Medco Health Solutions Q1 2008 Earnings Call Transcript

Apr.30.08 | About: Medco Health (MHS)

Medco Health Solutions (NYSE:MHS)

Q1 2008 Earnings Call

April 29, 2008 8:30 am ET

Executives

Valerie Haertel-Vice President of Investor Relations

David B. Snow, Jr.-Chairman and Chief Executive Officer

Richard Rubino-Chief Financial Officer

Thomas M. Moriarty- General Counsel, Secretary and Senior Vice President, Pharmaceutical Contracting

Timothy C. Wentworth-President and Chief Executive Officer, Accredo Health Group, Inc.

Kenneth O. Klepper-President and Chief Operating Officer

Analysts

Tom Gallucci-Merrill Lynch

Lisa Gill-J.P. Morgan Securities Inc.

Lawrence Marsh-Lehman Brothers

Robert Willoughby-Banc of America Securities LLC

Ricky Goldwasser-UBS Securities LLC

Ross Muken-Deutsche Bank Securities, Inc.

Randall Stanicky-Goldman Sachs

Glenn Garmont-Broadpoint Capital

Arthur Henderson -Jefferies & Company, Inc.

John Kreger-William Blair & Company

Steven Halper-ThomasWeisel Partners, LLC

Kemp Dolliver-SG Cowen & Co.

Tony Perkins-First Analysis Securities Corporation

Barbara Ryan-Deutsche Bank

Michael Baker-Raymond James

Charles Boorady-Citigroup

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 First Quarter 2008 Medco Health Solutions Earnings Conference Call. (Operator Instructions) I would now like to turn the call over to Valerie Haertel, Vice President Investor Relations. Please go ahead.

Valerie Haertel

Thank you, Brandy. Good morning everyone and thank you for joining us on Medco’s First Quarter 2008 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 President and Chief Operating Officer Kenny Klepper; President and Chief Executive Officer of Accredo Health Group, Tim Wentworth and our newly appointed General Counsel, Secretary and Senior Vice President of Pharmaceutical Contracting Tom Moriarty. Tom succeeds David Markowitz, who retired earlier this year in the general counsel role. As a reminder, Medco’s board of directors authorized the two for one stocks list that was effective in January 2008 and all financials are reported on a per 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.

Before I turn the call over to Dave Snow, I would like to remind you that in light of SECs regulation updates, management will be limited in responding to inquiries form investors and analysts in a non-public forum; therefore we encourage you to ask all questions of a 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 Reform Act of 1995.These statements involve risks and uncertainties that may cause results to differ materially from those set forth in the 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 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 the risk factors section of the company’s interim report on Form-10-K, Forms 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 copyrights for the contents of this discussion and the written materials used on this 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?

David Snow

Thank you, Valerie. Good morning and thanks to all of you for joining us.

Last week we shared with you some important news, our renewed and aligned agreement with United Health Group that I will discuss further in my remarks. Today we are providing additional good news. We are reporting record results for the first quarter of 2008 driven by continued growth across all of our chief strategic growth drivers. We set records related to generics, mail and specialty pharmacy and achieved strong results for both net new sales and Medicare.

I will focus the majority of my time on our results and our strategic direction and I will spend just a few minutes discussing our Liberty branded diabetes franchise and our new international initiatives, which are part of a broader, multi-pronged long-term growth strategy. Then I will ask Rich Rubino to discuss our financial results in greater detail and provide more color on the quarter, and finally we will open the call for your questions.

For the first quarter, net revenues rose to nearly $13 billion, an increase of 16.2% over the $11.2 billion in the first quarter of 2007, reflecting price inflation from brand name pharmaceutical manufacturers and higher volumes associated with new client wins partially offset by a record high generic dispensing rate. Our strong generic dispensing rate of 63.3% delivered $750 million in incremental generic savings to our clients and members reducing our top line by benefiting Medco’s profitability.

GAAP diluted earnings per share for the quarter increased 6.4% to $0.50 per share compared to $0.47 in 2007. Excluding the amortization of intangible assets from the 2003 spin off first quarter 2008, diluted earnings per share increased 5.8% to $0.55 per share from $0.52 per share in 2007.

