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MedcoHealth Solutions (NYSE:MHS)

Q1 2011 Earnings Call

April 28, 2011 8:30 am ET

Executives

Robert Epstein - Chief Clinical Research & Development Officer and President of Advanced Clinical Science and Research

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

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

Kenneth Klepper - President and Chief Operating Officer

David Snow - Chairman and Chief Executive Officer

Analysts

George Hill - Citigroup Inc

Lisa Gill - JP Morgan Chase & Co

Ricky Goldwasser - Morgan Stanley

Ross Muken - Deutsche Bank AG

Helene Wolk - Sanford C. Bernstein & Co., Inc.

Thomas Gallucci - Lazard Capital Markets LLC

Lawrence Marsh - Barclays Capital

Randall Stanicky - Goldman Sachs Group Inc.

Amanda Murphy - William Blair & Company L.L.C.

Operator

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 MedcoHealth Solutions First Quarter 2011 Earnings Call. [Operator Instructions] I would like to now turn the call over to Ms. Valerie Haertel. Ms. Haertel, you may begin your conference.

Valerie Haertel

Thank you, Andrea. Good morning, and thank you for joining us on Medco's first quarter 2011 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 President of Global Pharmaceutical Strategies; Steve Fitzpatrick, President of Accredo Health Group; Dr. Rob Epstein, President of Advanced Clinical Science and Research; Tim Wentworth, Group President of the Employer and Key Accounts; Glenn Taylor, Group President of Health Plans; and Mary Daschner, Group President of Government PBM.

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 for disclosing material non-public information and for complying with these disclosure obligations under Regulation FC. 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-Q 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. Today we're reporting strong first quarter 2011 earnings reflecting continuous success across our strategic growth drivers. Additionally, we are raising the midpoint of our full year 2011 EPS guidance range of -- for the first quarter, GAAP diluted earnings per share reached $0.80 representing 19.4% growth over first quarter 2010. Diluted earnings split per share, excluding all intangible amortization, our new pure cash EPS measure, reached $0.91, a 19.7% increase over first quarter 2010 equivalent.

Even with ever growing volumes at the lower-priced generic drugs in our revenue mix, first quarter 2011 net revenues increased to a record of more than $17 billion representing 4.3% growth over the same period last year. Within our net revenues, service revenues grew 57.5% to a record $357.8 million fueled by our United BioSource acquisition and service revenue growth across the company. With the respect to the operating metrics that contributed to our strong financial results.

Total prescription volumes for first quarter 2011 adjusted to the difference in dates applied between retail and mail grew 2.1% to 244.3 million prescription. Importantly, mail-order prescriptions totaled 27.7 million, with generic mail-order volumes increasing a substantial 9.3% to a record 17.7 million prescription, even in a quarter where there were no contributions from new generics. Our first quarter 2011 overall generic dispensing rate rose 3.4 percentage point to a record 73.1%. And within that, our mail-order generic dispensing rate component increased 4.5 percentage points to a record 53.8%.

The year-over-year improvement in our overall generic dispensing rate drove record incremental savings to our clients and members of $1.1 billion for the quarter, as a growing number of members took advantage of this high-quality, more affordable alternative.

Moving on to our Specialty business, Accredo's performance remains strong, with record first quarter 2011 revenues of $3.1 billion, up 14.9%. Accredo's operating income rose 13.2% to a record $120.6 million.

As an aside, Keith Fitzpatrick, who has served as President of Accredo since 2008, recently announced his retirement effective July 1. We all thank Steve for his years of excellent service and wish him a very happy retirement. We have named Frank Sheehy, a 13-year Medco veteran, to succeed Steve on July 1 as Accredo's President. Frank also joins Medco's Executive Committee. Frank has an outstanding track record of business success and has earned some of the highest client and employee satisfaction ratings ever recorded in our company. Frank's deep understanding of our customers and their needs in the specialty drug space make him well suited to lead the Accredo business as we continue to expand Accredo's capabilities through new innovations.

On the 2012 sales front, while it is still too early in the 2012 selling season for the majority of our prospects who have finalized their decisions, we are very pleased with several significant early season wins. We remain confident in our well differentiated services and our strategic positioning in the marketplace. A good example of our differentiated service offerings is our Medicare business. For the quarter, our Medicare PDP grew 16% over first quarter 2010, driven by the national 5-star rating of excellence that was awarded to Medco. This 5-star rating was the first and only one to be awarded to any national PDP by CMS.

