Third-Quarter 2009 Highlights:
September Year-to-Date 2009 Highlights:
2009 Guidance Raised and Narrowed:
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2010 Guidance:
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.
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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.
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, are affected by the changes in prescription volumes between retail and mail order, the relative representation of brand-name, generic and specialty pharmacy drugs, as well as the level of efficiency in the business. Adjusted prescription volume equals substantially all mail-order prescriptions multiplied by three, plus retail prescriptions. These mail-order prescriptions are multiplied by three to adjust for the fact that they include approximately three 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 by adjusting for this significant non-cash item it enhances comparability of the company's financial results with its peers. The intangible asset amortization resulting from Medco's acquisitions, such as the acquisitions of Accredo Health, Incorporated in August 2005, and PolyMedica Corporation in October 2007, are not part of the excluded amortization in this calculation because they result from Medco investment decisions.
Conference Call
Management will hold a conference call to review Medco's financial results and operating outlook on November 3, 2009 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 www.medcohealth.com/investor.
For a replay of the call:
A replay of the call will be available after the event on November 3, 2009 through November 17, 2009. Dial in: (800) 642-1687 from inside the U.S., or (706) 645-9291 from outside the U.S. Please use pass code 34291401.
About Medco
Medco Health Solutions, Inc. (NYSE: MHS) is pioneering the world's most advanced pharmacy® and its clinical research and innovations are part of Medco making medicine smarter(TM) for more than 60 million members.
With more than 20,000 employees dedicated to improving patient health and reducing costs for a wide range of public and private sector clients, and 2008 revenue exceeding $51 billion, Medco ranks 45th on the Fortune 500 list and is named among the world's most innovative, most admired and most trustworthy companies.
For more information, go to http://www.medcohealth.com.
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, including those set forth below.
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.
-- Record GAAP diluted EPS of $0.69, up 19.0 percent from $0.58 in third-quarter 2008 -- Record diluted EPS, excluding $0.06 in amortization of intangible assets from the 2003 spin-off, of $0.75, up 19.0 percent from $0.63 in third-quarter 2008 -- Total net revenues increased 17.8 percent to $14.8 billion -- Specialty pharmacy revenues increased 19.2 percent to a record of over $2.4 billion -- Generic dispensing rate increased 3.3 percentage points to a record 67.7 percent -- EBITDA per adjusted prescription increased to a record $3.27 from $3.19 in third-quarter 2008 -- Cash balance at quarter-end of $2.0 billion, after paying down $400 million of short-term debt
SOURCE Medco Health Solutions, Inc.