To appreciate this strong quarter, it is important to provide some additional context. First, the year-over-year comparison sets a very high bar given that the first quarter of 2007 included a significant nonrecurring benefit from the temporary availability of generic Plavix. Second, the first quarter of 2008 included slightly higher start up costs of $8 million related to the record level of new business we installed for January 2008, including FEP, the state of New York and HIP of greater New York.

The first quarter of 2008 also included an unplanned, non-recurring swap write-off of almost $10 million, which Rich will discuss later.

The positive generic Plavix effect in the first quarter of 2007 coupled with the first quarter 2008 start up costs and swap write-off create a slight decline in the year-over-year quarterly comparisons of net income, $270.2 million in 2008 versus $274.8 million in 2007. As we stated on our last call, we have been dispensing generic Protonix for a portion of the first quarter of 2008. To give you a sense of its relative impact, the benefit from generic Protonix is significantly less than the benefit we receive from a full quarter of generic Plavix in 2007 by a factor of six.

EBITDA per adjusted script was $2.96, a slight decline from the record high of $2.99 achieved in the first quarter of 2007, but a sequential improvement of 16.5% from the fourth quarter of 2007.

Now to more granular level, I will discuss our key growth drivers for the first quarter of 2008 beginning with generics. We achieved a record high overall generic dispensing rate of 63.3%, up 5.1% points from the same period last year. This quarter, as expected, we benefitted from the launch of generic Fosamax in February, a $1.5 billion blockbuster drug, and the first generic in the osteoporosis class. As we just discussed and noted on our year-end call, our limited supply of generic Protonix also contributed to the quarter.

Turning to mail order, we achieved a record mail order prescription volume of 26.6 million prescriptions, up 13.7% from first quarter 2007. Our mail order penetration rate on an adjusted prescription basis reached 38.4%, a 1.5% increase from first quarter 2007. This is a direct benefit of our very successful sales year and that sales momentum continues. Annualized 2008 new-name sales to date has reached $5.1 billion, an increase of $200 million from the 4.9 billion in new-name sales we reported last quarter, which included the previously announced wind of FE, the state of New York, and other business including HIP of greater New York under the Emblem help umbrella. Our business relationship with Emblem has expanded to include GHI business and we expect the relationship to expand over time.

To date net new sales for 2008 stand at $4.6 billion, considerably higher than the $4.0 billion discussed on our year-end call. This net new growth reflects the $200 million increase in new-name sales and strong growth in our existing accounts.

As I noted at the out set of my remarks, we announced a new and aligned agreement with United Health Group. The term of this new agreement runs through December 31, 2012 and does not contain a market check. This aligned agreement is designed to drive value through mail order and generic drugs and further leverages our purchasing power. United Health Group will set the formulary and handle the plan design, as they always have, and we will continue to manage prescription drug acquisition and dispensing, leveraging our scale in automation. United Healthcare also has the option to assume responsibility for some of the customer service functions we currently provide, which is common with our larger health plan clients. United Health Group is a valued and strategic partner, we appreciate their confidence and trust, and we appreciate the fact that after thorough review, United Health Group chose to stay with us.

Turning to renewal activity, we currently expect $14.4 billion in 2008 renewals. We have completed approximately 95% of our 2008 scheduled renewals, up from the 85% we discussed on our year-end call. The United Health Group renewal is not included in this $14.4 billion. With the United Health Group’s renewal, our renewals in 2009, totaling over $18 billion, are already over 60% complete. Let me say that again, 6 0, 60% complete.

Our 2008 client retention rate remains at a historically high level, 98% and continues to represent, what we believe, is the highest retention rate reported in the industry. With continued strength in net new business wins and renewals, we have clearly demonstrated the compelling value proposition created by our advanced clinical platform. This comprehensive approach to advance pharmacy care resonates with our clients by delivering superior clinical care and better clinical and financial outcomes. This has allowed us to maintain our historical pricing discipline. We would characterize the recent pricing environment as competitive, rational, and stable, as reflected in the new business and renewal results we reported today. As with any competitive industry, it is difficult for one company to win all of the business. In the quarter we lost Employee Retirement Systems of Texas and ATT opted to consolidate its business through a renewal with incumbent CBS; as a result, we lost the smaller Bell South component. The ERF loss is included in the net new numbers I just provided and the Bell South contract will be counted as a 2009 transition.