For 2011 year-to-date, our annualized new-named sales remain at approximately $1.7 billion, and our net-new sales remain approximately $1.5 billion. We have now completed over 90% of our 2011 scheduled and early elective client renewals, up from the over 80% we reported on our fourth quarter call, and our 2011 year-to-date client retention rate remains at over 99%.

Turning to guidance. It is with confidence that we raise the midpoint of both our GAAP diluted EPS and our diluted EPS excluding all intangible amortization, reflecting the strength we are seeing, thus far, in our 2011 results. In addition, we are raising our GAAP diluted EPS range by $0.03 due to a lower-than-expected intangible amortization expense associated with our UBC asset, which Rich will discuss further. Our full year 2011 GAAP diluted EPS guidance increased to a range of $3.59 to $3.69, up from the previous range of $3.53 to $3.56, now reflecting a growth rate of 14% to 17% over 2010. Diluted earnings per share, excluding all intangible amortization is now expected to be in the range of $4.02

to $4.12, up from $3.99 to $4.12, now reflecting 13% to 16% growth over 2010 earnings per share.

In summary, we remain focused on the fundamentals of our business, and are enthusiastic about our prospects for continued strong growth. Our ability to narrow guidance this early in the year serves to further fuel that enthusiasm. With that, I'll turn the call over to Rich Rubino, who will take you through the details of our first quarter 2011 financial and 2011 guidance. Rich?

Richard Rubino

Thank you, Dave. Good morning. As Dave mentioned come first quarter EPS results were strong with GAAP diluted EPS of $0.80 representing 19.4% growth over first quarter 2010 and diluted EPS excluding all of intangible amortization of $0.91, representing 19.7% growth over the first quarter equivalent of $0.76.

As we previously guided, first quarter 2011 EPS results include a planned $0.04 benefit associated with changes to the employee post-retirement health care benefit plan. Approximately 3/4 of which flowed to cost of sales and 1/4 to SG&A expense.

Even when excluding net benefit, the GAAP EPS growth rate was 13.4% and the pure cash EPS growth rate was 14.5%. Our gross margin and EBITDA per adjusted script both grew with this onetime benefit is excluded. Total first quarter 2011 net revenues reached a record $17 billion, representing growth of 4.3% over first quarter 2010. Our product revenue grew 3.6%, reflecting our new business wins, as well as higher prices charged by brand name, pharmaceutical manufacturers, partially offset by a higher representation of lower-priced generics.

Service revenue continues to be a very meaningful growth driver, increasing 57.5% over first quarter 2010. This strong performance reflects the service revenue contribution from UBC, which closed on September 16, 2010, as well as the expansion of our overall client base and our Medicare Part D service fees.

Turning to rebates, we earned a record $1.5 billion for the first quarter, an increase of 3.4% over the same period last year, even though we are dispensing fewer brand-name medication and more generics. This year-over-year growth is attributable to new client wins and continuous improvements with formulary contracting. Our first quarter 2011 rebate retention rate was 11.6% compared to 12.1% in the first quarter of 2010 as we continue to drive significant value to clients in a highly transparent manner.

As Dave mentioned, mail-order volume remains strong as clients and members continue to choose this lower cost and clinically effective service. In first quarters 2011, our total mail-order prescription volume was 27.7 million. Within this, generic prescription volumes increased 9.3% to a record 17.7 million, while brand-name prescription volume decreased 9.1% to 10 million prescriptions. Our generic dispensing rate has now increased a very substantial 450 basis points since first quarter 2010 to a new record of 63.8%. Based upon our current forecast, we are raising our 2011 mail-order volume guidance range to 108 million to 110 million, up from the previous 107 million to 109 million scripts.

Our strong generic mail-order prescription volumes and our fee service gross margin, meaningfully drove our first quarter consolidated gross margin, which increased 7.8% over first quarter 2010 to $1.07 billion. Our consolidated gross margin percentage of 6.3% for the quarter increased 20 basis points from the 6.1% in the first quarter 2010, including the strong first quarter 2011 generic mail-order prescription volume and growth in service margin.

Selling, general and administrative expenses of $387.1 million for the first quarter increased over first quarter of 2010 by $36.5 million or 10.4%, including increased expenses associated with the addition of UBC, as well as higher professional fees and other expenses associated with strategic initiatives. Our total EBITDA for first quarter of 2011 reached $734.2 million, representing growth of 6.9%. EBITDA for adjusted prescription for the quarter increased 4.9% to $3.01.

Our intangible amortization of $73.2 million in the first quarter 2011 increased 3.8% from $70.5 million in first quarter 2010, primarily reflecting the UBC intangible assets. The final purchase accounting valuation for the UBC acquisition resulted in a lower identified intangible asset value that we included in our previous GAAP EPS guidance. And therefore, overall intangible amortization expense for full year 2011 will be lower than originally guided by approximately $20 million.

