Medco Health Solutions reports third-quarter total net revenues of $14.8 billion

Nov 3 2009

Medco Health Solutions, Inc. (NYSE: MHS) today reported record third-quarter 2009 GAAP diluted earnings per share of $0.69, up 19.0 percent compared to $0.58 for the third quarter of 2008. Adjusting for the amortization of intangible assets that existed when Medco became a publicly traded company in 2003, third-quarter 2009 diluted earnings per share increased 19.0 percent to $0.75, from $0.63 in the third quarter of 2008. With continuing strong performance expected for the remainder of the year, GAAP diluted EPS for 2009 is now projected to grow 21 to 22 percent. On top of this increased 2009 growth expectation, 2010 GAAP diluted EPS is projected to grow an additional 17 to 22 percent.

Medco continues to demonstrate strong momentum in the marketplace. Annualized 2009 new-named and net-new sales stand at records of more than $10 billion and more than $8 billion, respectively. For 2010, annualized new-named sales climbed from the $2.8 billion reported last quarter to $4.1 billion, and net-new sales have also surpassed the $4 billion mark.

"Clients are drawn to the value driven by Medco's innovations, and they have expressed their strong interest and confidence in Medco by awarding us over $20 billion of new business since 2008. Of equal importance, we currently expect to retain 99 percent of our clients in 2010, a new company record," said David B. Snow Jr., Medco chairman and chief executive officer.

"We continue to leverage the power of our clinical innovations and highly efficient infrastructure to deliver improved care to patients, and reduced costs for the healthcare system - the essence of real healthcare reform. With a specialized patient-centric clinical model - a proven brandable difference - we expect our momentum to continue. This confidence is evident in our raised 2009 earnings guidance and strong 17 to 22 percent GAAP diluted EPS growth expected for 2010," said Snow.

Financial Results

Medco reported third-quarter total net revenues of $14.8 billion, an increase of 17.8 percent from third-quarter 2008 reflecting contributions from significant new client wins, as well as price inflation on brand-name drugs, partially offset by higher volumes of lower-priced generic drugs. Medco's generic dispensing rate increased 3.3 percentage points from third-quarter 2008 to a record 67.7 percent. The mail-order generic dispensing rate increased 2.3 percentage points to 58.1 percent and the retail generic dispensing rate increased 3.0 percentage points to 69.4 percent. Higher volumes of lower-priced generic drugs reduced net revenues for third-quarter 2009 by approximately $560 million, representing significant savings for Medco clients and members.

Total prescription volume, adjusting for the difference in days supply between mail-order and retail, of 220.2 million increased 14.1 percent from the third quarter of 2008. Mail-order prescription volume was 25.5 million, a 2.3 percent decrease from third-quarter 2008. Mail volume reflects a decline in brand-name drugs of 7.0 percent, partially offset by a 1.4 percent increase in generic drugs, where clients and members benefit from the highest savings. Significant new business wins drove strong growth in retail volumes, reaching 144.3 million, a 25.4 percent increase over third-quarter 2008. With the strong growth in retail volumes the adjusted mail-order penetration rate decreased 5.9 percentage points from third-quarter 2008 to 34.5 percent. (Please see Table 5 for the calculation of adjusted prescription volume.)

Gross margin for third-quarter 2009 increased 12.5 percent over third-quarter 2008, to a record $1.04 billion. As a result of the significant incremental retail volumes from new clients, the total gross margin percentage decreased 40 basis points to 7.0 percent from 7.4 percent in the third quarter of 2008.

Selling, general and administrative (SG&A) expenses of $369 million increased $21.8 million over third-quarter 2008, reflecting higher performance-related compensation expense for 2009 and increased depreciation expense associated with investments across the business.