Specialty Pharmacy is our next strategic growth driver and we delivered another record quarter. For the first quarter Accredo Health Group’s net revenues increased 30.3% to a record $1.9 billion from $1.4 billion for the same period in 2007, reflecting the new FEP specialty contract installed in January, other new business, and a favorable product mix. Accredo’s first quarter 2008 gross margin was 7.7%, down slightly from 8% in the first quarter of 2007, due primarily to 2008 start-up costs and client mix. Operating income for Accredo grew 19.1% over first quarter 2007, reflecting the strong bottom line effect of the record quarter.

For the first quarter, Medicare Part D PDP revenues rose 16.5% to $152.5 million from $130.9 million for the same period last year. For the first quarter of 2008 seniors in our Medicare programs continued to select mail order and generics, reflected by an adjusted mail penetration rate of 27.8% and a generic dispensing rate of 67.5%.

During the quarter Medco repurchased $1 billion of the $2 billion remaining in our share repurchase authorization. Since our programs inception in August 2005 and through the first quarter of 2008, we have repurchased $132.4 million shares valued at $4.5 billion, at an average price per share of $34.10. This has proven to be a very efficient use of cash, cash which directly benefits our shareholders. We are confident in our ability to deliver strong growth in 2008 and beyond as we continue to innovate and create value by building upon our therapeutic resources center strategy and developing our personalized medicine initiatives designed to generate superior and clinical and financial outcomes in the US and eventually abroad.

As you all know, this past October Medco acquired PolyMedica, the leading stand-alone mail diabetic supply company in the country. This was an important strategic acquisition for Medco because it provided significant new capabilities and infrastructure to better care for diabetic patients. As a result of the acquisition Medco now serves an additional one million diabetic patients on top of the three million diabetic patients in our commercial book of business. Medco also benefits from the well-recognized Liberty business consumer brand in the Medicare space, ACLEA lab certified in 50 states into which we have already introduced genetic testing equipment for our pharmacogenomic initiatives and strong compliance programs that drive superior health outcomes for our diabetic population.

Recently CMS notified companies regarding their participation status in the competitive bidding pilot for then competitive bidding areas. PolyMedica was not a winning bidder. The impact to Medco’s 2008 earnings is immaterial, specifically less than ½ penny per share, which we plan to mitigate. As we noted previously, the pilot only affects 7 to 8% of our Liberty base. More importantly, the strategic fit for this asset for our therapeutic resource centers, our large commercial population, and our international initiatives remains compelling. We believe that the CMS competitive bidding process was seriously and fundamentally flawed, something we have communicated to CMS. We have already begun working with CMS and congress to address the process prior to a national roll out currently scheduled for 2010.

Turning to our international activities, this quarter we entered the international marketplace. It is evident that Medco’s proprietary and innovative technologies and intellectual properties have broad application in other countries where they are also working to improve clinical quality, while at the same time facing increased costs related to higher drug utilization. An international footprint is part of our long-term strategy to plant seeds for growth. To that end, this quarter we launched a collaboration with Sweden’s government operated retail pharmacy provider, Apoteket to create an advanced drug utilization based review system, the first of its kind in Sweden, which we believe will become the national standard. This technology-based infrastructure will be used by all retail pharmacy’s to provide a consistent patient safety net as Sweden prepares to deregulate its retail pharmacy market next year. We look forward to leveraging our collective expertise to reduce overall health care costs for Sweden.

