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Medco Health Solutions (NYSE:MHS)

Q4 2011 Earnings Call

February 21, 2012 8:30 am ET

Executives

Valerie Haertel -

David B. Snow - Chairman and Chief Executive Officer

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

Timothy C. Wentworth - Group President of Employer and Key Accounts

Analysts

Vijay Kumar - Deutsche Bank AG, Research Division

Kipp R.F. Davis - Barclays Capital, Research Division

Ricky Goldwasser - Morgan Stanley, 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

Operator

Good morning. My name is Darla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Medco Health Solutions Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Valerie Haertel, Vice President of Investor Relations. Please go ahead.

Valerie Haertel

Thank you, Darla. Good morning, and thank you for joining us on Medco's Fourth Quarter and Full Year 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 a question-and-answer session are Kenny Klepper, President and Chief Operating Officer; Tom Moriarty, General Counsel, Secretary and President of the global pharmaceutical strategies; and Tim Wentworth, Group President of Employer and Key Accounts.

During the course of this call, we will make forward-looking statements as that term is defined in the Private Securities and 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 nonpublic 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 earnings call are owned by Medco Health Solutions, Inc. 2012. Slides to accompany our presentation, which detail our financial and operating results, are currently available in the Events section of the Investor Relations site on medcohealth.com. Additionally, 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 Medco's Chairman and CEO, Dave Snow. Dave?

David B. Snow

Thank you, Valerie, and thanks to all of you for joining us this morning. Today, we are reporting record fourth quarter and full year 2011 earnings, reflecting strong financial and operating performance. I will be focusing my remarks on our full year 2011 results, and Rich will focus his commentary on our fourth quarter performance. The results I will discuss exclude expenses associated with our pending merger with Express Scripts unless otherwise noted.

Now I'd like to begin with our full year 2011 year-over-year financial and operational performance. Every single 2011 number I mention represents a Medco record. We reported GAAP diluted earnings per share of $3.62 or $3.74 when excluding $80.2 million of merger-related expenses, an increase of 18.4% over the $30.16 per share we earned in 2010. Even when including the merger-related expenses, our 2011 EPS represents a record. Our diluted earnings per share, excluding all intangible amortization and merger-related expenses increased 17.5% to $4.17 from $3.55 in 2010. Total net revenues for 2011 grew 6.2% to $70.1 billion. Product net revenues increased 5.7% over 2010 levels to $68.6 billion, and service revenues increased 39% to $1.5 billion.

Our total gross margin dollars reached $4.62 billion in 2011, up 6.7% from the $4.34 billion in 2010. EBITDA rose 6.6% to $3.2 billion in 2011 from just under $3 billion in 2010. Our EBITDA per adjusted prescription increased 3.9% to $3.23 in 2011 compared to $3.11 in 2010. Our total prescription volume adjusting for the difference in days' supply between mail-order and retail increased 2.5% over full year 2010 to 980.7 million. Mail-order prescription volume increased 3% to 113.1 million, the generic volumes increasing 8.3% to 73.2 million. Our overall utilization rates were steady to up slightly in the course of 2011 compared to 2010. Our full year 2011 generic dispensing rate increased 2.8 percentage points to 73.8%. The mail-order generic dispensing rate for 2011 increased 3.3 percentage points to 64.8%, while the retail generic dispensing rate increased 2.6 percentage points in 2011 to 75.3%.

Our Accredo specialty business also delivered record revenue and operating income. Revenue increased 18.5% to $13.4 billion, and operating income grew 27.9% to $560.6 million. To repeat what I said earlier, all of the 2011 statistics I just mentioned represent Medco records.

Turning to sales for 2011, annualized new-named sales totaled $3.2 billion. Net new sales totaled $2.1 billion, and our client retention rate exceeded 99%. We continue to win new business for 2012, and our 2012 annualized new-named sales currently stand at approximately $2.6 billion, up from the $1.6 billion we reported last quarter. As the government becomes an even more significant payer over the next several years, I am pleased to report that Medco's PDP experienced overall enrollment growth in 2012 of 64%. This includes 14% growth in the individual market and a very strong 140% in our EGWP business. Our high level of success is directly linked to excellence and execution, a key reason why Medco's PDP remains the highest ranked national PDP by CMS.

