Medco second-quarter GAAP diluted EPS increases 20.3% to $0.77

Jul 22 2010

Second-Quarter 2010 Highlights:

• GAAP diluted earnings per share (EPS) increased 20.3 percent to a record $0.77 from $0.64 in second-quarter 2009
• Diluted EPS, excluding $0.06 in amortization of intangible assets from the 2003 spin-off, increased 20.3 percent to a record $0.83 from $0.69 in second-quarter 2009
• Total net revenues increased 9.9 percent to a record $16.4 billion
• Specialty pharmacy revenues increased 18.1 percent to a record $2.8 billion
• Mail-order prescriptions increased 6.2 percent to a record 27.5 million
• Generic dispensing rate increased 3.3 percentage points to a record 70.6 percent

Improves 2010 EPS Guidance Range:

• Narrows full-year 2010 GAAP diluted EPS range to $3.10 to $3.15, representing 19 to 21 percent growth over 2009. The previous guidance range was $3.05 to $3.15 per share.
• Narrows and raises full-year 2010 diluted EPS range, excluding amortization of intangible assets from the 2003 spin-off, to $3.34 to $3.39, representing 18 to 20 percent growth over 2009. The previous guidance range was $3.28 to $3.38 per share.
• Amortization of intangible assets from the spin-off increased to $0.24 per share from $0.23 per share as a result of revised expectations for a lower 2010 diluted weighted average share count. As a result, GAAP diluted EPS did not increase in tandem with diluted EPS excluding amortization of intangible assets.

Medco Health Solutions, Inc. (NYSE: MHS) today reported second-quarter 2010 GAAP diluted EPS of $0.77, up 20.3 percent compared to $0.64 for the second quarter of 2009. Adjusting for the amortization of intangible assets that existed when Medco became a publicly traded company in 2003, second-quarter 2010 diluted earnings per share increased 20.3 percent to $0.83, from $0.69 in the second quarter of 2009. Second-quarter 2010 results reflect an EPS benefit of approximately $0.03 associated with Medco’s receipt of a settlement award in a class action antitrust lawsuit brought by direct purchasers of a brand-name medication. This earnings benefit was included in Medco’s original EPS guidance but was expected later in 2010.  Excluding the $0.03 benefit, Medco’s EPS for the second quarter remains a record.

Medco is improving its 2010 EPS guidance range, expecting GAAP diluted EPS growth of 19 to 21 percent over 2009 and, excluding amortization of intangible assets, diluted EPS growth of 18 to 20 percent.

“Our second-quarter performance continues to demonstrate the power of our unique clinically-driven model that is delivering meaningful results for our clients and members.  Medco’s sales and client retention results remain strong, and we are retaining and winning business at profitable levels consistent with our disciplined sales approach. Our 2010 sales results continue to grow. Our annualized new-named sales for 2010 have increased to $5.1 billion, up from the previously reported $4.4 billion, and net-new sales are now over $5 billion, up from the previously reported $4.3 billion. Our 2010 client retention rate remains over 99 percent.  As a result of our continued strong top-line and bottom-line performance, we are improving our full-year 2010 diluted EPS guidance range,” said Medco Chairman and Chief Executive Officer David B. Snow Jr.

“While still early in the 2011 selling season, our annualized new named sales and net-new sales for 2011 are now approximately $1 billion, up from the over $500 million previously reported, and our 2011 client retention rate remains well over 99 percent,” Snow said.

“We continue to build a portfolio for long-term growth, as evidenced by our recently announced plans to create Medco Celesio B.V., a 50-50 joint venture with Celesio AG to deliver technology-enabled advanced clinical solutions in a phased approach to as many as 29 countries across Europe. We also announced the first advanced clinical solutions client in Germany. We are pleased to have a partner with 175 years of history in Europe as well as a team of capable professionals on the ground to build this business. Our joint venture is designed to create customized solutions to meet the unique challenges of each country we serve while operating within their regulatory framework,” Snow added.  

Second-Quarter Financial and Operational Results

Medco reported record second-quarter net revenues of $16.4 billion, an increase of 9.9 percent from second-quarter 2009 -- primarily as a result of contributions from significant new client wins and higher prices charged by brand-name pharmaceutical manufacturers, partially offset by higher volumes of lower-priced generic drugs. Medco’s generic dispensing rate increased 3.3 percentage points from second-quarter 2009 to a record 70.6 percent. The mail-order generic dispensing rate increased 3.5 percentage points to a record 61.2 percent and the retail generic dispensing rate increased 3.3 percentage points to a record 72.3 percent. Higher volumes of lower-priced generic drugs reduced net revenues for second-quarter 2010 by a record amount of approximately $870 million, delivering significant savings to clients and members.  