Total amortization of intangibles for 2011 is now expected to be in the range of $280 million to $300 million compared to the previous guidance of $300 million to $320 million. The $20 million reduction in the range equates to the $0.03 improvement in our revised full year 2011 GAAP diluted EPS guidance.

Total net interest and other expense of $54.2 million for the first quarter of 2011 increased $14.9 million from the $39.3 million in first quarter 2010, primarily reflecting the new debt we added to finance the UBC acquisition last September.

First quarter of 2011 effective tax rate was 40.1% compared to 39.8% in the first quarter 2010. We still expect the full year of 2011 effective tax rate to be approximately 39%. Net income for the quarter increased 3.9% to $333.1 million from the $320.5 million reported for the first quarter of 2010.

Moving on to share repurchases. During the first quarter of 2011, we repurchased 13.5 million shares for $836.6 million at an average per share cost of $60.20, through our pre-authorized trading plan. Of these repurchases, a total 6.4 million shares, cost of $400 million, have been repurchased under the new $3 billion plan authorized by Medco's Board of Directors on February 2. We expect to begin repurchasing shares again next week and anticipate repurchasing approximately $2 billion in shares during 2011, consistent with the detailed guidance we provided last November.

As a result of our share repurchases and normal climate component, we closed the first quarter with a cash balance of $127 million. We expect our quarterly cash balances to increase over the course of this year. Our total debt for the first quarter remained consistent with fourth quarter 2010 of $5.0 billion.

Turning to our Specialty segment, as Dave already mentioned, Accredo achieved revenues of $3.1 billion and record operating income of $120.6 million for first quarter 2011. Accredo's gross margin percentage for the quarter was 6.6% compared to 7.1% first quarter 2010, reflecting the product, channel and new client mix effects to be experienced as 2010 progressed, which includes meaningful growth across the vast majority of Accredo's products. Sequentially, Accredo's gross margin percentage increased 10 basis points from the 6.5% reported in the fourth quarter 2010.

Moving on to Medicare. We continue to experience growth in our highly rated Medicare PDP. First quarter 2011, Medco's PDP revenues increased over 16% to nearly $440 million. As Dave explained, we are raising the midpoint of our 2011 EPS guidance for both GAAP and pure cash EPS measures, narrowing the range for the high-end to a $0.10 range from the previous $0.13 range, and additionally, increasing our full year GAAP diluted EPS by $0.03. The raising of the midpoint reflects strengthened fundamental operating earnings expectations for the year, while the $0.03 raise to full year GAAP diluted EPS is the function of the lower intangible amortization expense I mentioned earlier.

Table 9 of our earnings release lays out the math very clearly. To briefly repeat our improved 2011 guidance, diluted GAAP EPS is now expected to grow 14% to 17% over 2010 in the range of $3.59 to $3.69. Pure cash EPS is now expected in the guidance range of $4.02 to $4.12, representing growth of 13% to 16% over the 2010 full year equivalent of $3.55.

Now I would like to take you through the detailed component of our 2011 guidance beginning with renewals. We continue to expect to renew approximately $15 billion of business in 2011, including schedule and early elective renewals, representing less than 1/4 of our business. As Dave mentioned, we now have over 90% of our 2011 renewals completed, up from the over 80% we recorded last quarter. As previously disclosed, approximately 75% of the 2011 renewal pricing already took effect in the first quarter of 2011, with the remainder expected primarily in the third quarter. At this point, we continue to expect 2012 renewals to be in the range of $16 billion to $17 billion, approximately 25% of our book.

As you can see from our slides on the web, the majority of our detailed 2011 guidance component remains consistent with those we provided on our fourth quarter call. 2011, we continue to expect a $0.09 incremental contribution from new generics, $0.01 expected in the second quarter, $0.02 expected in the third quarter and $0.06 expected in the fourth quarter, $0.03 of which relates to Lipitor for the five-week month of December. We continue to expect stability or year-over-year expansion in our gross margin percentage and EBITDA for adjusted script performance in 2011.

Now I would like to walk you through some of the changes to our 2011 guidance components. As I briefly mentioned earlier, our mail-order prescription volumes for 2011 are now expected to be in the range of $108 million to $110 million, up from the previous range of $107 million to $109 million. SG&A expenses for 2011 are now expected to be approximately $1.7 billion, an improvement from the previously narrowed range of $1.7 billion to $1.75 billion.