Now I'd like to share some thoughts on the pending merger with Express Scripts. On February 10, Medco and Express Scripts certified to the FTC that they had substantially complied with the FTC's second request. We remain confident that our proposed merger will be completed within the first half of this year. As I noted last quarter and what should be clear from the record results we reported today, we are planning to merge with Express Scripts from a position of strength. Our confidence is based on the following key factors: While Medco remains a strong enterprise, combining with Express Scripts provides us with the opportunity to better position ourselves to meet the challenges of health care reform and pass along even greater savings to our clients and patients. We continue to estimate that the newly merged company will deliver more than $1 billion in additional annual savings to customers, commencing after closing. Additionally, the PBM marketplace is highly competitive today, and it will remain highly competitive after the transaction closes, benefiting consumers from both a cost and quality of care perspective. This proposed merger embodies the spirit of the new Health Care Reform Legislation that promotes cost savings to solve America's health care burden. By combining with Express Scripts, we will be better able to deliver what our nation needs now, high-quality care at even lower cost to our clients and patients. Simply put, Medco and Express Scripts can do this much more effectively together.

Before I turn the call over to Rich, I would like to thank all my colleagues at Medco at every level of the company who have worked tirelessly this year to deliver best-in-class service to our clients and patients. On behalf of Medco's executive leadership, we applaud your hard work and dedication, attributes that have contributed to the success of this great company and will enable our next phase of growth, innovation and value creation for the benefit of all of our stakeholders.

With that, I'll turn the call over to our CFO, Rich Rubino, who will discuss additional fourth quarter 2011 financial performance details. Rich?

Richard J. Rubino

Thank you, Dave. Good morning. As Dave mentioned, our fourth quarter and full year 2011 EPS results were strong. As we expected, the fourth quarter of 2011 was the strongest quarter of the year with GAAP diluted EPS increasing 22.7% to a record of $1.08, a record that is even more significant when you exclude the $0.06 and fourth quarter 2011 merger-related expenses, bringing that number to an equivalent of $1.14, representing growth of 29.5% from the fourth quarter last year. You will recall from our original guidance that the 2011 fiscal year includes 53 weeks, and the fourth quarter includes that extra week, bringing the quarter to 14 weeks compared to the 13 weeks in fourth quarter 2010. The extra week does not have a material effect on earnings.

Diluted EPS excluding all intangibles and merger-related expenses of $1.25 this quarter represents a record, a 26.3% increase over fourth quarter 2010. This $1.25 is a meaningful $0.18 higher than our previous equivalent EPS record of $1.07 set in the third quarter of 2011. Fourth quarter 2011 merger-related expenses, primarily including legal fees and employee retention-related expenses, were $43.6 million or $0.06 per share. In the fourth quarter 2011, $42.3 million of the merger-related expenses are reflected in SG&A expense and the remaining $1.3 million in cost of sales. For full year 2011, the merger-related expenses were $80.2 million or $0.12 per share, with $77.9 million included in SG&A expenses and the remaining $2.3 million in cost of sales.

Total fourth quarter 2011 net revenues reached a record of nearly $19 billion, representing growth of 12.2% over fourth quarter 2010. The increase in net revenue includes our new business wins, as well as higher prices charged by brand-name pharmaceutical manufacturers, partially offset by a higher mix of lower-priced generics.

This quarter, our clients and members saved approximately $900 million compared to fourth quarter 2010 from the increased utilization of generics, bringing them total savings of $3.6 billion for full year 2011. Service revenue continued to be a significant growth driver, increasing 18.3% over fourth quarter 2010 to a record $413.6 million. This strong performance reflects increased service revenue contribution from UBC, as well as growth in our client service offerings across the company.

Turning to rebates, we earned nearly $1.7 billion for the fourth quarter and $6.2 billion for the full year 2011, both records even though we are dispensing fewer brand-name medications and more generics. These earned rebate levels represent 14.6% growth for the quarter and 6.9% growth for the year, attributable to continuous improvements in formulary contracting and very importantly, clients continuing to embrace our innovative formulary management programs.

Our fourth quarter 2011 rebate retention rate of 12.0% compared to 13.0% in fourth quarter 2010, as we continue to drive significant value to clients in a highly transparent manner. For the full year, our rebate retention rate of 12.2% compared to 12.5% in 2010. Said another way, approximately $0.88 of every rebate dollar we earn goes directly into the hands of our clients.