Total prescription volume, adjusting for the difference in days supply between mail-order and retail, was 238.4 million, a 6.0 percent increase over the second quarter of 2009. Mail-order prescription volume was a record 27.5 million, a 6.2 percent increase from second-quarter 2009. Importantly, while brand-name mail-order prescription volumes decreased 2.7 percent from 11.0 million in the second quarter of 2009 to 10.7 million prescriptions in the second quarter of 2010, mail-order generic prescription volumes increased 12.8 percent to a record 16.8 million.

Significant new business wins also drove higher retail volumes, reaching 156.7 million, a 6.2 percent increase over second-quarter 2009, decreasing slightly the adjusted mail-order penetration rate to 34.3 percent in second-quarter 2010 from 34.4 percent in the second quarter of 2009, reflecting the proportional growth in volume at retail and mail.

Total gross margin for second-quarter 2010 increased 4.5 percent over second-quarter 2009, to a record $1.06 billion. The total gross margin percentage decreased 30 basis points to 6.5 percent from 6.8 percent in the second quarter of 2009, reflecting the effect of client renewal pricing, higher retail volumes, and a decline in the Accredo gross margin percentage due to product, channel and new client mix, partially offset by the core PBM’s incremental second quarter contribution from new generics and the settlement award. The second-quarter 2010 total gross margin percentage increased 40 basis points compared to the 6.1 percent achieved in first-quarter 2010.

Total selling, general and administrative expenses of $376.4 million increased 1.5 percent, or $5.7 million, from second-quarter 2009.  

Earnings Before Interest Income/Expense, Taxes, Depreciation and Amortization (EBITDA) for the quarter reached a record $730.2 million, an increase of 5.9 percent, or $40.8 million, over the same period last year. EBITDA per adjusted prescription for second-quarter 2010 decreased slightly to $3.06 compared to $3.07 in the second quarter of 2009, and increased sequentially by 6.6 percent over the first-quarter 2010 results of $2.87. (Please refer to Table 6 for a reconciliation of EBITDA to reported net income.)

Total interest and other (income) expense, net, of $32.5 million in second-quarter 2010 decreased 21.1 percent, or $8.7 million, compared to the same period in 2009, reflecting lower interest rates on debt and lower debt levels.

Income before the provision for income taxes for the second quarter of $582.1 million increased 10.2 percent compared to $528.0 million in the second quarter of 2009.

The second-quarter 2010 effective tax rate of 38.7 percent compared to 40.9 percent in the second quarter of 2009, reflecting lower state income tax rates.

Net income increased 14.4 percent over the same quarter last year to a record $356.9 million.

Medco year-to-date cash flows from operations of $990.8 million decreased from 2009 mainly as a result of significant inventory reductions and strong retail claim volume growth in 2009. The company now expects cash flow from operations of over $2.4 billion for full-year 2010, up from the previous guidance of approximately $2.3 billion. The company closed second-quarter 2010 with nearly $1.2 billion of cash on its balance sheet.

“Even after this strong quarter, we continue to expect earnings per share improvement in each of the next two quarters this year, driven by gross margin expansion in the second half of 2010. We now expect to deliver full-year 2010 return on invested capital of approximately 35 percent, up from the previous guidance of well over 30 percent,” said Richard J. Rubino, chief financial officer.  

Specialty Pharmacy Group

Revenues for Accredo Health Group grew 18.1 percent to a record $2.8 billion in the second quarter of 2010, reflecting the contribution from significant new client wins and growth across the specialty business.

Accredo’s gross margin percentage decreased to 7.0 percent in the second quarter of 2010 compared to 7.4 percent for the same period in 2009, primarily resulting from product, channel and new-client mix.  Operating income grew 24.2 percent to a record $109.9 million from $88.5 million in the second quarter of 2009, driven primarily by the revenue growth.  

Share Repurchase Programs

During the second quarter of 2010, Medco completed the remaining $331.6 million in authorized share repurchases under the prior $3 billion program. Also, under the new $3 billion share repurchase program approved in May 2010, Medco repurchased a total of 12.0 million shares for $696.5 million with an average per-share cost of $58.14. In total, Medco repurchased 17.6 million shares for $1.03 billion during the second quarter of 2010 with an average per-share cost of $58.45.

For July 2010 to date, Medco repurchased 8.7 million shares for a total cost of $489 million at an average per-share cost of $56.13.

Improves 2010 Guidance Range

Medco is narrowing full-year 2010 GAAP diluted EPS range to $3.10 to $3.15, representing growth of 19 to 21 percent over 2009. The previous GAAP diluted EPS guidance range was $3.05 to $3.15. Medco is narrowing and raising full-year 2010 diluted EPS range, excluding the amortization of intangible assets from the 2003 spin-off, to $3.34 to $3.39, representing growth of 18 to 20 percent over 2009. The previous diluted EPS guidance range was $3.28 to $3.38. The effect on EPS from the amortization of intangible assets associated with the 2003 spin-off increased to $0.24 from $0.23 cents in the revised full-year 2010 guidance as a result of the expectations for a lower 2010 diluted weighted average share count.