Now to give you some insights into the quarterly flow of earnings for 2011, we now expect EPS to improve progressively quarter-to-quarter, with the largest sequential improvement from third quarter to fourth quarter 2011. Our second quarter 2011 pure cash EPS is now expected to increase slightly over the first quarter 2011 EPS amount of $0.91. The percentage split in EPS between the first half and the second half of 2011 is now expected to be consistent with that experienced in 2010.

In conclusion, we delivered a strong quarter of operating results and EPS, representing a solid start to 2011. We remain confident in our prospects for the quarters ahead and for our continued growth well into the future. Now Dave and I would like to open the lines for questions. Andrea?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Lisa Gill with JPMorgan.

Lisa Gill - JP Morgan Chase & Co

Rich, just first a clarification. When you talk about the second quarter being up from the first quarter, you're talking about the actual number that you reported this quarter, which includes the onetime benefit, is that correct?

Richard Rubino

That is correct. We expect it to be higher than the $0.91 we reported this quarter.

Lisa Gill - JP Morgan Chase & Co

Okay, great. And then just secondly, as you think about 2012, Dave, and you think about what customers are looking for, you talked about your differentiated offering, can you talk at all if -- what's happened recently with CalPERS? Does that come up in the conversation? Are people just looking beyond that and saying, "Medco's got a great offering, and it's not having any impact on your selling season for 2012"? Any comments would be helpful. And then just lastly, if you can help us to understand the timing of FEP?

David Snow

Sure. I'll answer a couple of pieces, and then I'll ask the guys who are out there every day with the clients to answer another piece. But what our clients are most focused on in 2012 and beyond that is really the rate of increase in cost on the specialty side of the business. And they're looking for new innovation and solutions there because it's -- the small molecule goes from brand -- generic, they're getting great relief. But they see where specialty is heading. That's where all the new brand innovation is occurring, and we're working with them on some, I think, exciting solutions for the future. And that's where a lot of the conversation goes when you talk about renewals and retention. When you look at FEPO, I will just tell you that we actually went back and look at what this timing was for announcement last time they went out the full RFP. And they're on schedule actually. When we looked at it last time, which is I think 5 years ago now, they didn't actually announced till late in the second quarter. And we didn't have invest -- we weren't able to tell investors where we - where that went until our second quarter call. So they may or may not be ahead of that schedule, but relative to previous years, they're on schedule, and we still feel as though we have a very competitive offering there. Relative to your final question, Lisa, I'm going to ask Tim Wentworth and then Glenn Taylor to reflect their markets and the CalPERS situation. So, guys, why don't you go ahead.

Timothy Wentworth

We feel, in a nutshell, it's not been a significant topic of conversation. Once we got passed the first week and were able to file the points of the 8-K. It's not been a significant distraction. I don't think it's an issue to putting together a fabulous sales and retention year for us. When you look in the marketplace I am in, which include the states, where we you may have expected some sensitivity, plans, their consultants have significant challenges. They recognize the quality of our programs. They recognize the long standing integrity of our company. And most importantly, we've consistently delivered. When you take a look at the most recent awards that we're very pleased to get and the information that's out publicly, there exact quote was they believe Medco provides high value cost-management programs, and they have a strong critical underpinning that sits under that. So we have had no issue. And in fact, I'm extraordinarily excited about what I see this year.

Glenn Taylor

Lisa, this is Glenn Taylor. Tim's right since the 8-K and we were able to give a little bit more explanation. We've had about a 10-day news cycle, if you will, from the middle to the end of March. And that was it. I haven't had a single conversation since March 31. In that time, we've had 2 significant renewals, which we don't talk about and disclose individual contracts. We've had 2 fairly significant wins. So we're thinking we're in very good shape to have a very good selling season this year, and this issue is just not an issue.

Operator

Your next question comes from the line of Larry Marsh from Barclays Capital.

Lawrence Marsh - Barclays Capital

Just a follow up to Lisa's question, maybe another add-on, which is around timing. Dave, obviously, when you're at healthcare conference, the Steptoe[ph] report came out which, I thought, was very inflammatory, and you did disclose in the 8-K that clearly you see there's nothing that you've done wrong. You're not alleged to do anything wrong. But as you talked about, there's still a little bit of this air of uncertainty. Are you in a position at all to talk about when you like to be able to be clear about the position you have in the marketplace and the resolution of this?

David Snow

Well, I'm going to ask Tom Moriarty, our General Counsel. This is a legal matter and I'm going to have to [indiscernible] some thoughts, okay, Larry?