In fourth quarter 2011, our total mail-order prescription volume reached a record $30.4 million. Within this, generic prescription mail-order volumes increased 14.9% to a record $20.1 million. Brand-name prescription volumes decreased 1% to 10.3 million prescriptions. Our generic dispensing rate at mail increased 3.2 percentage points from fourth quarter 2010 to a new record of 66.1%. The strong generic dispensing rate at mail results from the recent availability of generic Lipitor and higher substitution rates on some older generics. The higher generic dispensing rates combined with increased service gross margin drove our fourth quarter consolidated gross margin to a new record of $1.28 billion, an increase of over 10% from fourth quarter 2010. As we expected, the availability of generic Lipitor on November 30 contributed $0.03 to our earnings per share during the fourth quarter.

Total gross margin percentage of 6.7% for the quarter is 20 basis points lower from fourth quarter 2010. The full year 2011, total gross margin percentage of 6.6% is consistent with 2010.

Selling, general and administrative expenses from fourth quarter 2011 totaled $481.7 million. When reduced by the $42.3 million in merger-related expenses I explained earlier, SG&A expenses were $439.4 million, an increase of 2.5% over fourth quarter 2010. For the full year, SG&A expenses were $1.74 billion or $1.67 billion excluding the merger-related expenses of $77.9 million, which represents growth of 7.5% over full year 2010. When also excluding the effect of the UBC acquisition in September 2010, SG&A increased by 2.6% for the year. This reflects efficiencies across the enterprise, while we continue to invest in our clinical and strategic programs and new technologies to drive even higher levels of service to our clients and members, as well as enhanced visit efficiencies.

When excluding the merger-related expenses, our fourth quarter 2011 EBITDA marked yet another record at $899.6 million, growth of 14.4% over fourth quarter 2010. EBITDA per adjusted prescription for fourth quarter 2011 increased 6.2% to $3.42 from the $3.22 in the fourth quarter of 2010, just $0.01 shy of the EBITDA per script record set in third quarter 2011.

Total net interest and other expense of $51.7 million for fourth quarter 2011 increased $1.3 million from the $50.4 million in fourth quarter 2010. For the full year, total net interest and other expense of $209.8 million increased by $46.7 million compared to the $163.1 million for 2010, reflecting the new debt we added to finance the UBC acquisition in September 2010.

The fourth quarter 2011 effective tax rate was 37.0% compared to the 37.7% in fourth quarter 2010. Our effective tax rate for the full year was 38.7%, in line with the 38.9% in 2010.

Net income for fourth quarter 2011, a record $424.4 million, includes $27.5 million in merger-related expenses, this essentially being the tax effective equivalent of the $43.6 million pretax number I described earlier. Excluding these expenses, the resultant net income of $451.9 million represents a 19.4% increase from fourth quarter 2010. For full year 2011, we achieved net income records of $1.46 billion and $1.51 billion, including and excluding the merger-related expenses, respectively.

Moving onto share repurchases, there were none during the fourth quarter of 2011 due to the pending merger with Express Scripts. As mentioned on our previous earnings call, future repurchases have been suspended. We have always viewed share repurchases as one of several effective tools we have utilized in enhancing value to our shareholders. Our inception today fazes [ph]. Since we first started our share repurchase program in 2005, we have repurchased 285.5 million shares at a cost of $12.85 billion and an average per share price of $45 even.

Full year 2011 cash flow from operations was $1.28 billion compared to $2.34 billion for the same period in 2010. The decline from 2010 can be primarily attributed to 3 factors: First, the 53-week fiscal year in 2011 resulted in a cutoff in the low cash point of our biweekly client billing and retail pharmacy reimbursement cycle, resulting in a decline of well over $400 million. Second, the 53-week year includes 2 quarters of prepayments processed at the end of each calendar year, 2010 and 2011, instead of the customary one quarter, generating a reduction of over $300 million. Third, included in our 2010 results was a onetime collection of an approximately $200 million income tax receivable from the Internal Revenue Service.

While our mail-order prescription volumes set record highs in 2011, our inventory balance represents a record year-end low of $897.8 million at the end of 2011 or $115 million reduction from year end 2010. Our total debt for 2011 has remained consistent with the fourth quarter of 2010 at $5.0 billion. As you know, one measure that is very important to us is return on invested capital, which reached 31.6% this year. This includes the invested capital associated with the UBC acquisition in September 2010.

