Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Dave Snow - Chairman and CEO

JoAnn Reed - CFO

Rich Rubino - SEP Controller and CAO

Kenneth Klepper - President and COO

David Machlowitz - General Counsel

Valerie Haertel - VP of Investor Relations

Analysts

Tom Gallucci - Merrill Lynch

Larry Marsh - Lehman Brothers

Lisa Gill - JPMorgan

Charles Boorady - Citigroup

Charles Rhyee - Oppenheimer

Michael Baker - Raymond James

Ricky Goldwasser - UBS

Ross Muken - Deutsche Bank

Kemp Dolliver - Cowen & Company

John Kreger - William Blair

Art Henderson - Jefferies & Co.

Alex Specler - Goldman Sachs

Tony Perkins - First Analysis

Robert Willoughby - Banc of America Securities

MedcoHealth Solutions Inc. (MHS) Q4 2007 Earnings Call February 19, 2008 8:30 AM ET

Operator

Good morning. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter 2007 MedcoHealth Solutions Earnings Call. (Operator Instructions)

I would now like to turn the call over to Valerie Haertel, Vice President of Investor Relations. Please go ahead, ma'am.

Valerie Haertel

Thank you Brandy. Good morning, and thank you for joining us on Medco's full year, and fourth quarter 2007 earnings conference call. With me today, our speakers are, Chairman and Chief Executive Officer, Dave Snow; Chief Financial Officer. JoAnn Reed; and her successor SEP Controller and Chief Accounting Officer, Rich Rubino; also joining us for our question and answer session, are President and Chief Operating Officer Kenneth Klepper, and General Counsel, David Machlowitz.

Medco’s Board of directors authorized a two for one stock split, that was effective on January 24th, to holders of record on January 10. In this discussion we will be clear as to whether we’re addressing earnings on a pre-split or a post–split basis. If you have not yet received a copy of our earnings press release, it is available on the investor relations section of our website at medco.com.

Included in the release is table number 4, which outlines our diluted earnings per share results on a GAAP basis and excluding the intangible amortization from the 2003 spin-off, both on a pre-split and post-split basis.

Before I turn the call over to Dave Snow, I would like to remind you that in light of SEC's Regulation FD, management will be limited in responding to inquiries from investors and analysts in a nonpublic forum. Therefore, we encourage you to ask all questions of material nature on this call.

During the course of this call, we will make forward-looking statements, as that term is defined in the Private Securities Litigation of 1995. These statements involve risks and uncertainties that may cause results to differ materially from those set forth in these statements. No forward-looking statement can be guaranteed, and actual results may differ materially from those projected. We undertake no obligation to publicly update any forward-looking statement, whether as 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 the risk factors section of the company's end report on Form 10-K, Form 10-Q and other reports and registration statements filed from time to time with the Securities and Exchange Commission.

Copies of Medco's filings are available from the SEC, the Medco website or from the Medco investor relations department. The copyright for the contents of this discussion and the written materials used on the earnings call are owned by Medco Health Solutions, Inc. 2008.

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

Dave Snow

Thanks, Valerie and good morning, and thanks to all of you for joining us. Today we are reporting strong results for both the full year, and fourth quarter of 2007, driven by solid execution across all of our key strategic growth drivers, which includes generics, mail, net-new sale, specialty pharmacy, and Medicare.

Our strong 2007 performance has set the stage for a stronger 2008 than originally anticipated, and therefore we are now raising our 2008 guidance and narrowing the range.

I will elaborate on our new guidance after first discussing our earnings result. 2007 was an extraordinary year for Medco. We saw $14.7 billion in generic drug introductions, drive all-time high generic dispensing rates, record mail order volume, and importantly, a record low 2% drug trend, reflecting Medco's ongoing commitment to drive superior financial outcomes for our clients and our members.

Generic introductions alone generated record client and member savings of $2.5 billion for the year. Even while delivering billions of dollars in generic savings for 2007, we achieved record revenues of $44.5 billion, a 4.6% increase over 2006.

For the fourth quarter, net revenues increased 4.1% to nearly $11.4 billion from the fourth quarter of 2006, reflecting higher mail-order volume associated with new clients, and price inflation from pharmaceutical manufacturers on brand name drugs, partially offset by a record generic penetration rate, and to a lesser extent roll-offs from 2006 client transitions.

For the fourth quarter, we generated $600 million in incremental generic savings for our clients and members. For full year 2007 and the fourth quarter, earnings per share, we exceeded the high end of our pre-split expectations that we last shared with you by $0.04 per share and $0.02 per share on a post-split basis.

GAAP diluted earnings per share for the year increased more than 34% to $3.25 on a pre-split, and a $1.63 on a post-split basis compared to 2006, excluding the 2006 legal settlements charge. Excluding the amortization of intangible assets from the 2003 spin-off and the 2006 legal charge, 2007 diluted earnings per share increased 31% to $3.64 on a pre-split, and a $1.82 on a post-split basis.

For the quarter our GAAP diluted earnings per share was $0.76 on a pre-split and $0.38 on a post-split basis. A penny decrease, from $0.77 on a pre-split and $0.39 post-split for fourth quarter 2006.

You will recall that fourth quarter 2006 included the non-recurring contribution from the limited supply of generic Plavix. The fourth quarter of 2007 included expenses of $39 million related to the significant new business we installed for January 2008, including FEP's, the State of New York and HIP of Greater New York, a new account we won very late in the year and installed in less than 30 days.

Excluding the amortization of intangibles that existed when Medco was spun off in 2003; fourth quarter 2007 diluted earnings per share was $0.86 on a pre-split and $0.43 on a post-split basis.

Full year 2007 net income increased 24.9% to $912 million from $730.1 million in 2006, excluding the first quarter of 2006 legal charge. Fourth quarter net income of $207.6 million, decreased 9.3% from the fourth quarter of 2006.

To put our quarterly performance into perspective, record generic dispensing rates and mail order volume, combined with our operational discipline enabled us to increase our total gross margin by 40 basis points to 6.7%, compared to 6.3% recorded in the fourth quarter of 2006. This represents a strong performance considering that fourth quarter 2007 gross margin included $31 million of a total $38 million in new client start-up costs to support significant new client business and fourth quarter 2006 included the Plavix benefit. JoAnn will discuss this further in her remarks.

We achieved record level EBITDA per adjusted scrip in 2007, which increased 19.2% to $2.67 from $2.24 in 2006 excluding the 2006 legal charge. Before, I move on to our key growth drivers, I am pleased to report that the integration of our PolyMedica acquisition completed on October 31 is going extremely well and we are very excited about this valuable new assets ability to contribute to our therapeutic resources center and consumer branding strategies.

Now, I would like to review our key growth drivers for the full year and fourth quarter of 2007, beginning with generics. 2006 was an extraordinary year for generic introductions, with $16.1 billion in new releases, and 2007 was a close second with $14.7 billion. This enabled us to achieve a fourth quarter generic dispensing rates of 61.4%, up 4.1% percentage points from the same period last year.

The most significant new generics that contributed our earnings growth for the full year and fourth quarter included Norvasc, Toprol-XL, Ambien, Lotrel and Coreg. We will continue to benefit from the full year with respect to these new generics in 2008.