Thomas Moriarty

Sure, Larry. I mean, as we said before, we're working with both the SEC and the California AG. We have been and will continue to voluntarily provide information. We very clearly are working to put this behind us, but I cannot predict with any real certainty of the timing of that or the outcome. But as we've seen in this quarter and as we go forward, we're going to remain very focused on our business and continue to drive value for our clients, and continue to work to put this behind us.

Operator

Your for next question comes from the line of Ross Muken with Deutsche Bank.

Ross Muken - Deutsche Bank AG

So in talking to the consultants, one of the things that consistently comes up this season, and it's come up in prior seasons, is sort of your differentiated clinical offering and sort of the distance you put versus the competition there on sort of a regular basis. As you think about sort of the key messaging in the upcoming season and where you really feel like you're kind of driving the biggest delta versus your peers, what for you is kind of the key focal points that's new and different versus the prior year? And what do you have, kind of, that you sort of talked about more recently on the pharmacogenomic front?

David Snow

Let me talk about the things that I'm excited about and the things that have resonated in my conversations with clients. And then again I'll ask the Group Presidents to add anything that I don't cover. But for me, continuing to extend the consumer-driven capabilities down to the individual consumers -- so, for example, expressing gaps in care and evidence-based protocols through our website in the layperson language, so the consumer can understand how to manage their care better and where their gap exists and how they're following their treatment protocol has been hugely powerful. And in fact, the gap in care closures we're getting on the self-help basis has been dramatic and growing, and I'm excited about that, both because it improves outcomes at lower cost, but also it's the least expensive way to close gaps in care because I don't need to do the labor-intensive pharmacist coaching each and every time. I'm also thrilled that we just recently launched the Medco's smart phone app with Verizon, available both in Android and BlackBerry version. These are really exciting apps and that again get us to the next levels of influencing consumers in powerful ways that are clinically oriented, but also give them enormous financial information at the point of care with their doctor. And I think that that's something that is going to continue to propel better outcomes at lower costs through real clinical care and in complete communication among the parties involved for that care. And I like that. The other thing that isn't getting a lot of air time, and we've talked to all of you 2 times at 2 Analyst Day's, and I don't think people fully appreciate the power of it yet, but I guarantee you they will, if our investments and our efforts around what we call Medco 2.0 and the agile enterprise. The benefit that will bring to the competitive marketplace in go-forward years is incredible to me. It will unleash our ability to innovate in a quantum way. And I think we're going to take another attempt next Analyst Day to further explain how powerful this is, but that to me is what is really going to make a difference in how we take care of patients in a way and how we service our customers in a way no one else can. And I'm going to leave it there. I'll ask you guys, Tim and Glen, if you have anything to add.

Timothy Wentworth

I think the only thing that I would really point to besides the app, we launched, we actually developed in concert with our client advisory group, and we launched it recently to them. And everyone of them is going to heavily promote the app to their members, particularly once we get an iPhone application as well, which will be before the end of the second quarter. Huge in terms of the response to them, what that's going to enable in terms of the way we engage with our patients. But beyond that, I think the other big thing, Dave, are 2 things. One is our extended enterprise. We are continually being the leader at vendor summits that clients have to sit down with multiple points of care inside of their constellation, and being able to enable a greater level of connectivity than they can get by virtue of the way it goes in an unmanaged setting. So that's very powerful. And the fact that we can enabled that and bring to the table our open architecture, our patient health action plan and we can work that bidirectionally with these other caregivers is compelling. The third piece I would say is our EGWP strategy has been hugely successful. We have modeled over 50 clients in terms of looking at the value that list. We are installing a whole lot of them for '12 or '13. And we think that we brought a level of value there that is unparalleled in terms of both the number care that these clients want to continue to care for the members and at the same time bring in significant financial change to what it looks like in terms of providing that.

Richard Rubino

Yes, I would agree and say that every plan, health plan that I'm selling is looking for a 360 degree view of the patient, a true 360 degree view. While we can provide that that on the pharmacy side, we need to integrate that in with what they're doing on the medical, the lab et cetera. And that with the extended enterprise that Tim mentioned is really paying off, big dividends in our conversation.

David Snow

So obviously, Ross, we love that question because we have so much going on. I have to ask a couple of more executives to chime in simply because it's exciting. So I'm going ask Dr. Epstein to talk about his world, both research, UBC and the things we're doing that are resonating with clients there. I'm also going to ask Kenny if you could perhaps talk about some of the innovations we're working on relative to physicians stakeholders as we prepare for accountable care because I think that healthcare reform initiative is important. I think it again drives better clinical outcomes, and we think we can be a major enabler in that space. Maybe a brief comment on that related to 2.0 might be helpful. So, Rob?