Turning to our specialty segment. Accredo achieved record revenues of $3.8 billion for fourth quarter 2011, an increase of 28.3% over the same quarter last year. Accredo's gross margin percentage for the quarter amounted to 6.3% compared to the 6.5% in fourth quarter 2010, with the slight decline reflecting product and channel mix. Accredo's operating income for fourth quarter 2011 increased 44.3% to a record $158.6 million. The strong performance reflects our client's preference for the Accredo service model as well as more generally, the growing utilization of specialty drugs.

Product categories that drove the growth include multiple sclerosis, rheumatoid arthritis and oncology. With new drug introductions also driving growth, the hepatitis drug category.

Finally, I would like to remind you of what we said last quarter regarding our 2012 guidance, which reflects what is filed in the S-4 by Aristotle Holdings. The full year 2012 guidance amounts I'm about to discuss are unchanged from the S-4 filing and my remarks on our third quarter earnings call. Revenue is expected to be approximately $58.9 billion for full year 2012. The decline from 2011 contains many moving parts, including clients that have transitioned from Medco due to acquisitions by competitors and other reasons. Also contributing to the decline in revenues is the generic wave in 2012, which is projected to reduce our net revenues by approximately $6.5 billion. If you look at this from the other side of the ledger, this is value that accrues to clients and patients, a material win for the consumer.

Our EBITDA at the high end is expected to total as much as $3.4 billion in full year 2012, a function of the generic wave and expected continuously improving business efficiencies yielded in the course of the year. Looking at EBITDA as a percentage of revenue, which is not an EBITDA margin, we expect this measure to increase from 4.5% in 2011 to as much as 5.8% at the high end in 2012, which would represent a Medco record. We expect a meaningful increase in our full year 2012 gross margin percentage and EBITDA per script for the full year 2012 as well, resulting not only from the generic wave and the business efficiencies I just mentioned but also from the fact that the large retail clients that have transitioned in 2012 carried extraordinarily low profit margins.

One additional note. In large part because of the compounding effect of new generic introductions in the course of 2012 and expected progress in business efficiency gains through the year, we expect our 2012 EBITDA to be more heavily weighted to the back half of the year than we experienced in 2011.

Further, on a generic compounding effect, we're off to a great start in 2012, the generic Lipitor having been available since November 30, 2011. But there are many new blockbuster drugs expected to have generic availability in the course of 2012, including Lexapro in March, Plavix in May, Singulair in August and Diovan in September. As I said earlier, our clients and members are expected to save $6.5 billion in 2012 from this generic wave. And as Dave Snow's quote says in our earnings release, our ability to generate shareholder value is directly tied to our success in lowering health care costs for clients and patients.

In conclusion, we delivered a record quarter and full year of operating results and EPS. We remain confident in our future prospects, and we believe that the value we can drive to clients and members will be even greater with the Medco and Express Scripts combination.

Now I would like to open the call to questions. Darla?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Ross Muken with Deutsche Bank.

Vijay Kumar - Deutsche Bank AG, Research Division

This is Vijay, in for Ross. My first one was regarding the ongoing or impending closure of the deal. How do you handle questions like this as you get into the meat of selling season? I mean, what are clients asking? And how do you respond on the merger?

David B. Snow

All I can tell you is that we're having a, right now, a very strong sales season, and clearly, the people who are making these decisions are fully cognizant of our intent to merge with Express Scripts. And I think what they see is an opportunity to get involved with a company that is phenomenal at service and creates an enormous value proposition, and they also understand that the value proposition will only improve post merger. So we're getting great reception right now despite the fact we're in the middle of a merger which can be confusing, but the economics are so clear that I think our clients -- the prospects say, "You know what? I'm going to go with this. It makes a lot of sense to me."

Vijay Kumar - Deutsche Bank AG, Research Division

Sure. Maybe my second one on -- there's been a lot of noise on narrow networks and could you just talk about the relative economics of narrow networks compared to traditional open network model?

David B. Snow

Yes, are you talking retail networks?

Vijay Kumar - Deutsche Bank AG, Research Division

Yes.