Turning to mail-order, our mail volume reached a new record in 2007 totaling $94.8 million prescriptions, up 6.5% from 2006. Our fourth quarter mail volume increased $1.8 million or 8% over 2006 to a record $24.4 million. Our mail-order penetration rate on an adjusted prescription basis reached 38%, a 2.4 percentage point increase from fourth quarter 2006.

Annualized 2008 new name sales, currently total $4.9 billion, an increase of $400 million from the $4.5 billion we disclosed at our Analyst Day. This includes the previously announced wins of FEP and the State of New York and other business, which represents more than five million lives. Today net-new sales for 2008, which takes into account losses and erosion are at $4 billion.

Turning to renewal activity, we have completed approximately 85% of our anticipated 2008 renewals of $14.7 billion. Our 2008 client retention rate now exceeds 98% and continues to represent what we believe is the highest retention rate, reported in the industry. Another important growth driver is specialty pharmacy, a business that continues to perform extremely well for Medco.

Accredo Health Groups net revenues increase 11.2% to $6 billion from $5.4 billion in 2006, reflecting a favorable product mix and particular strength in the area of intravenous immunoglobulin or IVIG treatment. Revenues for Accredo in the fourth quarter increased 12.3% to $1.6 billion, from $1.4 billion in the same period of 2006. Accredo's full year 2007 gross margin was 7.9%, up from 7.8% in 2006 reflecting a favorable product mix. Fourth quarter gross margin increased to 8% from 7.8% in the fourth quarter of 2006, even with the investments associated with de-installation of FEPs specialty business.

As we announced previously in the fourth quarter, Accredo closed the purchase of Critical Care Systems, one of the nation’s largest providers of home-based ambulatory specialty infusion services. We are confident that this strategic asset will integrate seamlessly into our existing Accredo business.

Approximately six weeks of CCS results have been included in Medco’s fourth quarter financials. And early indication show that the business is delivering operating margin ahead of our expectations, with respect to our Senior Solutions business activity our full year 2007 Medicare Part D PDP revenues were $484 million, slightly ahead of the guidance we provided at the Analyst Day

For the fourth quarter Medicare Part D PDP revenues were a $115.8 million, down 43% from $203.1 million from the same period last year. Both periods reflect the January 1, 2007 loss of dual eligible members. That said for the fourth quarter of 2007, a higher relative mix of members with financial incentives to use mail and generics increased our adjusted mail penetration rate to 29.5%, and our generic dispensing rate to 65.8% for this population.

Since the program’s inception in August of 2005, and through the fiscal year end of 2007, we have repurchased 55.7 million shares pre-split, and a 111.4 million shares post-split, valued at $3.5 billion at an average per share price of $63.11 pre-split, and $31.56 post-split.

In the fourth quarter due to the guideline restriction set by our Board, and managed through our trading plan, Medco did not repurchase any shares. We have since modified our trading plan and resumed share repurchases in the first quarter of 2008.

In light of our stronger than expected full year and fourth quarter 2007 financial and operational performance, and our continued confidence in the industry trends, we are raising our 2008 earnings per share guidance and narrowing the range.

On our third quarter earnings call, we provided 2008 GAAP diluted earnings per share guidance in a range $3.89 to $4.01 on a pre-split basis, which represents $1.95 to $2.01 on a post-split basis. This quarter we are raising our 2008 GAAP diluted per share guidance by more than 5% from mid-point to mid-point, to a range of $4.14 to $4.22 on a pre-split basis, and $2.07 to $2.11 on a post-split basis, representing a growth rate of 27% to 29% over 2007.

Excluding the amortization of intangibles from the spin-off, the 2008 diluted earnings per share guidance we provided, was in the range of $4.20 to $4.41 on a pre-split and $2.15 to $2.21 on a post-split basis. This is being raised to a new 2008 diluted earnings per share range of $4.54 to $4.62 on a pre-split basis and $2.27 to $2.31 on a post-split basis representing a growth rate of 25% to 27% over 2007.

We are confident in our ability to deliver strong double digit growth in 2008 and beyond, as we continue to innovate and build value by leveraging our therapeutic resource center strategy, designed to generate superior clinical and financial outcomes.

With that I’ll turn the call over to our retiring CFO, JoAnn Reed

And our incoming CFO, Rich Rubino, who will discus the details behind our 2007 full year, and fourth quarter financial performance ,and our 2008 guidance. JoAnn?

JoAnn Reed

Thanks Dave, good morning everyone. For the year, Medco reported record net revenues of $44.5 billion, a 4.6% increase over 2006. For the fourth quarter, net revenues were nearly $11.4 billion, an increase of 4.1%. Total product net revenues for the fourth quarter of $11.2 billion, increased 4.2% compared to the fourth quarter of 2006 and include a product net revenues of $6.6 billion for retail and $4.6 billion for mail-order.

For the quarter, total service revenues were $138.2 million, a decrease of 4.5% compared to the same period last year due to lower manufacturer service revenues. Service revenues include the $97.6 million of client and other service revenues and $40.6 million of manufacturer service revenue.

For the full year 2007, mail-order revenues increased 8.6% to $17.5 billion, and retail revenues increased 2.1% to $26.4 billion. For the full year, mail-order volume reached a record 94.8 million prescriptions, an increase of 6.5% compared to 2006 and in line with our expectations. During the fourth quarter, we dispensed 24.4 million mail-order prescriptions an increase of 8% over fourth quarter 2006. Fourth quarter adjusted mail-order prescriptions, as a percentage of total adjusted volume increased 2.4 percentage points to 38.4% and was consistent with the third quarter of 2007.

The number of members in our retail refill allowance program, commonly known as mandatory mail, remained flat from third quarter to fourth quarter at more than 9 million lives. However, for the full year, our RRA lives increased by 1.3 million lives, or almost 17%.

Overall this reflects a growing interest in the clinical and cost advantages of mail order among both our existing clients and our new clients, which have a higher than expected average mail penetration of 53.2% compare to the 32% represented at Analyst Day.

For the full year, retail prescription volume of $465 million was flat compared with 2006. For the quarter, retail prescription volume was $117.1 million, a decrease of 2.4% from the fourth quarter of 2006, largely related to a below average cold and flu season, and 2006 client transition.

When comparing the fourth quarter to the third quarter of 2007, retail prescription volume increased by 4.1% or 4.6 million prescriptions. Total prescription volume for 2007, adjusting for the difference in day supplied between mail and retail, increased 2.5% or $18.4 million over 2006 to $748.3 million For the fourth quarter, total adjusted prescription volume of $190 million, represents a 1.2% increase over fourth quarter 2006.

Total gross margin for the 2007 was 6.6%, an increase of 90 basis points over 2006. As a result of higher generic dispensing rates, and higher mail-order volumes, fourth quarter total gross margin increased 40 basis points to 6.7% over fourth quarter 2006, an increase of 30 basis points over third quarter 2007.

Our gross margin increased even after including $31 million of the $38 million in new client startups, and one-time costs in this quarter, which was slightly above our previous estimates of $30 million to $35 million. As well as the absence of the short-term benefit of generic products experienced in the fourth quarter of 2006, the 6.7% fourth quarter gross margin includes product margin of 6.1% and service margin of 60.4%.

