Medco fourth-quarter total net revenues increase 12.2% to record $19.0 billion

Feb 21 2012

Fourth-Quarter 2011 Highlights:

• Record GAAP diluted earnings per share (EPS) of $1.08 increased 22.7 percent; Diluted EPS of $1.14, excluding $43.6 million of expenses associated with the pending merger with Express Scripts, Inc., increased 29.5 percent over $0.88 in fourth-quarter 2010  
• Record diluted EPS, excluding all intangible amortization and merger-related expenses, increased 26.3 percent to $1.25 from $0.99 in fourth-quarter 2010  
• Total net revenues increased 12.2 percent to a record of nearly $19.0 billion, with service revenues up 18.3 percent to a record $413.6 million
• Gross margin increased to a record $1.28 billion, representing a gross margin percentage of 6.7 percent
• EBITDA (Earnings Before Interest and Other Income/Expense, Taxes, Depreciation and Amortization) increased 14.4 percent to a record $899.6 million and EBITDA per adjusted prescription increased 6.2 percent to $3.42 when excluding merger-related expenses
• Mail-order prescriptions increased 9.0 percent to a record 30.4 million, with generic volumes increasing 14.9 percent to a record 20.1 million
• Generic dispensing rate increased 2.5 percentage points to a record 74.7 percent
• Specialty pharmacy revenues increased 28.3 percent to a record $3.8 billion, with an increase in operating income of 44.3 percent to a record $158.6 million

Full-Year 2011 Highlights:

• Record GAAP diluted EPS of $3.62 increased 14.6 percent; Diluted EPS of $3.74, excluding $80.2 million of expenses associated with the pending merger with Express Scripts, Inc., increased 18.4 percent over $3.16 in 2010  
• Record diluted EPS, excluding all intangible amortization and merger-related expenses, increased 17.5 percent to $4.17 from $3.55 in 2010  
• Total net revenues increased 6.2 percent to a record $70.1 billion, with service revenues up 39.0 percent to a record $1.5 billion
• Gross margin increased to a record $4.62 billion, representing a gross margin percentage of 6.6 percent
• EBITDA increased 6.6 percent to a record $3.2 billion and EBITDA per adjusted prescription increased 3.9 percent to a full-year record of $3.23 when excluding merger-related expenses
• Mail-order prescriptions increased 3.0 percent to a record 113.1 million, with generic volumes increasing 8.3 percent to a record 73.2 million
• Generic dispensing rate increased 2.8 percentage points to a full-year record 73.8 percent
• Specialty pharmacy revenues increased 18.5 percent to a record $13.4 billion, with an increase in operating income of 27.9 percent to a record $560.6 million

Medco Health Solutions, Inc. (NYSE: MHS) today reported record fourth-quarter 2011 GAAP diluted EPS of $1.08, an increase of 22.7 percent, which includes expenses associated with the pending merger with Express Scripts, Inc. of $43.6 million before provision for income taxes. When excluding these merger-related expenses, diluted EPS increased 29.5 percent over fourth-quarter 2010. Adjusting for all amortization of intangible assets and excluding merger-related expenses, fourth-quarter 2011 diluted earnings per share increased 26.3 percent to a record $1.25, up from $0.99 in the fourth quarter of 2010. As mentioned in Medco's original guidance, full-year 2011 includes a 53 week fiscal calendar, compared to 52 weeks in 2010. The additional week is included in fourth-quarter 2011 results and did not have a material effect on earnings.

Medco also reported record full-year 2011 GAAP diluted EPS of $3.62, an increase of 14.6 percent, which includes expenses associated with the pending merger with Express Scripts, Inc. of $80.2 million before provision for income taxes. When excluding these merger-related expenses, diluted EPS increased 18.4 percent over full-year 2010. Adjusting for all amortization of intangible assets and excluding the aforementioned merger-related expenses, full-year 2011 diluted earnings per share increased 17.5 percent to a record $4.17, up from $3.55 in 2010.

"Our record earnings for the quarter and the year continue to be driven by our model that delivers significant drug cost savings to our clients and patients while also driving down the total cost of healthcare through highly-differentiated clinical innovation.  Our strong operating performance resulted in fourth quarter and full-year 2011 records that include revenues, gross margin dollars, EBITDA, prescription volumes, generic dispensing rates, and full-year EBITDA per adjusted script," said David B. Snow Jr., chairman and chief executive officer of Medco.

