Medco second-quarter total net revenues increase 4.1% to record $17.1 billion

Jul 21 2011

Second-Quarter 2011 Highlights:

• GAAP diluted earnings per share (EPS) increased 10.4 percent to $0.85 from $0.77 in second-quarter 2010  
• Diluted EPS, excluding all intangible amortization, increased 10.3 percent to $0.96 from $0.87 in second-quarter 2010  
• Total net revenues increased 4.1 percent to a record of $17.1 billion
• Gross margin increased 4.1 percent to over $1.1 billion, representing a gross margin percentage of 6.5 percent, consistent with second-quarter 2010
• EBITDA increased 0.8 percent to $736.1 million, and EBITDA per adjusted prescription increased slightly to $3.07
• Mail-order prescriptions increased 0.7 percent to 27.7 million, including generic mail-order prescriptions, which increased 6.0 percent to a record 17.8 million
• Overall generic dispensing rate increased 2.8 percentage points to a record 73.4 percent; mail-order generic dispensing rate increased 3.1 percentage points to a record 64.3 percent
• Specialty pharmacy revenues increased 13.2 percent to a record $3.2 billion; specialty operating income increased 20.8 percent to a record $132.8 million

2011 Guidance Reaffirmed:

• Full-year 2011 GAAP diluted EPS expected in the range of $3.59 to $3.69, representing growth of 14 to 17 percent over 2010  
• Full-year 2011 guidance for diluted EPS, excluding all intangible amortization, expected in the range of $4.02 to $4.12, representing growth of 13 to 16 percent over the 2010 full-year equivalent of $3.55 (please see Table 9)

Medco Health Solutions, Inc. (NYSE: MHS) today reported second-quarter 2011 GAAP diluted EPS of $0.85, up 10.4 percent compared to $0.77 for the second quarter of 2010. Adjusting for all amortization of intangible assets, second-quarter 2011 diluted earnings per share increased 10.3 percent to $0.96, up from $0.87 in the second quarter of 2010. When excluding the second-quarter 2010 benefit from a settlement award in a class action antitrust lawsuit brought by direct purchasers of a brand-name medication, second-quarter 2011 diluted EPS, excluding all intangible amortization, increased 14.3 percent from second-quarter 2010.

“Medco’s second-quarter results are characterized by strong performance across the enterprise. We generated record revenues that include a 43.3 percent increase in service revenues driven primarily by UnitedBioSource Corp (UBC) and growth across our portfolio of service offerings. Record specialty operating income, continued strong performance in Medicare, and record generic mail-order volume and generic dispensing rates also contributed to our earnings per share growth this quarter. Importantly, our margin percentage profile is stable and expected to grow in the future,” said David B. Snow Jr., chairman and chief executive officer of Medco.

For 2011, annualized new-named sales total nearly $3.0 billion, up from our previously reported $1.7 billion and net-new sales for 2011 are $2.1 billion, up from our previously reported $1.5 billion.  Our 2011 client retention rate remains at over 99 percent.

“With the 2012 selling season still in progress, our annualized new-named sales for 2012 stand at more than $800 million. Net-new sales are currently negative for 2012 due to the previously announced transitions of the Federal Employee Health Benefits Program and CalPERS, and Universal American/Member Health and Bravo Health due to the previously announced acquisitions of these businesses. Due to trends in the industry from the expected growth in generics, specialty pharmacy, and personalized medicine, combined with UBC and our unique clinical model that reduces the total cost of healthcare for our clients, we are confident that we can drive meaningful long-term earnings growth,” concluded Snow.  

Second-Quarter Financial and Operational Results

Medco reported record second-quarter 2011 net revenues of $17.1 billion, representing a 4.1 percent increase over second-quarter 2010 -- primarily the result of contributions from new client wins and higher prices charged by brand-name pharmaceutical manufacturers, partially offset by higher volumes of lower-priced generic drugs. This performance includes service revenue growth of 43.3 percent, reflecting the UBC acquisition and growth in Medco’s client service offerings across the company.

Medco’s generic dispensing rate increased 2.8 percentage points from second-quarter 2010 to a record 73.4 percent. The mail-order generic dispensing rate increased 3.1 percentage points to a record 64.3 percent, while the retail generic dispensing rate increased 2.7 percentage points to a record 75.0 percent. The year-over-year improvement in the overall generic dispensing rate drove incremental savings of approximately $900 million for Medco’s clients and members in the quarter.

Total prescription volume, adjusting for the difference in days supply between mail-order and retail amounted to 239.7 million, an increase of 0.5 percent over second-quarter 2010. Mail-order prescription volume increased 0.7 percent to 27.7 million. Importantly, generic mail-order prescription volumes increased 6.0 percent to a record 17.8 million, while brand-name mail-order prescription volumes decreased 7.5 percent to 9.9 million in the second quarter of 2011.