For the year our overall generic dispensing rates set a new record, and increased 4.5 percentage points to of 59.7%. Our generic dispensing rates at mail increased 5.2 percentage points to 50%, and our generic dispensing rate at retail increased 4.5% to 61.7%, compared to 2006.

For the quarter our overall generic dispensing rates reached a record 61.4%, increasing 4.1 percentage points from the fourth quarter of 2006, and 1.1 percentage points from the third quarter of 2007.

Our generic dispensing rate at mail increased 3.5 percentage points to 50.9%, from the fourth quarter of 2006. The retail generic dispensing rate increased 4.4 percentage points to 63.6%, compared to the same period last year and increased 1.4 percentage points from the third quarter of 2007.

Total rebates earned in 2007 were $3.6 billion, an increase of 4.2% from 2006. We retained 15.4% of earned rebate for the full year 2007, a decrease of 4.2 percentage points from 2006. Total rebates earned in the fourth quarter of 2007, declined 1% to $868 million from $877 million in 2006, reflecting the higher generic dispensing rates.

Medco retained 14.5% of rebates in the quarter, down from 17.4% a year ago. Sequentially rebates earned, increased 1.4%, due to enhanced formulary compliance at mail, improving market share performance. The declines in rebate retention rates for the fourth quarter ending year, reflects the continuation of changes in client rebates sharing term, associated with a significant volume at successful renewals and new business wins we have been experiencing and our leadership, and meeting the market requirements for financial transparency. This obviously has not affected our overall profitability.

For full year 2007, the revenues of our specialty pharmacy segment, Accredo Health Group was $6 billion. Operating income was $210.2 million and gross margin was 7.9%. Accredo Health Group revenues increased 12.3% to $1.6 billion for the quarter from the fourth quarter of 2006 and increased 6.6% sequentially.

Severance revenues for the quarter were $16.8 million. Operating income decreased slightly to $49.8 million, compared to $51.4 million in the fourth quarter of 2006, due to higher expenses related to preparation for the new 2008 FEP specialty business and the CCS acquisition.

Gross margin for Accredo Health Group was 8%, reflecting an improvement over the 7.8% margin reported in the fourth quarter of 2006. This margin expansion reflects favorable product mix, including IVIG treatment, and increased mail-order revenue, despite the FEP associated installation cost financing.

Accredo Health Group contributed $0.07 pre-split, or approximately $0.03 post-split to our full year 2007 EPS compared to 2007, which is in line with our expectations. For the quarter, Accredo contributed an incremental $0.01 per share pre-split, compared to fourth quarter of 2006, and had no impact to EPS post-split.

Moving on to PolyMedica; financial performance was inline with our expectations, slightly dilutive at a penny per share and as Dave mentioned, the integration of that business is going very smoothly. We continue to see a meaningful improvement in the use of generics and mail-orders in our Medicare Part D PDP population.

For full year 2007, our Medicare Part D PDP revenue of $484.2 million, decreased 43% over 2006 as a result of lower dual eligible members and were slightly higher than our expectations. The 2007 mail penetration rate for our PDP increased 12.9 percentage points to 30.1% compared to

The generic dispensing rates for our PDP reached a record 63.6%, 3.9 points higher than our book of business average, and 3.7 percentage points higher than the 59.9% for 2006. Most of the generic dispensing rates and the mail penetration rates of course are Medicare products, and were in line with our expectations for 2007. Our Medicare Part D PDP revenues for the fourth quarter of $115.8 million, decreased 43% from the fourth quarter 2006 reflecting the lower dual eligible.

The mail penetration rates for our PDP were 29%, significantly higher than a 16.5% for the same quarter last year, again largely due to the 2007 decrease in dual eligible members who have no financial incentives to use mail service and generics. The generic dispensing rate was a record 65.8%, a 4.1 percentage points increase over fourth quarter 2006.

Turning to SG&A for the year, expenses of $1.1 billion, an increase of 17.7% from 2006 excluding the first quarter 2006 legal charge. For the fourth quarter SG&A expenses of $328.6 million, increased 30.8%, reflecting higher labor-related expenses from business growth across the company and the additional expenses from acquisition of PolyMedica and CCF in the fourth quarter of 2007.

For full year of 2007, net interest and other expense of $99.8 million increased to 51.4% from 2006, reflecting higher borrowings from a debt refinancing that took place at the end of April, as well as additional debt associated with the PolyMedica and CCS acquisition.

For the quarter net interest and other expense amounted to $37.4 million, reflecting an increase of $21.2 million from the fourth quarter of 2006, an increase of $11.9 million from the third quarter of 2007.

For 2007 our EBITDA increased 22.5% to $2 billion over 2006, excluding the 2006 legal charge. EBITDA per adjusted prescription for the year increased 19.2% to a record high of $2.67, compared to $2.24 during the same period last year, excluding the 2007 legal charge.

EBITDA for the quarter increased $2.9 million to $482.1 million, compared to the fourth quarter of 2006. Our EBITDA per adjusted prescription for the quarter of $2.54 decreased $0.2 from the $2.56 in the fourth quarter 2006. The effective tax rate was 39.3% for the full year and 38.2% for the fourth quarter.

Net income for the year increased 24.9% to $912 million over 2006, excluding the 2006 legal charge. For the quarter, net income of 207.6 million decreased 9.3% from the $228.8 million, reported for the fourth quarter of 2006, due to the $38 million in start-up cost primarily reflecting the hiring of 3,000 employees in preparation for the significant new clients and mail volume for 2008.

These expenses included a labor cost, and training for a new employees working at our mail-order pharmacies and customer service location, labor costs for the client servicing organizations and necessary technology upgrade and communication material.

In addition, the fourth quarter of 2006 included a short term benefit from the unscheduled release of generic Plavix, and the benefit from share repurchases that were absent in the fourth quarter of 2007.

If we were to adjust for the impact of these operating items, the fourth quarter 2007 net income would have been meaningfully higher than 2006. For full year 2007 on pre-split basis GAAP diluted earnings per share increased 34.3% over 2006 to $3.25. On a post-split basis GAAP diluted earnings per share increased 34.7% over 2006, to a $1.53, excluding the 2006 legal charge.

On a pre-split basis excluding $0.39 per share in amortization of intangible assets that existed when Medco became a publicly traded company, full year 2007 earnings per share increased 30.9% over 2006 to $3.54. On a post-split basis excluding $0.19 per share, and amortization of intangible assets that existed when Medco became a publicly traded company, earnings per share increased 30.9% over to 2006 to $1.82.

For the quarter on a pre-split basis, GAAP diluted earnings per share were $0.76, representing a $0.01 decrease from 2006. On a post-split basis GAAP diluted earnings per share of $0.38 also decreased by a penny from fourth quarter 2006.

On a pre-split basis excluding $0.10 per share in amortization of intangible assets that existed when Medco became a public traded company, diluted earnings per share was $0.86, flat with the fourth quarter of 2006. On a post-split basis, excluding $0.05 per share in amortization of intangible assets that existed when Medco became public traded company fourth quarter 2007 diluted earnings per share was $0.43 flat, compared to fourth quarter 2006.

As Valerie mentioned in her opening comments you can refer to table 4 of our press release for all other pre and post-split statistics, I just discussed.