David B. Snow

Yes, I'll make a brief comment, and I'll ask Tim, who deals with this every day, to make a comment. But it really depends on the geographic location of the client, and it depends on the geo asset needs of their members. But -- and it depends -- there are 68,000 retail pharmacies out there, and if you're going to go from 68,000 to 60,000, that's one narrow network, but if you go down to 50,000, that's even narrower. If you go to 45,000, there are better price points the smaller you make that network. So you can see improvements of 2.5% to 3%. And Tim, do you want to add on that?

Timothy C. Wentworth

Exactly the number I would have thrown out. I mean, I think there's still keen competition in the retail channel for the members' drug spend and it does depend. We see a lot of interest in it, and we continue to be very well supported by our clients in doing our job. So it is certainly a dynamic that is being discussed on the marketplace.

Operator

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

Kipp R.F. Davis - Barclays Capital, Research Division

This is actually Kipp Davis, in for Larry. Just one quick one. Assuming that the transaction isn't approved, and I know you guys are obviously communicating that you think it will be. Can you just kind of update us on what the process and time table might be for communicating various alternatives and strategies as we think about 2013?

David B. Snow

I'm not going to talk about 2013. You already have our stand-alone guidance for '12. I think that's really all the information we can give you at this point in time.

Richard J. Rubino

And also as a reference, you can just look at the S-4 I mentioned earlier because that has our internal stand-alone projections including 2013.

Kipp R.F. Davis - Barclays Capital, Research Division

Got you. Okay. And then I guess another one is on the discussion of limited retail networks, obviously, we're getting a lot of questions about how you're communicating your strategy regarding limited retail networks given the potential for the merger. And with that in mind, how are you thinking about what your retail network is going to look like in -- next year? And how are you communicating that to clients?

David B. Snow

The merger had nothing to do with that conversation. And quite honestly, narrowed networks are driven by a client, and the client asks to see what their options are based upon price points they'd like to hit and the relative convenience or inconvenience to their members. So it's an ongoing conversation. The merger really doesn't change that conversation, and it's always a client decision or driven by a client. It's not something we force on a client.

Timothy C. Wentworth

Yes. I would just add that the conversations we have just ensure that -- and frankly, our contracts, that we collaborate with the client to take a look at the value that can be created and that we share the benefit of any value that's created. Clients want us to do our job. The concepts clearly support that, and we've been able to get clients very relaxed about this. As Dave said, certainly the issue is -- if you have the question comes up, and it really has been a nonissue, which explains why we've had a very successful early selling season as well.

David B. Snow

By the way, it's not uncommon to get a request for proposal that says, "Can you give me pricing for a full 68,000 pharmacy network and then a 50,000 pharmacy network." We often get a request for proposal that want options just like that, that are laid right out in the bid.

Operator

Your next question comes from the line of Ricky Goldwasser with Morgan Stanley.

Ricky Goldwasser - Morgan Stanley, Research Division

A couple of questions here on one, the 2012 guidance. I just wanted to confirm that it does include an initiative to lower cost structure.

Richard J. Rubino

That's right, and I think we made that clear in the S-4 also. Those are pure operating results.

Ricky Goldwasser - Morgan Stanley, Research Division

Okay. And then on the selling season, does the new sales number include Part D? And one follow-up question on the narrow network, I think you talked about 2.5% to 3% potential discount for a narrow network offering. Can you just give us more detail as by how much would a client need to narrow the network in order to get to those level of discounts?

David B. Snow

Now the second one, I would say for that kind of discount, you're typically looking getting the network down below 50,000.

Richard J. Rubino

Yes.

David B. Snow

And then...

Richard J. Rubino

On the new sales guidance, we always include Medicare just as part of our business.

Operator

Your next question comes from the line of Tom Gallucci, Lazard Capital Markets.

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

I guess just wanted to follow up on the specialty business. Two things: one, if you could give a little bit more color on some of what you're seeing there as follow-up to your formal remarks? And two, could you just remind us where are you in terms of penetration of your existing PBM base in terms of them using you for your specialty business?

Richard J. Rubino

Yes, we've given that number before. We have very, very high penetration, almost all of our clients, I would say, at this point.

David B. Snow

The way the clients think about this, Tom, is drugs are a continuum of care, and specialty is simply part of that continuum. And it's really rare to see bids that don't include the full spectrum of drugs available. It's very rare. So you can pretty much assume when we’re bidding, we’re bidding specialty and core drugs.