Additionally, earlier this month we announce the acquisition of a majority stake in Europa Apotheek Venlo for approximately $120 million which we closed yesterday. Europa Apotheek is a leading, privately held, mail order and specialty pharmacy services organization based in the Netherlands largely serving Germany. While this is a relatively modest investment, it gives Medco a strong presence in a progressive and growing country that is seeking to reduce health care costs. Germany is one of the worlds fastest growing markets for prescription drugs with current annualized drug spend of $35 billion. Mail order pharmacy service, currently in its infancy in Germany, is expected to reach $3 billion by 2012 as consumers and payers embrace the convenience, safety and cost savings of mail. We believe that we can accelerate the acceptance of mail order pharmacy in Germany utilizing Medco’s clinical and mail order knowledge, intellectual capital and proprietary technologies. These international opportunities represent two very different means of engaging the European marketplace; however both leverage our expertise and ability to provide customized solutions which are essential to our international strategy.

Internationally Medco is interested in partnering with governments, private and public entities, and entrepreneurs who share our values for improving pharmacy quality and safety while managing the cost of care. This partnership approach provides us with the necessary on the ground expertise and knowledge to be successful in health care systems and cultures that differ from our own.

In summary, Medco is both accelerating its success in its core businesses and expanding its markets all while advancing the practice of pharmacy and catalyzing the adoption of pharmacogenomics science. All of this is to the benefit of Medco clients, members, and shareholders. Today we have delivered a strong quarter and what we believe will be a strong year. We raised guidance last quarter by 5% from our original 2008 guidance, projecting growth of 27 to 29% with EPF of $2.07 to $2.11, which we are reaffirming today. Excluding the amortization of intangibles from the spin off, diluted earnings per share is expected to be in the range of $2.27 to $2.31 representing a growth rate of 25 to 27% over 2007.

Now I’ll turn the call over to our CFO Rich Rubino, who will discuss the details behind our first quarter 2008 financial performance and our 2008 guidance. Rich?

Richard Rubino

Thank you, Dave. Good morning. Before I begin, I would like to point out that we have increased the level of financial detail included in our press release. The tables now contain many of the key statistics you would normally find in our 10-Q. Hopefully this will assist you with your analysis.

Starting with the headlines, our GAAP diluted earnings per share increased 6.4% to $0.50 per share for the first quarter 2008, from $0.47 per share for first quarter 2007, and increased 31.6% from fourth quarter 2007. Excluding the intangible amortization from the spin off, diluted EPS increased 5.8% to $0.55 compared to $0.52 in first quarter 2007. This represents very strong performance considering the generic Plavix benefit from first quarter 2007 and the fact that we incurred start-up costs for the significant new client installations this quarter of approximately $8 million or $0.01 per share. In addition, we recorded an unplanned non-recurring charge of 9.8 million, that’s $9.8 million or approximately $0.01 per share in first quarter 2008 as the result of a swap write off associated with a new bond issuance, which I will discuss later on.

Now I will walk you through the components of our earnings for the quarter. Medco reported record net revenues of nearly $13 billion, a 16.2% increase over first quarter 2007. Sequentially net revenues exceeded fourth quarter 2007 by 13.9%. The product net revenues component of the total was $12.8 billion, representing 16.1$ growth over first quarter 2007 net revenues of $11 billion and 13.9% growth over the $11.2 billion in fourth quarter 2007.

First quarter 2008 product net revenues grew almost $1.8 billion compared to first quarter 2007. This growth is attributable to inflation on brand name drugs and higher dispensing volumes, particularly at mail. Newly acquired PolyMedica contributed approximately $200 billion to our net revenue growth this quarter. The same quarter net revenue growth includes, as an off setting item, the revenue reducing impact of higher generic dispensing rates, which was $750 million for the quarter. The mail component of the product net revenues totaled $524 billion, a 25% increase over first quarter 2007 and 17.6% over fourth quarter 2007. Our mail order prescription volumes for the quarter reached a record 26.6 million prescriptions, up 3.2 million prescriptions or 13.75 over first quarter 2007. As you would expect, our new client FEP was the largest single contributor to the growth. Sequentially, our mail volumes grew 9% with 2.2 million prescriptions over fourth quarter 2007.