For 2007, Medco repurchased 53.3 million shares on a post-split basis at a cost of $2 billion with no repurchases occurring in the fourth quarter. For 2008 to-date, on a post-split basis we have repurchased 13.5 million for a total cost of $676 million at an average per share price of $50.10 through February 14th.

Our weighted average fully diluted share count for the fourth quarter of 546.3 million shares on a post-split basis, decreased 44.8 million compared to adjusted 591.1 million for the fourth quarter of 2006. This reflects share repurchases made throughout the year partially offset by employees’ stock option.

The reduced weighted average diluted share count contributed $0.03 per share post-split to the fourth quarter 2007 EPS, compared to the fourth quarter of 2006. We finished the fourth quarter of 2007 with 535.9 million shares outstanding on a post-split, plus a dilutive equivalent of approximately 11.7 million additional shares, bringing in the total fully diluted share count to approximately 547.3 million on December 29th, 2007. This fully diluted share count becomes the entry point for fiscal 2008.

Turning to the balance sheet; we closed the year with $774 million of cash, compared to narrowly $819 million at the end of the fourth quarter of 2006. Our full year 2007 capital expenditure amounted to $178 million, which included $150 million for maintenance capital, $18 million for capital software development in conjunction with the 2008 new client installations, $5 million for the new pharmacy in Indiana and $5 million from PolyMedica and CCS.

2007 cash-flow from operations was $1.4 billion compared to $1.2 billion for 2006, reflecting the underlying strength of our balance sheet and continued earnings growth.

Today, we raised and narrowed our guidance for 2008, primarily as a result of continued positive long-term trends in all areas of our business. Guidance for 2008 of GAAP diluted earnings per share is now projected to be in the post-split range of $2.07 to $2.11, representing growth of 27% to 29% over 2007.

Excluding the amortization of intangibles related our spin-off in 2007; we are increasing and narrowing our 2008 post-split guidance to a range of $2.27 to $2.31 per share, representing growth in the range of 25% to 27% from 2007.

Now, I'd like the turn the call over to Rich Rubino, who will walk you through the details of our 2008 guidance. Rich?

Rich Rubino

Thank you, JoAnn and good morning. Guidance that Ann just articulated for 2008 GAAP EPS growth of 27% to 29%, includes the following key assumptions. The continuation of the stronger than expected fourth quarter 2007 core business performance into 2008.

For new schedule 2008 generic introductions, we now expect approximately $0.24 per share, an incremental earnings contribution on pre-split basis or $0.04 higher than our previous guidance of $0.20 per share. On a post-spilt basis the incremental earnings contribution is expected to be $0.12 per share.

The most significant generic introduction in 2008 represents osteoporosis drug Fosamax, which was launched as planed in early February of 2008. Importantly, this is the first generic to become available in this therapeutic drug category, which could drive generic Fosamax market share beyond the existing market share for brand name Fosamax.

As a reminder, our original included only scheduled generic introductions, because it is impossible to accurately predict early-run schedule releases. However, our revised guidance includes a limited benefit from the at-risk launch of generic Protonix; with a national drug spend of approximately $2.3 billion. We have secured a limited supply from mail-order members. We also expect continued increased purchasing benefits across our book-of-business on both new and previously released generic medications.

Turning to mail-order, as we look at ahead to 2008, we expect to see continued growth in mail-order volume. We still expect approximately 105 million mail-order prescriptions driven by significant new clients wins including FEP, as well as expected erosion related to client transitions, primarily the Ohio accounts I discussed at Analyst Day.

The average mail penetration rate for new 2008 account is expected to be 63%. Please note that, when excluding FEP, this penetration rate declines to 28%, reflecting the impact of new state business with higher relative retail volumes.

Moving to the 2008 renewals, I want to provide a brief update on where we currently stand for the year. As David mentioned, we have completed 85% of our 2008 renewals currently scheduled. This includes six accounts with over 500 million each in drug spend.

As an update to what I provided at Analyst Day, we now expect 2008 renewals to total $1 4.7 billion in drug spend, up from $14 billion. Approximately, 74% of the renewal pricing will take effect in the first quarter of 2008, compared to the 55% experienced in the first quarter of 2007. The remainder of the $14.7 billion in renewal pricing is now expected to role-in with approximately 9% in the second quarter, 13% in the third quarter, and the remaining 4% in the fourth quarter.

We continue to expect Accredo year-over-year to contribute incremental growth of another $0.06 to $0.09 per share pre-split or $0.03 to $0.05 per share post-split reflecting higher revenues and operating profit contribution in 2008. This also include better than expected net income contribution from our CCS acquisition. Accredo revenue is still expected to reach $7 billion in 2008.

Our 2008 projection for Medicare PDP revenues remains at approximately $540 million. We previously guided to an SG&A range, excluding Polymedica and CCS of $1.80 billion to $1.100 billion.

We now expect consolidated SG&A for 2008 including these acquisitions to be in a range of $1.350 billion to $1.370 billion. Our projections for overall 2008 PolyMedica performance remained unchanged. We expect 2008 net interest expenses to be in the range of $180 million to $210 million, reflecting the interest on additional debt incurred associated with the fourth quarter 2007 acquisitions of PolyMedica and CCS.

We expect our maintenance capital expenditures to be inline with our historical investment of $150 million per year, largely as a result of the construction and progress of our third automated dispensing facility and the build out for further service offerings from the inclusion of PolyMedica and CCS.

Total capital expenditures in 2008 are expected to reach approximately $285 million. Slightly higher than our previous guidance of $270 million. We still anticipate the new automated dispensing facility to be operational in 2009.

We are expecting an effective tax rate of approximately 39% to 39.5%, consistent with previous guidance. Our weighted average diluted share count of $265 million to $275 million on a pre-split basis, which is $530 million to $550 million post-split remains unchanged. This assumes the completion of our $5.5 billion share repurchase program in 2008 representing $2 billion in repurchases during the course of 2008.

While we do not provide specific quarterly guidance there are a few points to keep in mind, as you model 2008 relative to the first quarter. Please remember that the first quarter of 2007 included the non-recurring generic Plavix expenditure. We also had renewal pricing in effect for 55% of accounts in the first quarter of 2007, as compared to the 74% of accounts for first quarter of 2008. 38% of new generic introductions will occur in the first quarter including generic Fosamax.

Additionally, our revenues in volumes and associated margins will be higher in the first quarter of 2008, as a result of our significant net-new client wins, effective January 1 2008 adding approximately $1 billion in revenue for the quarter with average mail penetration of 63%.

And as a final note on our fourth quarter 2007 results as is our practice I would like to note that there will be no additional one-time non-recurring items for fourth quarter 2007 as discussed on this call contained in our 10-K, which will be filed later today.

As you can see we had a fundamentally strong 2007. And 2008 holds great promise as we continue to deliver world class service to clients and members, and drive shareholder value.

Now Dave, JoAnn and I would like to open the lines for questions. Brandy.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Tom Gallucci with Merrill Lynch.