"On February 10, Medco and Express Scripts certified that we substantially complied with the second request from the Federal Trade Commission (FTC).  As we look ahead, we remain confident that our merger with Express Scripts, Inc. will close in the first half of 2012.  We continue to strongly believe that the combined company will be best positioned to drive down prescription costs for America while also delivering advanced pharmacy services and solutions to help solve America's most pressing healthcare challenges.  Finally, as we have stated many times over the years, our ability to generate shareholder value is directly tied to our success in lowering healthcare costs for clients and patients," added Snow.  

Fourth-quarter Financial and Operational Results

Medco reported fourth-quarter 2011 net revenues of nearly $19.0 billion, representing a 12.2 percent increase over fourth-quarter 2010.  As mentioned in Medco's original guidance, all fourth-quarter 2011 financial measures reflect a 14 week fourth-quarter fiscal reporting calendar, compared to 13 weeks in fourth-quarter 2010.  (Please see table 9.) The increase in net revenues also reflects 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 18.3 percent, reflecting increased revenues from United BioSource (UBC) and growth in Medco's client service offerings company wide.

Medco's generic dispensing rate increased 2.5 percentage points from fourth-quarter 2010 to a record 74.7 percent. The mail-order generic dispensing rate increased 3.2 percentage points to a record 66.1 percent, while the retail generic dispensing rate increased 2.4 percentage points to a record 76.2 percent. The year-over-year improvement in the overall generic dispensing rate drove incremental savings in fourth-quarter 2011 of approximately $900 million for Medco's clients and members.

Total adjusted prescription volume of 263.1 million increased 7.7 percent over fourth-quarter 2010 reflecting the extra week of volume in fourth-quarter 2011. Mail-order prescription volume increased 9.0 percent to 30.4 million also reflecting continued steady utilization trends. Importantly, generic mail-order prescription volumes increased 14.9 percent to 20.1 million, while brand-name mail-order prescription volumes decreased 1.0 percent to 10.3 million in the fourth quarter of 2011.

Retail prescription volumes increased 7.0 percent from fourth-quarter 2010, to a record 172.7 million. The fourth-quarter 2011 adjusted mail-order penetration rate of 34.4 percent was 50 basis points higher than the fourth quarter of 2010.

Total gross margin for fourth-quarter 2011 reached a record $1.28 billion, increasing more than 10 percent from fourth-quarter 2010. The total gross margin percentage of 6.7 percent was 20 basis points lower than fourth-quarter 2010.  

Total selling, general and administrative expenses (SG&A) of $481.7 million increased 12.4 percent from fourth-quarter 2010.  Excluding merger-related expenses of $42.3 million, total SG&A expenses were $439.4 million which represents growth of 2.5 percent over fourth-quarter 2010.  The merger-related expenses primarily include legal fees and employee retention-related expenses.  An additional $1.3 million in merger-related expenses is included in cost of revenues.

EBITDA reached a record $856.0 million for fourth-quarter 2011. Excluding merger-related expenses, EBITDA for the quarter was also a record $899.6 million, an increase of 14.4 percent or $113.1 million over the same period last year. The associated EBITDA per adjusted prescription for fourth-quarter 2011 reached $3.42, up 6.2 percent from $3.22 in the fourth quarter of 2010.

Total interest and other (income) expense, net, of $51.7 million in fourth-quarter 2011 increased $1.3 million compared to the same period in 2010.

Income before the provision for income taxes was a record $673.7 million for fourth-quarter 2011. Excluding merger-related expenses, income before the provision for income taxes increased 18.1 percent to a record $717.3 million, compared to $607.3 million for the fourth quarter of 2010.

The fourth-quarter 2011 effective tax rate was 37.0 percent compared to 37.7 percent in fourth-quarter 2010.

Net income was a record $424.4 million for fourth-quarter 2011. Excluding merger-related expenses, net income increased 19.4 percent over the same quarter last year to a record $451.9 million.  

Full-Year Financial and Operational Results

Full-year 2011 net revenues increased 6.2 percent over 2010 to a record $70.1 billion.  Full-year 2011 revenues reflect 53 weeks of activity in Medco's fiscal reporting calendar, when compared to 52 weeks in 2010.  The increase in net revenue also reflects contributions from new client wins and higher prices charged by brand-name pharmaceutical manufacturers, partially offset by higher volumes of lower-priced generic drugs. Included in this performance was service revenue growth of 39.0 percent, reflecting the UBC acquisition on September 16, 2010, and growth in Medco's client service offerings company wide.

Medco's generic dispensing rate increased 2.8 percentage points from 2010 to a full-year record 73.8 percent. The mail-order generic dispensing rate increased 3.3 percentage points to a full-year record of 64.8 percent, while the retail generic dispensing rate increased 2.6 percentage points to a full-year record 75.3 percent. The year-over-year improvement in the overall generic dispensing rate drove incremental savings in 2011 of approximately $3.6 billion for Medco's clients and members.