The number of members in our retail resale allowance program, commonly known as mandatory mail, now stands at over $10.1 million compared to the $9 million reported at the end of 2007. This reflects the continued strong interest in the clinical and cost advantages of mail order among both our existing and new clients. Our first quarter 2008 mail order prescription volumes do not include diabetic supplies, which are primarily filled through PolyMedica, nor do they include volumes for over the counter products dispensed in our mail order facilities. Volumes for both of these items were relatively small previously and amounted to approximately 1/.2 million units in the first quarter 2008. We expect diabetic supply volumes to grow at an accelerated pace now that we have acquired PolyMedica and we believe OTC drugs also present an exciting opportunity for future growth. These represent new facets of our long-term strategy and we believe providing this additional transparency will be useful going forward.

The retail component of product net revenues was $7.4 billion, a 10.5% increase over first quarter 2007 and up 11.4% compared to fourth quarter 2007. Retail volumes of 127.2 million prescriptions increased 6.4% over first quarter 2007 and increased 8.6% over fourth quarter 2007 reflecting new client wins. Also, we did note higher flu, cough and cold prescription volumes in the first quarter 2008 compared to both the first and fourth quarters of 2007. Total prescriptions adjusted for the difference in base supply between retail and mail were $206.7 million for the quarter. Our adjusted mail order penetration reached 38.4%, 1.5 percentage points higher than first quarter 2007. Our generic dispensing rates also continued to accelerate. Our record overall generic dispensing rate for this quarter of 63.3% increased 5.1 percentage points over first quarter 2007 and 1.9 percentage points sequentially. Generic dispensing rates of mail, which have a significant impact on our overall profitability, rose to 53.6%, up 5.2 percentage points over the first quarter 2007 generic dispensing rate of 48.4% and up 2.7 percentage points sequentially. First quarter of 2007 included the short-term supply of generic Plavix. In addition, as Dave mentioned, we are currently carrying a short-term supply of generic Protonix and we dispensed this generic during the last two months, first quarter 2008.

Our product margin of 6.2% for first quarter 2008 reflects a 10 basis point increase over both the first quarter and fourth quarter 2007 results. This reflects higher mail volumes and penetration and higher generic dispensing rates partially off set by the start-up costs mentioned earlier.

Our gross rebates earned in first quarter 2008 reached a record 1 billion, $53 million, and 14.6% higher than first quarter 2007 and up 21.3% compared to fourth quarter 2007. This growth reflects new business wins and increased levels of formulary compliance bolstered by our higher mail penetration and clinical programs where we deliver value for our clients and our members.

Our rebate retention rate was 20% in first quarter 2008, a significant upward move from 14.5% in the previous quarter. As we have consistently stated, we deliver value to clients differently based upon their preferences. Some opt for higher rebate sharing arrangements, while others prefer steeper discounts in lieu of rebates, as an example. The increased retention rate in 2008 reflects a current mix of client preferences in our book of business.

Moving onto the service category, our service revenues of $156 million for the quarter increased 17% over first quarter 2007 and increased 12.9% sequentially. The 156 million also includes client and other service revenues of $114.8 million and manufacturers service revenues of $41.2 million. Compared to the first and fourth quarters of 2007, the majority of the growth stems from the client and other services revenue component. This growth reflects our revenues from our clients who use our Medicare Part D offerings, our revenues from our clinical programs and nurse services and increased administrative fees driven by higher prescription volumes.

Our overall service margin percentage for first quarter 2008 of 70.6% is consistent with the full year 2007 service margin percentage of 70.9% recognizing the quarterly fluctuations during 2007.

Summarizing gross margin, our overall gross margin percentage for first quarter 2008 of 6.9% was consistent with first quarter 2007, which included the short-term Plavix benefit. Additionally and as I noted on my year-end call, we had renewal pricing in effect for approximately 55% of our accounts in the first quarter of 2007 compared to approximately 70% for the first quarter of 2008. As we have stated in the past, when we renew an account our profitability generally declines for that account in the quarter of renewal and recovers over time. From a sequential quarter perspective our gross margin percentage was up 20 basis points from the 6.7% in fourth quarter 2007, which you will recall included 31 million of the 38 million start-up costs we recorded in the fourth quarter of 2007.