Tom Gallucci - Merrill Lynch

Good morning. Thanks for all the color. I guess Rich, just a follow up on what you were just discussing there in terms of guidance. As you went through the items, most of them appeared fairly steady with prior guidance. I think the one point that jumped out at me that you raised little bit on EPS basis, was the generics. So, can you maybe highlight some of the key areas where your up in guidance on EPS basis $0.10 or $0.12 or so?

Rich Rubino

Right. Looking at the high end of the range we are increasing the high end on a post-split basis by about $0.10.

Tom Gallucci - Merrill Lynch

All right

Rich Rubino

And the contributors there are, if you factor it in, the $0.02 beat our expectations in the fourth quarter of 2007, and assume that carries forward through all of 2008, which we believe it will, that generates $0.08 of the $0.10 increase in guidance right there.

In addition what you have on top of that, is the additional $0.02 on a post-split basis going from $0.10 to $0.12 for the impact of new generic introductions, and largely the effect there, is the limited supply of generic Protonix, that I mentioned, as well as an improved anticipated purchasing on additional new generic introductions that were scheduled in 2008.

Tom Gallucci - Merrill Lynch

Okay. So then I guess the key question there is, what specifically was better than you guys had forecast internally in the quarter, that drove the upside on the earnings line?

Rich Rubino

The fundamental drivers of our margin essentially, margin at mail is driven by our ability to achieve high levels of purchasing discounts on generic drugs in particular. I would say that in addition to our operational efficiencies, as we continue to scale up our automated pharmacies. We believe based on what we’ve seen thus far, through 2007, as well as the beginning of 2008, with a sterling new client installed in dispensing, mail-order productivity, as well as customer service productivity, we expect to see gross margins continuing through 2008 from that as well.

Dave Snow

Hey Tom this is Dave and I want to add one other thing, if you recall at Analyst Day, we talked pre-split about an $0.08 to $0.10 contribution, if in fact Plavix and Effexor did come out, I'm sorry Protonix and Effexor came out, and we're not realizing all of that yet, we only have the limited part of Protonix at this point, a limited supply. So we're still working on a full year opportunity there, plus lets hope that the Effexor does come out.

So this is consistent in what we talked about at Analyst Day that unscheduled releases are not in our guidance, and as they come out and as we can supplied, there is upside in our numbers.

JoAnn Reed

On the other major issue in the fourth quarter was the 1.4 percentage points improvement in DDR rate that were still up on retail at 1.1% on now, having higher generic dispensing rates in the fourth quarter will continue in to 2008.

Tom Gallucci - Merrill Lynch

That was better than you were looking for internally?

JoAnn Reed

That’s exactly right Tom

Tom Gallucci - Merrill Lynch

And anything there that particular drove it and I’ll hop on to the queue. Thank you?

JoAnn Reed

No luckily for us it was better generic substitution rate across all of the generic product line.

Rich Rubino

May we have the next question please?

Operator

Your next question comes from Larry Marsh with Lehman Brothers

Larry Marsh - Lehman Brothers

Close enough, good morning, first of all JoAnn and since this is your last call, best wishes once again on your retirement, and I know, you’ll miss dealing with us next call.

JoAnn Reed

Thank you.

Larry Marsh - Lehman Brothers

Okay. Maybe just to elaborate Dave’s, there are really two quick things I wanted to get your comment on. First of all lets get the way the update on the nydrol relationship. Obviously, being given the small granularity on their business, you talked about it not changing your guidance in ’08. Since you're narrowing that guidance, is there anyway to discuss that more specifically and when do you hope to have that relationship resolved?

Dave Snow

Sometime this year, one way or the other, we should have an answer. Obviously we’re in discussions now and remember to the extent we make a decision, if it were to be one we’re not together. It doesn’t come into effect till 2010. It really doesn’t affect our performance this year at all. So it's one of those things that is going to take awhile. It’s a complicated relationship, and this is the year we’re working where our future holds together.

Larry Marsh - Lehman Brothers

Okay. And maybe just another comment, I know that you and Rob at your Analyst Day talked about the results of TRC, and some of the clinical initiatives been measurable, in order to have an impact and how you saw your business. Can you give us any update or any more details about whether you have been able to measure any success and whether you’re going to be able to use that in your selling season this year?

Dave Snow

Well I can tell you that the Therapeutic Resource Center as a concept is something that has been very meaningful in our sales process and our renewal process. The personalized medicine stuff has some phenomenal results that are going to be publishable. And we are really excited about what we are doing with Coumadin and the statistics continue to hold that 66% of the people we are doing generic testing on, were making recommendations of Doxidel, changing the standard dosing, which I believe will have meaningful impact on hospital admission rates and overall healthcare cost. On the Tamoxifen study we are finding that 10% of women are not metabolizing the drug. These results too are really interesting and will be published. What is also really interesting, is that about two out of 600 doctors even knew about the generic test for Coumadin, and about one out of 10 know about the generic test for Tamoxifen. So, what very clear is this powerful new science is just really creating a knowledge domain that’s extremely deep and hard for doctors to keep up with and it's really important role for us.

Our client are absolutely signing up immediately for these personalized medicine initiatives. We have a really interesting protocol around diabetes that we are now launching that I think again is going to be meaningful for our clients as diabetes is an enormous source for drug spending, and there is a really large opportunity in total healthcare management in that space. So it's been great in the sales process and the results are going to be publishable. So, it's not just theory, the practice is bearing fruit that we can apply to our sales and renewal process today.

Larry Marsh - Lehman Brothers

Okay. Great, thanks for the update and a finally I guess for Rich and JoAnn, just clarification. Your service gross profits were down, it looks like $20 million below what I was thinking. You may already said that in the prepared remarks. But is there anything particular that drove that?

JoAnn Reed

No, Larry, the service revenues were down slightly, primarily because of the volume on retail, which is how we earned the administration fees in the clinical program. So nothing to be alarmed about and as we continue to increase the retail volume in 2008, I think you will see that bounce back.

Larry Marsh - Lehman Brothers

On the gross profit as well, you mentioned revenues but I was looking at that the gross profits to be more?

JoAnn Reed

Yes. Sure.

Larry Marsh - Lehman Brothers

Okay and then just a quick clarification then, you know I know at Analyst Day where you would call that anticipation of an AWP rollback in Q1 that could impact Accredo slightly, as well as the, I think you have not renewed your wholesale agreement. Were those two items enough to move a lump off for 08 or not really?

JoAnn Reed

Larry, the AWP issue on specialty was not included in our prior guidance, nor is it included. We were just getting in our hands up there, that’s a good enough factor, and then in terms of the wholesale agreement, as you all know, we did renew our agreement with Marathon again for another five years, and yes, that was part of the core fundamental improvement.

Larry Marsh - Lehman Brothers

Okay. For giving us the best update, thanks.

Rich Rubino

Thanks Larry.

Operator

Your next question comes from Lisa Gill with JPMorgan

Lisa Gill - JPMorgan

Good morning

Rich Rubino

Morning Lisa.

Lisa Gill - JPMorgan

I think at the time Dave that you signed the business with HIP, I think at the end of the press release you talked about opportunities to pick GHI, and perhaps you are in negotiation on that piece of business. Can you give us an update on that?

And then secondly Rich, when we think about the guidance that you've given and thank you for all the clarity there, we think about this first quarter and everything that we have to compare to the last year. So we would be thinking about the first quarter being down, versus last year, and really things been backend loaded just given the amount of renewals that will happen in the front half of the year?