Robert Epstein

On the pharmacogenomics front, we have launched 4 new clinical programs this year in the areas of neurology and cancer, and they are selling very briskly. We now have over 300 clients enrolled in multiple pharmacogenomics programs, representing about 12 million of our lives. So it's really exciting, and they're really excited to take on new pharmacogenomics tests which are new. These are trickier to do than the prior ones, they're not cheap [indiscernible] or blood tests. So it's a real positive for us to be able to figure out how to get that done. Also, we've launched our new service which is kind of like a 1-800 number to call certified genetic counselor to get advice when you're newly diagnosed with any sort of problem like cancer. And that's actually gotten a little traction even when we just started subscribing that new service. We've added a number of hospitals to our genomic medical institute network, including one in Canada, which is pretty exciting, where we are arming hospitals around the country with genomic information to make them certified genomic centers. And then in another area in genomic which is new for us is to take the intelligence around [ph] that DNA Direct has and offer those as the policy service health plan, who don't have their own technology equipment. And we've actually had a number of sales in that area since the beginning which has been a real uplift for us. So all areas are inspiring. They're all new. On the research front, we have a dozen large multi [indiscernible] patient ongoing studies, several of which we'll complete this year. But you'll be hearing in the back half of the year some of the results that are very large prospective studies that has taken us into new areas including neuropsychiatry, where we have not been before. So it's pretty exciting. Actually, the neuroscientific community has been really excited about the work we're doing since no one else is really doing it. On the UBC front, the synergy has just been simply awesome. Since we announced the acquisition at the end of September, we also launched the Medco Research Consortium, which is any client interested in participating in the research, including UBC. We now have well over 100 clients representing 40 million of our lives in the consortium. And we now actually have clients participating in [indiscernible] studies or safety studies or both. And the early feedback has been really exciting. People love it. The members love it. They like the having the added protection of the safety in the particular type study. And so everything has been a real exciting first quarter for us, and we're just really looking forward to ongoing advances this year.

Kenneth Klepper

Just to add to what's been said is we view the area of health Information Technology as a really exciting space for us. One of the things that we're very excited about when you think in terms of extended enterprise and the broad portfolio of clinical capability is -- the real game changer is to help get the healthcare system wired in the country. And 1 of the most powerful features of that is being able to help support the point of care where the patient and the physician interaction is at its most important. To be able to provide this 360 degree insights to that point of care. We believe it improves the ability of the physician to make decisions and prescribing course of treatment and also allows us to place a set of evidence-based protocol that allows us to put a benchmark to the type of activities that are happening. So I think you will see over the not too distant future an expanding portfolio of cloud computing-based solutions at point of care, and it's also the mechanism we're going to be using to enable both the medical home and Campbell Care Organization [ph as well. So the wiring aspect, we think, has a lot of potential.

Operator

Your next question comes from the line of George Hill with Citigroup.

George Hill - Citigroup Inc

Dave and Rich, the increase in generic volumes in mail is pretty impressive this quarter given the lack of generic introductions. Can you talk about what drove that?

David Snow

Yes I'll mention a few things, and then, Rich, feel free to add on. I think a couple of things. First of all, clients are at a point where they understand that mail is an incredible cost-effective channel, and that mail is outstanding at driving generic expensing rates. So we've had great benefit design support on the part of our clients to drive this outcome. And I would also tell you the economy continues to aid the choice of generics because clearly when people are financially strapped, they say, "Hey, I'd rather have less out of pocket expense," and they're moving from brands to generic. And the interchange that's going on between brand and generic voluntarily on the part of consumers is simply that I need to save some money has been incredibly strong. The final thing I've mentioned is that we have a team that always is working with clients to drive better generic expensing results across the channel, both mail and retail, and we've come up with a few new innovations that I don't choose to describe in great detail, but they've been very effective in improving mail choice and generic choices at mail. So we're actually feeling as though this is a momentum thing that we can sustain for a while.

Richard Rubino

I'll just add to that. Now when you look into the significant products that went generic last year, Flomax, Cozaar, Hyzaar, Effexor XR, those all had very high mail-order penetration rates in our book of business. You might recall that at Analyst Day, I pointed to them on average being about 45% mail-order penetration, which is probably 10 points higher book of business average. In addition, we continue to see significant share gains as volume increases for simvastatin. That continues to be the case. Of course, we pointed to that in the past as well. Lastly, I'll say that plan designs have been established recently perhaps more than ever before in support of step therapy programs. We're ultimately -- we are driving very material savings for clients and patients by starting them on the lower cost alternatives.