Before I move on, I would like to reiterate that PolyMedica is managed within our core PBM segment. The integration as well as the business and financial performance are on track with our expectations.

Turning to the Specialty Pharmacy Segment, Accredo Health Group net revenues reached almost $1.9 billion, representing a new record. Operating income was $63.7 million and gross margin was 7.7%. Accredo Health Group revenues increased 30.3% over first quarter 2007 and were up 18.2% over fourth quarter 2007. Operating income increased 19.1% over first quarter 2007 and 27.95 over fourth quarter 2007.

The fourth quarter of 2007 reflected start-up costs for new business, including FEP, and a strong first quarter 2008 results reflect the new FEP volume. The 7.75 gross margins for Accredo Health Group compares to 8.0% for the first and fourth quarters of 2007 and reflects a new client mix and first quarter 2008 start-up costs of $3 million. You may recall that the TCS infusion business was acquired by Accredo Health Group on November 14, 2007 and its results are included in the Accredo Health Group results from that point forward. TCS performance continues to exceed our expectations and we remain excited about the growth prospects in infusion care. Accredo Health Group contributed incremental growth of $0.01 to our first quarter 2008 earnings per share compared to first quarter 2007, which is in line with our expectations.

Turning toe the Medicare PDP, our revenues for first quarter 2008 of 152.5 million increased 16.5% over the $130.9 million for first quarter 2007. Please keep in mind that we now have higher dual eligible enrollment compared to 2007, but we are still substantially lower than the 2006 dual eligible enrollment levels. As we have said in the past, dual eligible’s have no economic incentive to use mail or generics.

The mail penetration rate for our PDP was 27.8% in first quarter 2008 compared to 30.2% for first quarter 2007 and 29.5% for fourth quarter 2007. The generic dispensing rate for our PDP was 67.5% compared to 61.3% for first quarter 2007 and 65.8% for fourth quarter 2007.

Proceeding to SG&A, for the first quarter of 2008 expenses of $328.4 million increased 32.2% from first quarter 2007 and decreased slightly from fourth quarter 2007. The growth over the first quarter 2007 is substantially attributable to the addition of PolyMedica expenses of $46 million and TCS expenses of $14 million with the remainder primarily from growth in the core business.

The PolyMedica and TCS acquisitions impacted fourth quarter 2007 SG&A expenses for part of that quarter, 26 million from PolyMedica and $8 million from TCS. Also recall that we incurred approximately $7 million start-up expenses that were charged to SG&A in the fourth quarter of 2007.

Our EBITDA for first quarter 2008 was $611.9 million, an increase of 8.0% over first quarter 2007 and up 26.9% over fourth quarter 2007. Our EBITDA for adjusted prescription for the quarter of $2.96 compares to $2.99 in the first quarter of 2007 and $2.54 for the fourth quarter of 2007, reflecting the gross margin dynamics I previously discussed.

Our intangible amortization in first quarter 2007 reflects the PolyMedica and TCS acquisitions. For first quarter 2008, PolyMedica contributed $`3.5 million of the amortization and TCS contributed $1.4 million. The fourth quarter 2007 intangible amortization expense was $64.2 million reflecting a partial quarter contribution from these acquisitions. In the fourth quarter of 2007 we recorded $8.7 million for PolyMedica and $900.000 from TCS.

Net interest and other expense of $54.3 million increased substantially from $14.9 million in first quarter 2007 and are up 45.2% from the $37.4 million we reported for the fourth quarter of 2007. Our debt levels have increased from 1.5 billion at the end of the first quarter of 2007 to 3.5 billion at year-end 2007 and to $4.2 billion at the end of this quarter. In March of 2008 we issued $1.2 billion in tenure bonds and $300 million in five-year bonds to finance the PolyMedica acquisition.

In the fourth quarter of 2007 we added a forward-looking fixed interest rate swap agreements to hedge cash flows associated with the anticipated bond offering of which $9.8 million was charged to net interest and other expense in the first quarter of 2008 upon completion of the bond offering. As I mentioned earlier, this non-recurring item reduced our first quarter 2008 earnings per share by $0.01.