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

Okay. What about flipped around the other way then? So how much of your business in specialty is with your PBM customers versus others?

Richard J. Rubino

Well, we haven't given those percentages before, but I can tell you that the specialty business really includes 3 pieces. One is the Medco mail. Then, there's the Medco retail, and then there's what we call AOB, administration of benefits, which is essentially where Accredo acts as a provider, almost a retail provider to health insurers, et cetera. That -- the balance changes back and forth in the course of year-to-year-to-year, which is what the channel mix is that we referred to, but there is no dominant component. None of those 3 is a dominant or majority component of the total business.

Timothy C. Wentworth

And Tom, we continue to see the sort of maturing and evolving of the conversation with clients away from the pure movement to preferred channel of Accredo into now -- medical channel lockout continues to be a very big focus, so that's a piece that we're penetrating aggressively with a lot of upside. We see step therapy opportunities now, and we're putting them in, in half a dozen categories and growing. So again, as it matures and so forth, the opportunity to continue to grow Accredo's solution set for our clients has continued to mature as well.

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

Okay. Maybe just one follow-up there. On that note, Tim, you mentioned step therapy and specialty. Can you just remind us where you sort of are in step therapy in the core? And did that grow a lot of the benefit design in '12 versus '11 for your customers?

Timothy C. Wentworth

Step therapy in the core has been extraordinarily important for our clients saving money. It's obviously clinically a smart thing to do because the patients are going to be compliant on these drugs that often cost them less by virtue of the right clinical choice. And so it was a major reason clients saw continued very, very low or negative drug trends in 2011.

Operator

Your next question comes from the line of John Kreger with William Blair.

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

It sounded like your annualized sales went up about $1 billion since the third quarter for 2012. Would you be willing to give us your net number for '12 as it stands right now?

Richard J. Rubino

Well, the net number, of course, reflects the losses and so forth that are already known, so the net number is obviously negative. But it's more important now that we talk about our momentum with regards to winning. The losses are done, and that's why we believe the annualized and made sales are more important. And I can also tell you, as Dave mentioned earlier, that we are seeing significant new sales activity for 2013 albeit so early in the year. So we're very excited about 2013 as well.

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

Rich, would it be fair to say the net number improved by close to $1 billion since the third quarter or less?

Richard J. Rubino

That is fair.

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

That's fair. Okay. And then a quick follow-up, if you could just expand a bit more on the impact of the extra week on the P&L. I'm guessing it clearly helped the revenues and volumes but also pressured margins a bit. So just to clarify, it was effectively a 0 impact on your bottom line. Is that right?

Richard J. Rubino

It was nominal. I mean, if you just do the straight algebra on the quarter, it would be 7%. But it's very difficult to isolate your profitability in a specific week, but it was clearly immaterial. We did help you though. If you go to Table 9 of the earnings release, we showed you what the volumes and the revenue effect would be for that week. But even taking out that week algebraically, it's still a strong record for the quarter and, of course, as well as the year.

Operator

We will take one final question today from the line of Steven Valiquette with UBS.

Steven Valiquette - UBS Investment Bank, Research Division

Rich, just a quick follow-up on an extra week. I'm trying to understand maybe it's tied into that, maybe it's not, but just the mechanics, the impact on the gross margin in the fourth quarter. Or maybe if you have any other color on just the gross margin in the fourth quarter as the kind of step-down a little bit sequentially from 3Q. And the other quick question I have was just the -- I forgot if you guys have provided the dollar amount of business that you have up for renewal this summer in the 2013 selling peak, and just an approximate number would be helpful.

Richard J. Rubino

Well, with regard to the effect of the week on the gross margin percentage, probably didn't affect the rounding. So I wouldn’t treat it as a factor. I think the largest single factor that drove the third quarter and the fourth quarter dynamic in gross margin was the retail volumes in the fourth quarter were higher, which is normal, right? You always have the seasonality effect, and you can see seasonal penetration rate. With regard to 2013 renewals, it's a little early to give that 2013 business up for renewal number. That's a number we would normally provide in the middle of the year.

David B. Snow

Thank you. Thanks for joining us today, everybody. We appreciate your time.

Operator

This concludes today's Medco Health Solutions Fourth Quarter 2011 Earnings Conference Call. You may now disconnect.

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