net income).

Interest and other (income) expense, net, of $54.3 million in first- quarter 2008 increased $39.4 million over the first quarter of 2007, largely attributable to higher debt levels from the 2007 refinancing and the senior notes issuance in March 2008. This expense also includes a $9.8 million non-recurring charge from a swap write-off associated with the issuance.

The effective tax rate for the first quarter of 2008 was 39.7 percent, in line with first-quarter 2007. Net income of $270.2 million declined 1.7 percent from the same quarter last year, primarily reflecting the Plavix benefit in first-quarter 2007, and the first-quarter 2008 new client start-up costs and swap write off.

Medco generated year-to-date cash flows from operations of $165.5 million, compared to $100.5 million for the same period in 2007, reflecting strong cash flows from core operations. The company closed the first quarter of 2008 with $540.6 million of cash on its balance sheet.

Senior Notes Issuance

On March 18, 2008, Medco completed an underwritten public offering of $300 million aggregate principal amount of 5-year senior notes and $1.2 billion aggregate principal amount of 10-year senior notes. Medco used the net proceeds from the sale of these senior notes to repay borrowings under its revolving credit facility used to fund the PolyMedica acquisition.

Share Repurchase Program

In conjunction with its $5.5 billion share repurchase program, Medco repurchased 21 million shares at a cost of $1 billion during the first quarter, representing an average per-share cost of $47.55. From the inception of the share repurchase program in 2005 through the end of the first quarter of 2008, Medco has repurchased 132.4 million shares at a total cost of $4.5 billion, with an average per-share cost of $34.10.

Specialty Pharmacy Segment

Revenues for Medco's specialty pharmacy segment, Accredo Health Group, achieved a new record and grew 30.3 percent to nearly $1.9 billion, compared to $1.4 billion in the first quarter of 2007, primarily the result of the contribution from significant new clients commencing in January 2008, and the addition of Critical Care Systems in fourth-quarter 2007.

Gross margin in first-quarter 2008 of 7.7 percent declined from 8.0 percent in first-quarter 2007, reflecting new client mix and start-up costs from new client installations. Operating income rose 19.1 percent, to $63.7 million from $53.5 million in the first quarter of 2007, driven by increased mail-order volume from the new business.

Reaffirming 2008 Guidance

For full-year 2008, Medco continues to expect GAAP diluted earnings per share in the range of $2.07-$2.11, representing growth of 27-29 percent over 2007. Diluted earnings per share in 2008, excluding the effect of amortization of intangibles that existed when Medco became a public company, continue to be projected in the range of $2.27-$2.31, a growth rate of 25-27 percent over 2007. (Please see Table 9 for a reconciliation of earnings per share guidance).

Use of Non-GAAP Measures

Medco calculates and uses EBITDA and EBITDA per adjusted prescription as indicators of its ability to generate cash from its reported operating results. These measurements are used in concert with net income and cash flows from operations, which measure actual cash generated in the period. In addition, Medco believes that EBITDA and EBITDA per adjusted prescription are supplemental measurement tools used by analysts and investors to help evaluate overall operating performance and the ability to incur and service debt and make capital expenditures. EBITDA does not represent funds available for Medco's discretionary use and is not intended to represent or to be used as a substitute for net income or cash flows from operations data as measured under U.S. Generally Accepted Accounting Principles (GAAP). The items excluded from EBITDA, but included in the calculation of reported net income, are significant components of the consolidated statements of income and must be considered in performing a comprehensive assessment of overall financial performance. EBITDA, and the associated year-to-year trends, should not be considered in isolation. Medco's calculation of EBITDA may not be consistent with calculations of EBITDA used by other companies.

EBITDA per adjusted prescription is calculated by dividing EBITDA by the adjusted prescription volume for the period. This measure is used as an indicator of EBITDA performance on a per-unit basis, providing insight into the cash-generating potential of each prescription. EBITDA, and as a result, EBITDA per adjusted prescription, is affected by the changes in prescription volumes between retail and mail order, the relative representation of brand- name, generic and specialty drugs, as well as the level of efficiency in the business. Adjusted prescription volume equals the majority of mail-order prescriptions multiplied by 3, plus retail prescriptions. These mail-order prescriptions are multiplied by 3 to adjust for the fact that they include approximately 3 times the amount of product days supplied compared with retail prescriptions.

Medco uses diluted earnings per share excluding intangible asset amortization expense that existed when Medco became a public company in 2003 as a supplemental measure of operating performance. The excluded amortization is associated with intangible assets that substantially arose in connection with the acquisition of Medco by Merck & Co., Inc. in 1993 and were pushed down to Medco's balance sheet. The company believes that diluted earnings per share, excluding the amortization of these intangibles, is a useful measure because of the significance of this non-cash item and enhances comparability with its peers. The intangible asset amortization resulting from Medco's acquisitions, such as the acquisition of Accredo Health, Incorporated in August 2005, is not part of the excluded amortization in this calculation because it results from a Medco investment decision.

Conference Call

Management will hold a conference call to review Medco's financial results and operating outlook on April 29, 2008 at 8:30 a.m. ET.

To access the live conference call via telephone:

Dial in: (800) 949-5383 from inside the U.S., or (706) 679-3440 from outside the U.S.

To access the live webcast:

Visit the Investor Relations section at or go directly to

For a replay of the call:

A replay of the call will be available after the event on April 29, 2008 through May 13, 2008. Dial in: (800) 642-1687 from inside the U.S., or (706) 645-9291 from outside the U.S. Please use passcode 42421044.

About Medco

Medco Health Solutions, Inc., (NYSE: MHS) is the nation's leading pharmacy benefit manager based on its 2007 total net revenues of more than $44 billion. Medco's prescription drug benefit programs, covering approximately one in five Americans, are designed to drive down the cost of pharmacy health care for private and public employers, health plans, labor unions and government agencies of all sizes, and for individuals served by the Medicare Part D Prescription Drug Program and those served by its specialty pharmacy segment, Accredo Health Group. Medco, the world's most advanced pharmacy(TM), is positioned to serve the unique needs of patients with chronic and complex conditions through its Medco Therapeutic Resource Centers(R), including its enhanced diabetes pharmacy care practice through the Liberty acquisition. Medco is the highest-ranked independent pharmacy benefit manager on the 2008 Fortune 100 list. On the Net:

This press release contains "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause results to differ materially from those set forth in the statements. No forward-looking statement can be guaranteed, and actual results may differ materially from those projected. We undertake no obligation to publicly update any forward- looking statement, whether as a result of new information, future events or otherwise. Forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about the business and future financial results of the pharmacy benefit management ("PBM") and specialty pharmacy industries, and other legal, regulatory and economic developments. We use words such as "anticipates," "believes," "plans," "expects," "projects," "future," "intends," "may," "will," "should," "could," "estimates," "predicts," "potential," "continue," "guidance" and similar expressions to identify these forward-looking statements. Medco's actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors. These factors include:

The foregoing list of factors is not exhaustive. You should carefully consider the foregoing factors and the other risks and uncertainties that affect our business described in our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and other documents filed from time to time with the Securities and Exchange Commission.

SOURCE Medco Health Solutions, Inc.

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