The effective tax rate for first quarter 2008 was 39.7% in line with first quarter 2007 and slightly higher than the 38.2% recorded in the fourth quarter of 2007.

Net income for first quarter 2008 was up $272.2 million, was down 1.7% from first quarter 2007, but up sequentially 30.2% for fourth quarter 2007.

Moving on to share repurchase, Medco repurchased 21 million shares during the first quarter of 2008 at a cost of $1 billion representing an average share price of $47.55. As of yesterday, April 28, our year-to-date share repurchases totaled $1.5 billion for 33 million shares at an average share price of $46.63; leaving $500 million to go at our $5.5 billion share repurchase authorization. Our weighted average fully diluted share count for first quarter 2008 of 537.8 million shares reflects a decrease of 44.5 million shares compared to 582.3 million for first quarter 2007. This reflects share repurchases made through out the period, partially offset by employee stock option. We finished the first quarter of 2008 with 517 million basic shares outstanding plus a dilutive equivalent of approximately 9.1 million additional shares, bringing the total fully diluted share count to approximately 526.1 million on March 29, 2008. This fully diluted share count becomes the entry point for the second quarter of 2008.

Turning to the balance sheet, we closed this quarter with $541 million of cash on our balance sheet compared to 483 million at the end of the first quarter of 2007. Our capital expenditures for first quarter 2008 amounted to $39 million, $14 million higher than first quarter 2007. The increase reflects investments in our new automated pharmacy in Indiana and includes capital associated with PolyMedica and TCS.

Cash flow from operations for the first quarter of 2008 was $165.5 million compared to $105.5 million for the first quarter 2007.

Moving onto guidance, today we are reaffirming our previous guidance for 2008 as we continue to see positive long-term trends in all key areas of our business. As Dave mentioned, we significantly increased our 2008 guidance on our year-end call by 5% and I’m very pleased to report that we remain confident in this very substantial growth rate. Guidance for 2008 GAAP diluted earnings per share remains in the range of $2.07 to $2.11 per share, representing growth of 27 to 29% over 2007. Excluding the amortization of intangibles relating to our 2003 spin off, guidance remains in the range of $2.27 to $2.31 per share, representing growth of 25 to 27% over 2007.

Now I will take you to the latest assumptions that support our guidance. As we indicated in our recent AK filing, the agreement with United Health Group does not affect 2008 earnings. For new schedule 2008 generic introductions we continue to expect approximately $0.12 per share in earnings contribution, the largest contributor is Fosamax and it also includes a limited benefit from the short-term mail order supply of generic Protonix.

Turning to mail order, we continue to expect approximately 105 million mail order prescriptions, excluding the diabetic supplies and OTCs I discussed earlier. Note that for the year, in addition to the significant new client wins, including FEP and the state of New York that drove first quarter 2008 volume, we expect to see some off setting erosion related to client transitions, primarily the Ohio accounts we discussed previously, the largest of which transitioned on April 1 of this year and the RS of Texas which will transition on September 1 of this year. The loss of the Ohio accounts was built into our previous guidance.

Moving to our 2008 renewals, as Dave mentioned, we have completed almost 95% of our scheduled 2008 renewals. The 95% includes six accounts with over $500 million each in drug spends. We expect 2008 renewals to total 14.4 billion in drug spend; approximately 75% of the renewal pricing took effect in the first quarter of 2008 compared to the 55% experienced in the first quarter of 2007. The remainder of the renewal pricing is now expected to roll in with approximately 15% in the second quarter, 8% in the third quarter, and the remaining 7% in the fourth quarter. We continue to expect Accredo to contribute year-over-year incremental growth of another $0.03 to $0.05 per share, and revenues are expected to exceed $7 billion.