Total adjusted prescription volume was 980.7 million, an increase of 2.5 percent over full-year 2010 reflecting the extra week of volume in fiscal 2011. Mail-order prescription volume increased 3.0 percent to a record 113.1 million also reflecting continued steady utilization trends. For full-year 2011 generic prescription volumes at mail increased 8.3 percent to a record 73.2 million, while brand-name prescription volumes decreased 5.5 percent to 39.9 million.  

Retail prescription volumes increased 2.2 percent from 2010, to a record 644.3 million. The full-year 2011 adjusted mail-order penetration rate of 34.3 percent was 20 basis points higher than 2010.

Total gross margin for full-year 2011 increased over 6.5 percent from 2010 and reached a record $4.62 billion. The total gross margin percentage of 6.6 percent was consistent with full-year 2010.  

Total SG&A expenses of $1.74 billion increased 12.5 percent from full-year 2010.  Excluding merger-related expenses of $77.9 million, total SG&A expenses were $1.67 billion which represents growth of 7.5 percent over full-year 2010.  When also excluding the effect of the UBC acquisition, SG&A increased by 2.6 percent. The remaining $2.3 million of full-year merger-related expenses is included in cost of revenues.

EBITDA represented a record $3.09 billion for full-year 2011. Excluding merger-related expenses, EBITDA reached a record $3.17 billion, an increase of 6.6 percent, or $196.6 million, over 2010. The associated EBITDA per adjusted prescription for 2011 reached a full-year record $3.23, up 3.9 percent from $3.11 in 2010.

Total interest and other (income) expense, net, of $209.8 million in full-year 2011 increased $46.7 million compared to 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 was a record $2,375.8 million for full-year 2011. Excluding merger-related expenses, income before the provision for income taxes increased 5.2 percent to a record $2,456.0 million, compared to $2,334.2 million for 2010.

The full-year 2011 effective tax rate was 38.7 percent compared to 38.9 percent in full-year 2010.

Net income was a record $1.46 billion for full-year 2011. Excluding merger-related expenses, net income increased 5.5 percent over 2010 to a record $1.51 billion.  

Cash flows from operating activities were $1,282.4 million in 2011 compared to $2,344.7 million in 2010. The decline from 2010 is primarily attributed to three factors. First, the 53-week fiscal year in 2011 results in a cut-off in the low cash point of our bi-weekly client billing and retail pharmacy reimbursement cycle, resulting in a decline of well over $400 million. Second, the 53-week fiscal year includes two quarters of calendar year-end pre-payments, one each for 2010 and 2011. This resulted in a reduction of over $300 million. Third, included in our 2010 results was a one-time collection of an approximately $200 million income tax receivable from the Internal Revenue Service.

Specialty Pharmacy

For fourth-quarter 2011, revenues for Accredo Health Group grew 28.3 percent to a record $3.8 billion. For full-year 2011, Accredo's revenues increased 18.5 percent to a record $13.4 billion. This strong performance primarily reflects growth in prescription volumes including the extra week of volume in fiscal 2011, increases in manufacturer brand pricing, broader utilization of specialty products, and the impact of recently introduced drugs.  Product categories that experienced the highest levels of revenue growth include multiple sclerosis, rheumatoid arthritis, oncology, and hepatitis. 

The Accredo fourth-quarter 2011 gross margin percentage decreased to 6.3 percent compared to 6.5 percent for the same period in 2010. Accredo's full-year 2011 gross margin percentage was 6.6 percent compared to 6.8 percent in 2010. The decline in gross margin primarily reflects product and channel mix.

Accredo's operating income for fourth-quarter 2011 grew 44.3 percent to a record $158.6 million. Full-year operating income increased 27.9 percent to a record $560.6 million from $438.2 million in 2010, driven primarily by the revenue growth and operating efficiencies.

Share Repurchase Programs

As a result of the pending merger, there were no share repurchases made during the fourth quarter of 2011. For full-year 2011, Medco repurchased 29.3 million shares through a pre-authorized trading plan at a cost of $1.787 billion, reflecting an average per-share cost of $60.93. On an inception-to-date basis, since repurchases commenced in 2005, Medco has repurchased 285.5 million shares at a cost of $12.85 billion reflecting an average share price of $45.00.

Richard Rubino, chief financial officer, noted, "We ended the year with record performance, including a 31.6 percent return on invested capital, a testament to the strong underlying fundamentals of our business.  The introduction of generic Lipitor contributed three cents to fourth quarter EPS as anticipated, and it will continue as a strong contributor in 2012 during the most significant wave of new generic availability in our industry's history."