Retail prescription volumes increased 0.4 percent over second-quarter 2010, reaching 157.4 million. The second-quarter 2011 adjusted mail-order penetration rate of 34.3 percent was consistent with the second quarter of 2010.

Total gross margin for second-quarter 2011 exceeded $1.1 billion, representing a 4.1 percent increase over second-quarter 2010. The total gross margin percentage of 6.5 percent was consistent with second-quarter 2010. When excluding the benefit from the settlement award in the second quarter of 2010, the gross margin percentage for second-quarter 2011 reflects an increase of approximately 20 basis points, primarily reflecting the strong second-quarter 2011 generic mail-order prescription volume and growth in service margin.

Total selling, general and administrative (SG&A) expenses of $420.3 million increased 11.7 percent, or $43.9 million, from second-quarter 2010, largely reflecting increased expenses associated with the recently-acquired UBC business, as well as higher professional fees and technology-related expenses associated with strategic initiatives. When excluding the effect of the September 2010 UBC acquisition, SG&A expenses increased less than 6 percent over second-quarter 2010.  

Earnings Before Interest and Other Income/Expense, Taxes, Depreciation and Amortization (EBITDA) for the quarter reached $736.1 million, an increase of 0.8 percent, or $5.9 million, over the same period last year. EBITDA per adjusted prescription for second-quarter 2011 reached $3.07, up 0.3 percent from $3.06 in the second quarter of 2010 (please see Table 6). When excluding the second-quarter 2010 settlement award, EBITDA increased 4.7 percent and EBITDA per adjusted prescription increased 4.1 percent from second-quarter 2010.

Total interest and other (income) expense, net, of $54.2 million in second-quarter 2011 increased $21.7 million compared to the same period in 2010, reflecting higher debt levels from the $1.0 billion senior notes issuance in September 2010 associated with the acquisition of UBC.

Income before the provision for income taxes for the second quarter decreased 4.2 percent to $557.6 million, compared to $582.1 million for the second quarter of 2010. When excluding the second-quarter 2010 settlement award, income before the provision for income taxes for second-quarter 2011 increased 0.5 percent from second-quarter 2010.

The second-quarter 2011 effective tax rate was 38.5 percent compared to 38.7 percent in second-quarter 2010.

Net income decreased 4.0 percent over the same quarter last year to $342.8 million. When excluding the previously mentioned second-quarter 2010 settlement award, net income for second-quarter 2011 increased 0.7 percent from second-quarter 2010.

Specialty Pharmacy

For second-quarter 2011, revenues for Accredo Health Group grew 13.2 percent to a record $3.2 billion. This strong performance primarily reflects growth in prescription volumes, increases in manufacturer brand pricing, broader utilization of specialty products, and the impact of recently introduced drugs. 

The Accredo second-quarter 2011 gross margin percentage of 6.7 percent compares to 7.0 percent for second-quarter 2010, reflecting changes in product and channel mix. Accredo’s operating income for second-quarter 2011 grew 20.8 percent to a record $132.8 million.  

Share Repurchase Programs

During the second quarter of 2011, Medco repurchased 9.6 million shares at a cost of $600 million, representing an average per-share cost of $62.44 through a pre-authorized trading plan. For the month of July 2011 to-date, Medco repurchased 6.3 million shares at a cost of $350 million, representing an average per-share cost of $55.89. For July 2011 year-to-date, Medco repurchased 29.3 million shares at a cost of $1,786.6 million, representing an average per-share cost of $60.93.

2011 Guidance Reaffirmed

Medco continues to expect to achieve full-year 2011 GAAP diluted EPS in the range of $3.59 to $3.69, representing growth of 14 to 17 percent over 2010. Diluted EPS, excluding all intangible amortization, is expected in the range of $4.02 to $4.12, representing growth of 13 to 16 percent over the 2010 full-year equivalent of $3.55 (please see Table 9).

Richard Rubino, chief financial officer noted, “We are pleased to deliver strong EPS that are even more impressive when the second-quarter 2010 benefit from the settlement award is excluded, resulting in a second-quarter 2011 diluted EPS increase of 14.3 percent over second-quarter 2010, excluding all intangible amortization. We have entered the second half of the year in a strong financial position with a healthy balance sheet, including record low inventory levels of $833 million - - the lowest level since 2001, and a continued strong return on invested capital of over 30 percent.  We remain confident in our expected GAAP diluted earnings per share growth of 14 to 17 percent for the full year.”  

SOURCE Medco Health Solutions, Inc.