Dave Snow

Let me talk about GHI HIP. I don’t know if all of you on the call are aware of this, but those various health plans are merging together along with ConnectiCare under a corporate entity called EmblemHealth. So as they make these decisions around their PBM, they are tying to together. They don’t want multiple PBMs for each one of their different plans. So, implementations and negotiations are staggered across these health plans. Now they don’t have anything announceable at this point, but I can tell you that just from a common sense point of view, the Emblem entity is going to not want multiple PBMs, they want to optimize the scale that they bring together under the new Emblem brand name.

Lisa Gill - JPMorgan

And Dave, when you think about the timing aspect of that, I mean, would you think that it would take a year for them to get everybody under the same PBM? Would it take months or what kinds of timeline should we be thinking about?

Dave Snow

I think you should about a year, Lisa.

Lisa Gill - JPMorgan

Okay.

Rich Rubino

And Lisa, to answer your question on the first quarter; we would expect that we will be up slightly first quarter of 2008, compared to the same quarter for 2007, based on the indicators I gave earlier.

Lisa Gill - JPMorgan

Great, that’s very helpful. And JoAnn, best of luck to you. Well very much, we'll miss you.

JoAnn Reed

Thank you, Lisa.

Operator

Your next question comes from Charles Boorady with Citigroup.

Charles Boorady - Citigroup

Thanks. Good morning.

Rich Rubino

Good morning, Charles.

Charles Boorady - Citigroup

First question on the FEB contract, were the profitability of that in '08 be sufficient to breakeven with the startup costs you incurred in the 4Q of '07?

Rich Rubino

Yes.

Charles Boorady - Citigroup

And in terms of renewals for 2009, can you talk about what that looks like so far? Is it getting a late start, or did it get an early start this versus last year, and any other major ones, aside from the AT&T, that you mentioned last quarter?

Dave Snow

I guess, and even based upon the statistics Rich mentioned, we are really pleased to be 85% done at this earnings call. Last year, through first quarter it was 55% and that were already installed in that first quarter, this time it's 74%. So that just tells you we're further ahead of schedule than last year in terms of the renewal process for business this year going into 1/1/09.

Charles Boorady- Citigroup

That's sounds great. In terms of any new wins and visibility on, who you might be going after for bids that's not your customer?

Dave Snow

There are some accounts out there that we're already working on. And these probably, as is typical, Charles you probably would not hear much until some time towards the end of the second quarter, because most of the big ones are really for a 1/1/09 start. So, they have time to have the various companies compete and make their decisions. So, we don't have any new news on that front, and I wouldn’t expect much in terms of the big accounts out there till towards the end of second quarter.

Charles Boorady- Citigroup

Got it. The large public health plans have been making a lot of noise about promoting integration of behavioral health, pharmacy, and other functions as a key selling tool. As I mentioned, integration has recently won a major account. And I know you have many health plan customers. I’m trying to separate or distinguish between ownership and integration on the PBM, and I’m wondering, can Medco be as integrated with the health plan, as health plan owns PBM, or have you found certain things that you can't provide, that health plan can do when it actually owns the PBM?

Dave Snow

My answer hasn’t changed to that question and I’m going to tell it to you again. My view is as you know, I ran health plans for 20 years, in this day and age with technology in it's current state, you can integrate real-time data under one roof. You do not need to make the data, to integrate the data real-time. So, that's in class is, still in my opinion, the right way to go when you are managing the healthcare of individuals, and I don't believe it is best-in-class when you look at the various assets under one roof.

I don't think you get best of breed. I think you drop down to something that I would call mediocre, and I am finding that those heath-plans that we worked with, are thrilled with the TRC concept. They are thrilled with what we're doing with personalized medicine. In-house health plans don't even have the size and scale-up mail to operationalize the things we're doing around the specialized practice of pharmacy.

So, I firmly believe what we're doing is best of breed and better total healthcare cost and total better healthcare outcomes are going to come out of our model. And we'll work with the Health Plan to understand that.

In terms of integrated health-plan win, I am sure there are still some, but I can tell you in the world we play in, which is the ASO world, it is really rare that we see an integrated health plan in a best and final. They don't have to scale and they don't have the, really the core capabilities that the big PBMs have.

Charles Boorady - Citigroup

Ken, when the health-plan is pitching there large employer customers, if they are using Medco, can I say that their PBM is integrated even if they don't own it. Are you saying you can achieve the same level of integration with the plan?

Dave Snow

Absolutely, we push data real-time, with CDH, consumer driven health, we push every transaction real-time to HSAs, FSAs to the health plan. We are capable of doing that. Many health plans are still not capable of real time data transmission. They are still in batch mode, but absolutely they can get this information that we produced real time.

Charles Boorady - Citigroup

This last question on PolyMedica, can you update us on any synergy achieved and also what your current expectations are for competitive bidding timeline?

Dave Snow

We are expecting some kind of information in probably the next 30 days around the competitive bidding process for that small pilot they are doing, which remember one way or the other is not that big relative to the total book of business of PolyMedica. But we’re staying tuned the bid that was placed for PolyMedica was done prior to Medco’s ownership. So the synergies in there, the cost structure in their bid were not necessarily reflective of what we’re going to see post full integration.

The integration is going fine but remember we’ve already guided that the incremental contribution of PolyMedica to our earnings in 2008 is going to be relatively small.

Charles Boorady - Citigroup

Okay, thank you.

Dave Snow

Okay.

Operator

Your next question comes from Charles Rhyee with Oppenheimer.

Charles Rhyee - Oppenheimer

Hi, I just have one quick question here your Accredo health revenues, I think you reported in the quarter about $1.6 billion, and at this point, it's sort of sitting above 10% of your total revenues, and that is $7 billion, for next year likewise. At this point you plan on breaking your specialty business out, as a reporting segment or how do you plan to report that, as we think about it going forward?

Rich Rubino

We actually have been reporting that as a separate segment since we acquired Accredo.

Charles Rhyee - Oppenheimer

I mean but your overall specialty will have -- in your press release as well will have some more of break out of the mail business.

Rich Rubino

Well the full detail will be presented in our SEC filings the 10-Qs the 10-Ks, which are filed at the end of the day that we release earnings. So you can just refer to the SEC filings for that detail.

JoAnn Reed

And we also break it out in our earnings release on a separate section. We just give you the highlights.

Charles Rhyee - Oppenheimer

Okay, okay great thanks.

Rich Rubino

Thank you.

Operator

Your next question comes from Michael Baker with Raymond James.

Michael Baker - Raymond James

I was just wondering if you could comment in general on pricing in this selling season, as well as whether or not any of the consulting firms have been successful in moving to a new benchmark?

Dave Snow

I would tell you that the pricing and the market place is competitive as it always is. I think that the pricing is moving, tied to the growing generic availability as we've always said it would, but it's not an unreasonable pricing environment, as I've said before, and it's still is true today. Price is like the ticket to entry, but the other brandable differences among the companies are playing the bigger roles, in the final decisions that these customers are making.

So I would say the stable environment, and I would say that the consulting community is not pushing new benchmarks, but they are evolving with the evolution of the changes in our industry as we move from brand drugs to generic drugs.

