Medco Health Solutions (MHS)

Q3 2011 Earnings Call

October 26, 2011 8:00 am ET


Thomas M. Moriarty - President of Global Pharmaceutical Strategies, Secretary and General Counsel

Valerie Haertel - IR

David B. Snow - Chairman and Chief Executive Officer

Richard J. Rubino - Chief Financial Officer and Senior Vice President of Finance

Frank J. Sheehy - President of Accredo Health Group

Glenn C. Taylor - Group President of Health Plans


Michael Cherny - Deutsche Bank AG, Research Division

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

John Kreger - William Blair & Company L.L.C., Research Division

Steven Valiquette - UBS Investment Bank, Research Division

Ricky Goldwasser - Morgan Stanley, Research Division

Lawrence C. Marsh - Barclays Capital, Research Division

Eugene Goldenberg - BB&T Capital Markets, Research Division

Charles Rhyee - Cowen and Company, LLC, Research Division

Robert M. Willoughby - BofA Merrill Lynch, Research Division

David Larsen - Leerink Swann LLC, Research Division



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Good morning. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Medco Health Solutions Third Quarter 2011 Earnings Call. [Operator Instructions] I would now like to turn the call over to Vice President of Investor Relations, Ms. Valerie Haertel. You may begin.

Valerie Haertel

Thank you, Andrea. Good morning, everyone, and thank you for joining us on Medco's Third Quarter 2011 Earnings Conference Call. With me today as speakers are Chairman and Chief Executive Officer, Dave Snow; and Chief Financial Officer, Rich Rubino. Also joining us for our question-and-answer session are: Kenny Klepper, President and Chief Operating Officer; Tom Moriarty, General Counsel, Secretary and President of Global Pharmaceutical Strategies; Frank Sheehy, President of Accredo Health Group; Tim Wentworth, Group President of the Employer and Key Accounts; and Glenn Taylor, Group President of Health Plans.

During the course of this call, we will make forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. 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 made on this call should be evaluated together with the risks and uncertainties that affect our business, particularly those disclosed in our SEC filings. Copies of Medco's filings are available from the SEC, the Medco Investor Relations Department or the Medco website. Medco intends to use the Investor Relations section of its website as a means of disclosing material non-public information and for complying with these disclosure obligations under Regulation FD. The copyrights for the contents of this discussion and the written materials used on this earning call are owned by Medco Health Solutions, Inc. 2011.

Slides to accompany our presentation, which detail our financial and operating results and the guidance discussed on this call, are currently available in the Events section of the Investor Relations site on Additionally, please note that we expect to file our 10-Q after the close of the market today. At this time, I would like to turn the call over to Dave Snow. Dave?

David B. Snow

Thank you, Valerie, and thanks to all of you for joining us this morning. Today, we are reporting strong third quarter 2011 earnings and narrowing the range of our full year 2011 earnings per share guidance to the high-end of previous guidance. GAAP diluted earnings per share for third quarter 2011 reached $0.90 or $0.96, excluding merger-related expenses incurred in the quarter, representing solid 12.9% growth over third quarter 2010. Even when including the merger-related expenses, our GAAP EPS is a record. Our diluted earnings per share, excluding all intangible amortization and the merger-related expenses, reached a record $1.07, reflecting a 12.6% growth rate over third quarter 2010. Importantly, our gross margin percentage was consistent with third quarter 2010 at 6.9%, up meaningfully from the 6.5% in second quarter 2011. And our EBITDA per script, excluding the merger-related expenses, also reached a record level at $3.43. Our mail volumes continue to be strong at this stage of the year. We are now confident that we will meaningfully surpass the high-end of our previous mail volume guidance range of 108 million to 110 million script.

Our Accredo business also delivered strong results with revenue growth of 16.7% and operating income growth of 33%, all at a 6.8% gross margin, consistent with third quarter 2010. The company is performing well across the board and we narrowed our a 2011 diluted earnings per share guidance excluding merger-related expenses and all intangible amortization to a range of $4.08 to $4.12, which represents 15% to 16% growth over 2010. Our previous guidance of $4.02 to $4.12 reflect the growth of 13% to 16% over 2010.

For the 2011 selling season, our annualized new-named sales totaled $3.2 billion, up from the $3 billion we previously reported. We have completed 98% of our 2011 renewals amounting to $16 billion client-drove spend. Our 2012 annualized new-named sales currently stand at approximately $1.6 billion, double the $800 million reported last quarter as our clinically focused model continues to have strong appeal in the marketplace.

Now, I would like to share some thoughts on the pending merger with Express Scripts. As you saw in the recently filed S-4, after an extensive review of numerous strategic alternatives through an exhaustive planning process, we determined that combining with Express Scripts was the best strategy to maximize value for our clients, members and shareholders. The merger is a solution to control escalating healthcare costs in America, costs that are undermining the U.S. competitiveness in the global economy. In 2010 alone, U.S. spending for prescription drugs reached $307.4 billion. Our aging population and an increased prevalence of chronic disease are projected to drive a 50% increase in prescription drug spending to well over $450 billion by 2019.

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