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MedcoHealth Solutions (MHS)

Q4 2010 Earnings Call

February 22, 2011 8:30 am ET

Executives

Valerie Haertel - IR

Glenn Taylor - Group President of Health Plans

Timothy Wentworth - Group President of Employer and Key Accounts

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

Steven Fitzpatrick - President of Accredo Health Group Inc

David Snow - Chairman and Chief Executive Officer

Analysts

Lisa Gill - JP Morgan Chase & Co

Ricky Goldwasser - Morgan Stanley

Ross Muken - Deutsche Bank AG

Steven Valiquette - UBS Investment Bank

Lawrence Marsh - Barclays Capital

TheStreet Recommends

Thomas Gallucci - Lazard Capital Markets LLC

Randall Stanicky - Goldman Sachs Group Inc.

Presentation

Operator

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Good morning. My name is Vanessa, and I will be your conference operator today. At this time, I would like to welcome everyone to the MedcoHealth Solutions Fourth Quarter 2010 Earnings Call. [Operator Instructions] I would now like to turn the call over to Ms. Valerie Haertel, Vice President of Investor Relations. Please go ahead, ma'am.

Valerie Haertel

Thank you, Vanessa. Good morning, and thank you for joining us on Medco's Fourth Quarter and Full Year 2010 Earnings Conference Call. With me today as speakers are Dave Snow, Chairman and Chief Executive Officer; and Rich Rubino, Chief Financial Officer. Also joining us for our question-and-answer session are: Kenny Klepper, President and Chief Operating Officer; Tom Moriarty, General Counsel, Secretary and Senior Vice President of Pharmaceutical Strategies and Solutions; Steve Fitzpatrick, President of Accredo Health Group; Dr. Rob Epstein, President of Advance Chemical Science and Research; Tim Wentworth, Group President of the Employer and Key Accounts; and Glenn Taylor, Group President 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 its 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 MedcoHealth 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 medcohealth.com. Additionally, please note that we expect to file our 10-K after the close of the market today.

At this time, I would like to turn the call over to Dave Snow. Dave?

David Snow

Thank you, Valerie, and thanks to all of you for joining us this morning. Medco is pleased to report record fourth quarter and full year 2010 earnings, reflecting strong financial and operating performance at the high end of our previously increased guidance. Today, I will focus my remarks on full year 2010 results and 2011 guidance, while Rich will focus on our balance sheet, our fourth quarter results and details surrounding our 2011 guidance. At our Analyst Day in November, we shared with you our expectations for Medco and our business strategy that is designed to continue delivering strong growth through 2020. We outlined our portfolio of growth drivers that will advance our mission to make medicine smarter for our clients and the more than $65 million members we serve. Today, we remain confident in our expectations and are pleased to provide you with the details of our performance for 2010 and expectations for 2011.

Let's begin with our year-over-year 2010 financial and operational performance. For the year, we delivered record GAAP diluted earnings per share of $3.15 representing growth of 21.1%. Our diluted earnings per share excluding the amortization of intangibles from the 2003 spin-off grew 20.1% to a record $3.40. Our net revenues reached a record $66 billion, up 10.3% from 2009 despite the higher volumes of lower-cost generics that reduced our net revenues by nearly $3.7 billion and correspondingly resulted in record client and patient savings.

Within net revenues, our higher margin-generating service revenues grew 28% to a record $1.08 billion, fueled by our United BioSource acquisition and service revenue growth across the company. We achieved record total gross margin of $4.3 billion, an increase of 7.7% over 2009.

Our EBITDA increased 8.1% to nearly $3 billion and our EBITDA per adjusted script increased 1.6% to a full year record of $3.11. And finally, our net income increased 11.5% to a record $1.4 billion. With respect to the operating metrics that contributed to our strong financial results, overall prescription volumes adjusted for the dates applied between retail and mail grew a strong 6.5% to a record 957 million prescriptions.

Mail-order prescriptions for the year grew at a strong 6.5% to 109.8 million, which exceeded the high end of our guidance of 109 million prescriptions and set a new record. Importantly, we experienced continued strength in generic mail-order volumes, increasing a substantial 13.4% to 67.6 million prescriptions as patients continued to choose lower-cost generic medications.

Growth of generics have now for the fourth quarter was even greater at 15.1%. Our overall generic dispensing rate rose 3.5 percentage points to 71% and within that, our mail-order generic dispensing rate component increased an even greater amount by 3.7 percentage points to a record 61.5%. For the full year, our Medicare Part D PDP revenues achieved a record, increasing 33.5% to well over $1.4 billion. We are proud to have been the first and only national PDP to be awarded five stars by CMS and believe this world-class recognition operationally not only validates our investments in our agile enterprise but also enables continued strength in our Medicare business going forward.

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