Michael Baker - Raymond James

Thanks. And then I have another question. I didn't catch all your response on the Therapeutic Resource Center side. I was wondering, did you comment on whether or not there are plans to expand to additional drugs and if so what they are and the timing?

Dave Snow

Yeah Michael, on the Therapeutic Resource Center, we have 14 diseases we’re focused around, including both the Accredo division, as well as our core. And we are staying at that level right now, but we are evaluating breaking out some of the diseases that are currently merged together in one Therapeutic Resource Center. The other point would be personalized medicine. We are looking at other drugs around personalized medicine. Because the TRC’s organized around therapy, personalized medicine has generic test-type specific drugs and we are evaluating 10 other tests associated with specific drugs and wont be making decisions about that probably over the next quarter or so.

Michael Baker - Raymond James

Thanks.

Rich Rubino

Thanks.

JoAnn Reed

And on your question, Michael on the benchmark

Michael Baker - Raymond James

Yes.

JoAnn Reed

First databank and Metacine were incorporated in early February, and I think the entire market is waiting for an outcome of that core appearance, to decide where they are headed next. So knowing they are so far in terms of changing to a new benchmark.

Michael Baker - Raymond James

Thanks a lot.

Operator

Your next question comes from Ricky Goldwasser with UBS

Ricky Goldwasser - UBS

Hi, good morning. Just a number of questions, first of all on GHI, I just need a clarification, Dave, basically do you expect that if you win this business, this would be a potential new ’09 business rather than an ’08 start.

Dave Snow

If we have an announcable event around GHI it would be an ’08 event.

Ricky Goldwasser - UBS

With the announcement sometime in ’08, do you expect it to be first half, second half and will the revenue impact be in ’08 or ’09.

Dave Snow

I believe their decision timeframe is mid-year sometime.

Ricky Goldwasser - UBS

Okay, and when as far as therapeutics substitution associated with generic Fosamax, is this included in your guidance?

Rich Rubino

You're referring to outside of the former brand. No, at this, our guidance doesn’t include the street brand for generic for Fosamax. We believe there could be some expansion beyond that, but we have to wait and see. So that is not in our current guidance.

Ricky Goldwasser - UBS

Okay so when we think about the moving thoughts for potential upside for 08 guidance, obviously Effexor is one of them which and Ambien is beyond the second you quantify the Effexor part to be around $0.06 and any sense for a therapeutic substitution?

Dave Snow

No, yeah Ricky, if you recall, at Analyst Day, we said that Protonix and Effexor together if they both came out, Protonix in January, Effexor in July, was worth $0.08 to $0.10, and it was more heavily weighted to Protonix than Effexor, because remember Effexor isn't an identical equivalent. The brand is a capsule and the generic is a tablet. So we don't think that the uptake is not going to be a natural identical brand to generic switch. So it was much weighted towards Protonix, that’s where we got to $0.08 to $0.10, and that’s how we guided relative to the split. So what you are seeing, is the delay in the Protonix it happened in February, and it’s a limited supply, so the upside is, so are we going to get a full year supply of Protonix, or is that one supply yet, and then Effexor is still in question. We also talked about, I believe it was in the last call that we were kind of at plan right now, relative to our net-new sales, so new sales wins, to the extent they come in ‘08, are opportunities from that goal.

Ricky Goldwasser - UBS

Okay, that’s helpful. Can you quantify us on the Protonix on the $0.08 to $0.10. What percent. Rich had said it was about $0.02 for the increase, is that how should we look at it?

Rich Rubino

On a post-split basis, I said that the new generic introductions added another $0.02 to the $0.10 that we’ve previously guided to. The largest competent of the $0.02 increase is Protonix, in addition to improved purchasing associated with other new generic introductions this year.

Ricky Goldwasser - UBS

Okay and then lastly can you just walk us through, I know you talked about the EPS benefit in ’07 from generics, I think it was about $0.24. Can you also add to that what was the incremental EPS benefit in ’07 from generic drugs that went off patent in the second half of ’06.

JoAnn Reed

Ricky, we don't see information like that. What we try to do is be as transparent as hospitals, so we give you our new generic introduction each year in terms trying to quantify that for you. But what we are doing on our overall existing business, as Rich said earlier, is just part of the improved fundamentals, generally that we saw in 2007. But we are not going to quantify how much each is individually worth.

Dave Snow

And I just want to be really clear, when Rich talked about $0.24 generics up from $0.20 for new generics in 08. He didn't talk about ‘07 new generics.

Rich Rubino

That's right. That 0.24 was on a pre-split basis.

Dave Snow

That's right.

Ricky Goldwasser - UBS

Okay, thank you.

Dave Snow

Thank you.

Operator

Your next question comes from Ross Muken with Deutsche Bank.

Ross Muken - Deutsche Bank

Good morning.

Dave Snow

Good morning Ross.

Ross Muken - Deutsche Bank

So in terms of the capital allocation strategy, I know you talked about in the call, that you intend toward share repurchase, but you guys have been very successful in integrating acquisitions over the last few years. So as you look across your therapeutic Resource Center model, and when you push in to personalize medicines, are you looking at tuck-in acquisitions to supplement what you already have, or do you think the initiatives you have currently, are enough from initial offering perspective to really go into the next selling season with?

Dave Snow

Rob, I would tell you that I am very satisfied with the platform we have, and what we're doing in the chronic and complex diseases that we serve today. However, I will also tell you that we will continue to evaluate opportunities, and we will be opportunistic to continually improve the value proposition that we can deliver around each of these therapies.

Ross Muken - Deutsche Bank

All right, well thank you, that was it. Most of my other questions were answered.

Dave Snow

Okay. Thank you.

Operator

Your next question comes from Kemp Dolliver with Cowen & Company.

Kemp Dolliver - Cowen & Company

A couple questions first how are you viewing Protonix. Is this something you are now viewing as a generic for mix calculation purposes with an authorized? Since this is not a straightforward situation, how are you thinking about it?

Dave Snow

I am thinking about it, and others can contradict me. I am thinking about it as an authorized generic that was released temporary supply. So it's not a fully launched generic. It has a start and it has a stop. And we don't know if it's going to come up as a really permanent generic. If it does it have to get through this 180 day exclusivity period and then we get to the real competitive pricing that you would typically see with a generic.

Kemp Dolliver - Cowen & Company

Yeah that’s very helpful thank you. And my second and last question relates to the cholesterol category. What have you seen in your book of business with regard to Simvastatin versus Zetia and Vytorin and you particularly the mail pharmacy’s, are you just seeing a pick up mainly in new scripts skew to Vytorin, or you're actually seeing some patients being switched having been on Zetia/Vytorin, and then switched to Simvastatin?

JoAnn Reed

Kemp, I n terms of our data can give you real data in terms the mail dispensing information. So we look back to the January 12th week our Vytorin share at that point in time was 11.7% and based on our last week it was down to 9.7% . So we lost 2 points there. In terms of zetia it was at 10.1%, it is now down to 8.4% and then Simvastatin picked up, it was at 23.7% and it is now at 26.4%.

Dave Snow

So that’s underlying fundamental in our numbers.

Kemp Dolliver - Cowen & Company

And how are you thinking about that trend for the year?