Operator

[Operator Instructions] Your next question comes from the line of Tom Gallucci with Lazard.

Thomas Gallucci - Lazard Capital Markets LLC

My question is for Rich, I think, primarily. Just curious, Rich, coming off the Q4 call, I guess, what confuse some people with sort of sequential ramp earlier this year. And now it seems it's a little bit more than we might have expected with some progress from Q1 into Q2. And you're sort of flattening, I guess, a little bit the steepness of the ramp throughout the year. So can you tell us what changed in the last couple of months that gives you a little bit more weight towards the first half as opposed to the second half?

Richard Rubino

Well, I can tell you probably the primary driver there is the strength we have in generic mail volumes. That clearly drove the first quarter. And obviously as we get deeper into the year, we have a clearer line of sight. And now obviously the second quarter is upon us, and I'm confident, at that this point, with my current line of sight, that it will be stronger than the first quarter. So the way I look at my -- you really have to take advantage of the most current information in projecting the year on this company because it's not that easy to look out for 2, 3, 4 quarters. I'm very confident in the second quarter. What I'm seeing is a continuation of what we've seen in the first. Strong mail, strong generic, continued competitiveness with regards to our ability to achieve competitive purchasing discounts, significant level of business efficiency across the board.

David Snow

I'm going to add a couple of secondary players. Rich is right in terms of one of the big player. But I would also add that we were very pleased with incrementally enrollment we got in our Medicare PDP. And I think that's heavily related to the 5-star rating we got as a national PDP because many of the patients who are 65 plus who picked these PDPs go to the government website to make their choice, and they look at the star rating as an important metric for making choice. So we had a nice surprise there relative to enrollment, which will sustain itself. The key members will stay members through the year. I would also say I'm extremely pleased in the rate of growth we're seeing at UBC. It's, and at this point, outperforming my original expectations, and I think it's sustainable. So there's some other players out there that are actually at an operating level contributing to our growing optimism for the year.

Lawrence Marsh - Barclays Capital

Okay, great. And maybe just as a follow there. You're talking about, Rich, mail generics being one of the bigger drivers. I guess, can you tell us what you sort of get factored in as you look at the second of the year relative to what we've seen in the first quarter? Is there a chance that if these trends sustain themselves and your line of sight continues to improve with times that you could do a little bit better or have you, sort of, got a little higher expectations already factored into the second half?

Richard Rubino

Well, I'm not going to change the guidance we just gave as a result of that question. I think we'll have to stay tuned and see how the year progresses as we get closer to the middle of the year. So obviously, I'll give you further insight in our next quarter call, but right now, we're delighted with where we are. Obviously, we're pleased to lop off the $0.03 in the bottom end of guidance. And just stay tuned.

Operator

Your next question comes from the line Randall Stanicky with Goldman Sachs.

Randall Stanicky - Goldman Sachs Group Inc.

On the Lipitor, Dave, I'm sure you're aware of [ph] pressing pretty hard from the litigation perspective to get a generic in earlier. And we're going to get an update on that today. Question is, if that was the case and we saw generics come earlier, should we be thinking about your $0.03 per month contribution in any different way? And then I have one follow-up.

David Snow

Okay, Randall, I'll ask Rich to take that, and then Tom, who's obviously the one who put together all our pharma deals. If you have anything to add, Tom, please feel free to...

Richard Rubino

I would just say that at this point, the probability level there is probably, I would think, quite low. Tom, would you agree with that?

Thomas Moriarty

I would agree with that.

Richard Rubino

So ultimately, from a probability perspective, we're assuming that we're going to stick with our $0.03 benefit from Lipitor in the fourth quarter. We're not expecting any news that would alter that before then, but, Tom, why don't you try to...

Thomas Moriarty

I would agree with that. I think if you look at the scenario, it's looking more likely towards November date as a [indiscernible] day.

Randall Stanicky - Goldman Sachs Group Inc.

The economics that you've got contracted, would that still be a similar type of opportunity or would that be potentially changed if it did come early?

Richard Rubino

Randall, as a matter of policy, we don't get into different sources and get pushed into probability therewith. So we're not going to discuss that. I think from a probability point of view, you should, as I always guide, to use the numbers that we gave you.

Operator

Your next question comes from the line of Amanda Murphy with William Blair.

Amanda Murphy - William Blair & Company L.L.C.