Earnings Before Interest Income/Expense, Taxes, Depreciation and Amortization (EBITDA) reached a record $719.3 million, an increase of 16.7 percent, or $103.1 million, over the same quarter last year. EBITDA per adjusted prescription increased to a record $3.27 from $3.19 in the third quarter of 2008. (Please refer to Table 6 for a reconciliation of EBITDA to reported net income.)

Total interest and other (income) expense, net, of $39.9 million in third-quarter 2009 decreased by 31.4 percent, or $18.3 million, compared to the same period in 2008, largely attributable to lower interest rates on debt and higher cash balances.

Income before the provision for income taxes of $552.7 million increased 23.3 percent over third-quarter 2008.

The third-quarter 2009 effective tax rate was 39.3 percent, compared to 34.0 percent in the third quarter of 2008. The third-quarter 2008 effective tax rate included a state income tax benefit that improved the third-quarter 2008 rate by over 5 percentage points.

Record net income of $335.6 million increased 13.5 percent over the same quarter last year.

Medco cash flows from operations for year-to-date September 2009 increased more than three-fold to $2.5 billion from $797 million for the same period in 2008. The company closed the third quarter of 2009 with $2.0 billion of cash on its balance sheet, after paying down $400 million of short-term debt.

"Our GAAP diluted EPS growth of 19.0 percent over third-quarter 2008 is even more impressive considering that the third-quarter 2008 EPS included a $0.05 state income tax benefit," said Richard J. Rubino, Chief Financial Officer.

Specialty Pharmacy Group

Revenues for Accredo Health Group grew 19.2 percent to a record of over $2.4 billion, compared to $2.0 billion in the third quarter of 2008, reflecting the contribution from significant new client wins and continued growth across the specialty business.

Accredo's gross margin was 7.4 percent in the third quarter of 2009 compared to 8.1 percent for the same period in 2008, reflecting channel mix. Accredo achieved operating income growth of 19.5 percent, earning a record $93.2 million in the quarter, up from $78.0 million in the third quarter of 2008.

Share Repurchase Program

As part of its $3 billion share repurchase program, through September year-to-date, Medco repurchased 23.6 million shares at a total cost of $1.01 billion with an average per share cost of $42.71. These repurchases took place in the first and second quarters of 2009, with no shares repurchased in the third quarter. Since the inception of the current program in November 2008, Medco has repurchased 28.7 million shares for a total cost of $1.21 billion with an average per-share cost of $42.01.

Guidance

Medco raised and narrowed its full-year 2009 GAAP diluted EPS guidance to a range of $2.58 to $2.60, representing 21 to 22 percent growth over 2008. Previous GAAP diluted EPS guidance, which was raised and narrowed as of the second quarter 2009, reflected a range of $2.54 to $2.59 and 19 to 22 percent growth over 2008.

Excluding amortization of intangible assets, diluted EPS was raised and narrowed to a range of $2.80 to $2.82, representing 20 to 21 percent growth over 2008. Previous diluted EPS guidance, which was raised and narrowed as of the second quarter 2009, reflected a range of $2.76 to $2.81 and 18 to 21 percent growth over 2008.

For the full-year 2010, Medco expects to achieve GAAP diluted EPS in the range of $3.05 to $3.15, representing growth of 17 to 22 percent over the raised 2009 guidance. Diluted EPS in 2010 excluding amortization of intangible assets, of $3.28 to $3.38, represents 16 to 21 percent growth over the raised 2009 guidance.

"We are confident in the power of our business model to drive meaningful value for our clients, members and shareholders. A solid balance sheet and strong earnings growth fueled by significant new client wins and record client retention rates are key elements of our long-term financial success. We also remain focused on driving working capital improvements, projecting a record $3.2 billion in 2009 operating cash flows, a level approximately two times what was generated in 2008. With this achievement, the stage will be set to further improve return on invested capital, which is growing from 20 percent in 2008 to an expected 25 percent in 2009, with a target of well over 30 percent in 2010. We believe this success will drive shareholder value for years to come," said Rubino.

Source: Medco Health Solutions, Inc.