JoAnn Reed

We think that it will continue to go on the upside with Simvastatin. The retail members are even more alarming for our Vytorin and Zetia 11.5% share down to 8.1%. Zetia 8.4% down to 5.4% and Simvastatin 28.9 up to 34%.

Kemp Dolliver - Cowen & Company

That’s really helpful. Thank you.

Operator

Your next question comes from John Kreger with William Blair

John Kreger - William Blair

Thanks very much. Just one question about your 2008 guidance. Can you help us collaborate the benefit you expect to get from lower drug purchasing trends and I am really trying to get at, are you seeing a level of competition among the generic companies and the wholesalers go up or be pretty steady with '07?

Rich Rubino

Well, I think, of course the more manufacturers you have, the better prices there are going to be. And as your scale increases, as you grow, as we are significantly this year, you are going to have a higher propensity to yield better purchasing and that’s basically what we are seeing.

With regards to what we are expecting at this point, regarding new generic introductions, that’s factored as I mentioned earlier into the $0.02 additional guidance for this year.

What we have seen historically, certainly in the last quarter or two it's factored into the core performance that was manifested in our $0.02 exceed your expectations for the fourth quarter that I'm carrying forward into 2008.

Dave Snow

I think, you know as I think about this, I think you are going to see one or two risk launches a year versus none in the past, because the settlements have really been favorable to the generic manufacturers and I think you are going to more routinely see an authorized generic and the filing generic company competing, which creates a better pricing scenario right our of the box. And then if it's a large enough drug, after the 180 days you are going to see that there are lot of generic competitors, especially for the big blockbusters and it's very favorable for us.

John Kreger - William Blair

Great, thanks very much.

Operator

Your next question comes from Art Henderson with Jefferies & Co.

Art Henderson - Jefferies & Co.

Good morning. Dave, just sticking with the Therapeutic Resource group; has your relationship with Healthways sort of met your expectations or is your commentary around expanding some focus in that area or building your presence sort of indicative that maybe you are not getting everything you want out of that?

Dave Snow

We are very satisfied. We think Healthways is a great organization. I’m just going to ask Kenny Klepper who works a lot with Healthways comment on that.

Art Henderson - Jefferies & Co.

Thanks.

Kenny Klepper

Yeah, we spend a fair amount of time with them and we've been very happy. If we will look at the marketplace, we’re seeing an increasing interest for the consolidated or the integrated services that we can provide from a traditional disease management, case management and active in Wellness services, and our Therapeutic Resources Centers. So we are doing technical integration at the telephonic and IT level. It is to really provide a very, very seamless never experienced that we think is going to be very unique in the marketplace.

Dave Snow

And our sales are starting to ramp up with them. So we are pretty pleased with kind of the business model we had talked about.

Art Henderson - Jefferies & Co.

Dave, have you guys got new call center that you guys are doing jointly together, it seem like I heard something about that?

Kenny Klepper

This is Kenny. We are opening up a Medco center of health action in San Antonio, which will be we think very unique in it's space, which will have therapeutic specialist co-located with the nursing pods in a single site, organized by clients, that really will provide we think an extremely high touch experience for the member, and bring together the best of the IP between our two organizations from health care point.

Art Henderson - Jefferies & Co.

Okay, great. Thanks for the color.

Kenny Klepper

You are welcome.

Operator

Your next question comes from Randall Stanicky with Goldman Sachs.

Alex Specler - Goldman Sachs

Hi, it's [Alex Specler] actually dialing for Randall. David, could you talk how sensitive the business is or not to a more economic slowdown?

Dave Snow

I actually believe that our industry is a great place to invest money in an economic slowdown because drugs will continue to be dispensed, people will continue to manage their chronic and complex diseases, and the dynamics around generics over the next through 2015 are not going to change. So, I hate to call Kramer to a group like Eagle, but people creep in, and this is a nice place to invest money in an economically tough time.

Alex Specler - Goldman Sachs

Just a quick follow-up on United Health. When do you think we can expect to hear about a potential renewal decision?

Dave Snow

As I said before, an arrangement this large is very complicated. It takes time. We are talking now and I would hope that there is some indication one way or the other by the end of the year.

Alex Specler - Goldman Sachs

Sounds great, thank you.

Rich Rubino

Welcome.

Operator

Your next question comes from Tony Perkins with First Analysis.

Tony Perkins - First Analysis

The percent of rebate returned to customer are increasing. Will we see or foresee this trend is continuing because of current trends?

Rich Rubino

What you'll see in 2008 is that we'll be retaining a bit more, maybe by a point or so than we experienced in 2007 because as I mentioned at Analyst Day the FEP contract does not include the pass-back or rebates, instead the pricing is focused on the pricing for the drugs on a AWP discounted-basis. So, I believe we'll see, when all is said and done somewhere between a point to a point and a half of increase in rebate retention 08 versus 07.

JoAnn Reed

But as you can see the retention rate, whether they go up or down, our profitability continues to improve because of the pricing terms, it just another pricing lever when we are pricing an account.

Tony Perkins - First Analysis

One more question, did really hear Dave say Kramer?

Dave Snow

Yes, I am sorry.

Tony Perkins - First Analysis

Okay.

JoAnn Reed

Brandy we have time for one last question.

Operator

Your next question comes from Robert Willoughby with Banc of America Securities.

Robert Willoughby - Banc of America Securities

Thank you. Rich, did you throw out a cash flow number for ’08 that you expected to generate, and if you can address the guidance for ’08, what it entails in terms of debt reduction and share repurchase, because I think I missed that?

Rich Rubino

I did not give a projection with regard to cash flow for the year. If you want from a cash flow from operations perspective. Historically it pretty much mirrors our net income growth, okay.

With regard to the share discussion. JoAnn mentioned in her remarks that will have an entry point for this year of 547 million shares. Our range currently for the year on a rated average basis, is 530 million to 550 million shares. That assumes that we spend the remaining $2 billion in share repurchases for the remainder of the year, closing out at $5.5 billion program. Recognize also there is business slight offset because we do have the diluted effect of stock options, which will net against the benefit of the share repurchases.

Robert Willoughby - Banc of America Securities

So no debt reduction?

Rich Rubino

With regards to debt reduction, we are not expecting any debt reduction at the current point. One item that you’ll see in our 10-K, is that we in fact do have additional liquidity available to us in the form of an additional revolving credit agreement to the tune of $800 million that’s priced at LIBOR plus 55. So to say, that debt will be going down the course of the year, not currently expected. We’ll see in the course of the year where the $100 million goes that could be used for swing space, depending on where we go through our cycles.

Robert Willoughby - Banc of America Securities

That's it. Thank you.

Rich Rubino

Thank you.

JoAnn Reed

Thank you all for your participation on this earnings call. As many of you know I have decided to retire as CFO of Medco on March 15. So this is my final earnings call. I want to thank you and say how appreciative I am for all the support that you have given me over the years. I will miss our interactions in the future but I have left you in the very capable hands as Rich Rubino my successor. Again, thank you so much and farewell.

Operator

This concludes today's Medco Health Solutions earnings conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: MedcoHealth Solutions Inc. Q4 2007 Earnings Call Transcript
This Transcript
All Transcripts