I had a question on Accredo. The revenue growth there seems to be in line with sort of what you've guided to but has sort of come down a little bit from what we've seen over the past few years. I'm just curious, how do you think about that segment kind of longer term? And have we seen the gross margin line kind of normalize? It was a little bit of an improvement over last quarter.

David Snow

Okay, I'll ask Steve Fitzpatrick to give you some help on that question.

Steven Fitzpatrick

It's maybe come down a little bit as we've been very effective in penetrating the Medco book of business and capitalizing from clients there. Moving forward, there's still lot of opportunity as this proportion of the specialties spin is on the medical side of the business, which we had historically been fairly effective in pulling over, and we'll continue to drive that. Particularly as we package our infusion capabilities, which are really unmatched in the market, and move forward to be a little more aggressive in the packaging [indiscernible]. We should continue to drive, not only our core specialty, which has driven a lot of our growth recently, but in the future the infusion capability which is some of the higher margin benefits.

David Snow

Yes, I'd add to what Steve just said. I think the infusion capabilities are real competitive assets that Medco uniquely has. But I would also say more broadly in the specialty space, there's an enormous opportunity on the medical side of the specialty spend benefit. And we're making great inroads there. I expect that to grow over time as we continue to build the products that make that whole over from medical to drug management on the PBM side more scalable. So we technically could double the size of Accredo if we could get the biotech spend that's on the medical side of the business over to the PBM side of the business. On top of that, there are 611 drugs in the pipeline clinical Phase II and III on their way to FDA approval, which will create its own source of growth for our business.

Richard Rubino

I would just add. From a gross margin percentage perspective, we're going to be pretty much in the zone that we've seen in the first quarter for the rest of year. You may see some ups and downs, but not massive variability.

Amanda Murphy - William Blair & Company L.L.C.

Okay, thanks. And then just one more on utilization. Some of the other companies on our list have reported stronger utilization growth over medium improving utilization growth in the first quarter. Would you agree with that just from an underlying prescription consumption standpoint?

Richard Rubino

Yes, I would say that we'll be issuing our drug term report soon. And for last year, certainly, we did see utilization increases, as I recall, of about 2-plus percent. That trend is not changing, so we are starting to see signs of that carrying into this year as well a little early. But we certainly aren't seeing any declines in utilization.

Operator

Your next question comes from the line of Helene Wolk with Stanford Bernstein.

Helene Wolk - Sanford C. Bernstein & Co., Inc.

Just a question around cost trends and understanding what you're seeing from a generic sourcing and a retail network fee perspective, both currently and what you expect for the year.

David Snow

Okay, Tom, you want to take that?

Thomas Moriarty

Well, I think, as we've commented before, we have a multi-sourcing strategy. And in terms of our ability to continue to generate value going forward [indiscernible]

Richard Rubino

It's the same from a retail contracting perspective as well. We have a line of sight into the continued improvement on the broader procurement front across channel.

Helene Wolk - Sanford C. Bernstein & Co., Inc.

And any sense of or help that you can provide in terms of the timing of the share repos? How we should think about the rest of the year unfolding?

Richard Rubino

Obviously, we're still at the $2 billion level. So the strongest quarter for repurchases is first quarter, but we expect it to come down a little bit in the second quarter from a dollar-value perspective. And then it should flatten off in the back half of the year. So you'll see us going down from the $836 million the first quarter to some level probably north of $500 million in the second quarter and then evens off in the back half of the year.

Operator

And your final question comes from the line of Ricky Goldwasser with Morgan Stanley.

Ricky Goldwasser - Morgan Stanley

I have a couple of follow up questions. Rich, just following up on the Lipitor question, is this $0.03 from Lipitor dependent on whether we will have 2 versus 3 manufacturers in December?

Richard Rubino

Consistent with my previous comment, I'm not going to get into any details with regard to who and how many. I just want you to know that we are as confident in the $0.03 as we were when we brought up the $0.03 several months ago.

Ricky Goldwasser - Morgan Stanley

And then, Dave, any update on the timing of United? Do still expect to hear any resolution at around the fall time?

David Snow

I'm going to echo the comment of Steve Hensley [ph] that he made on his earnings call. And that this we have a great relationship with United. We have been great partners. We are clearly looking to the end of this our current contract for 1/1/13, and I can't speculate about what the outcome will be, but we are anticipating a process just as we've talked about before. There's nothing really new to add at this point. But my view is, there's always a strong possibility of future relationships when your current relationship is so fundamentally strong.

Operator

And I would now turn it back over to our presentors for closing remarks.

David Snow

Thank you very much all of you for joining us today. And we look forward to talking to you at future conferences and our next quarterly call. Have a great day.

Operator

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.

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