2008 projection for Medicare PDP revenues increases to approximately 600 million up from 540 million. Our SEA guidance remains unchanged in a range of 1 billion 350 million to 1 billion 370 million including PolyMedica and TCS. Our projections for overall 2008 PolyMedica performance remain unchanged. Our total intangible amortization expense for 2008 is expected to be approximately $280 million. We expect 2008 net interest and other expense to be in the range of 220 to $230 million, higher than the 180 to $210 million range provided previously, reflecting the current debt profile and the swap write off of almost $10 million we recorded in first quarter 2008. This swap write off, which equates to approximately $0.01 per share, was unexpected at the time we last provided guidance, but due to strong continued company performance we are able to absorb this and reaffirm our previous guidance. We continue to expect our capital expenditures to approximate $285 million which includes the 2008 spending for our third automated dispensing facility in Indiana and the inclusion of PolyMedica and TCS. The new automated dispensing facility is on track to be operational in 2009.

We currently expect an effective tax rate of approximately 38.5 to 39.0%. Our weighted average diluted share count is currently projected at approximately 525 million shares. This assumes the completion of our $5.5 billion share repurchase program in 2008, representing $2 billion in purchases 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 second quarter: first the continuation of our strong first quarter core business performance. Inclusion of a full quarter effect of generic Fosomax, which became available in early February, approximately 15% of renewal pricing is expected to take effect in the second quarter. Volume erosion relates to the largest of the Ohio accounts, which transitioned on April 1 of this hear; higher interest expense anticipated for the second quarter, reflecting the current quarter of bonds issued in mid March. With regard to future uses of cash, in addition to completing the currently authorized share repurchase program in 2008, we intend to use our available pre-cash flow to continue to invest in our growing business, including targeted acquisitions as appropriate, and to use residual cash to lower our debt levels. As we have said in the past, we review cash utilization with our board each quarter.

I would like to note that our first quarter 10-Q, which will be filed later today, there will be no special, or 1-x financial items there in that were not disclosed on this call.

In conclusion, our first quarter performance represents a great start for 2008 and sets us on a clear trajectory for a strong year of continued growth. Our sights are also keenly focused on driving growth in 2009 and beyond.

Now Dave and I would like to open the lines for your questions. Brandy?

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Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Tom Gallucci with Merrill Lynch

Tom Gallucci-Merrill Lynch

Good morning, thanks for all the color. Just one clarification and then a question, Dave you had mentioned sort of the relative profitability, I think, of Protonix versus Plavix and I just wanted to make sure I got that straight. Can you review that again?

David Snow, Jr.

Yes, Plavix in its contribution in the first quarter of ’07 versus the other in the first quarter of 2008 is, the 2007 contribution is six times more valuable.

Tom Gallucci-Merrill Lynch

Okay, all right great. Then I was wondering on generic substitution or penetration, obviously it’s up a lot, there are a few new generics out there. I was curious if you have the break down or if you can anecdotally go through ─ is generic penetration rising within drugs that already have a generic available or is the bulk of that 5% increase due to new generics? So, is it a combination or is it mostly just the new ones?

David Snow, Jr.

It’s absolutely a combination. There is no question in my mind that peoples comfort with generic options is growing, that’s both patients as well as physicians. I also think, and I’ve mentioned this before, I really do believe as we move to an economy that may be in a recession people tend to be more sensitive to the price and they move to generics, which is great for us.

Tom Gallucci-Merrill Lynch

Then final one, I think Rich you mentioned something about maybe OTC opportunities, if you could expand on that, and that will be all for me, thank you.

Richard Rubino

Sure, I think if you look at the horizon over the next several years you can see where the OTC opportunities will be stemming from, and it could down the road become an important strategy for Medco as certain classes ultimately become subject to more over the counter penetration, and we believe that from Medco’s perspective we are uniquely positioned to take advantage of that OTC pipeline. So, I think it’s at a good point now with regard to the OTCs, as well as the PolyMedica diabetic supplies, since they’re new on board for the full quarter this year, to start pointing that out, so we can disclose in a transparent manner the growth going forward for these two area’s.

Thomas Moriarty

And, I would only add Rich that as we look at building out our therapeutic resource center and the continuum of care that they will provide growth at OTCs complain that may in fact take on a greater advantage for our clients and members.

Richard Rubino

Thanks, Tom. That was Tom Moriarty speaking. Do you have another question?

Operator

Your next question comes from the line of Lisa Gill with J.P. Morgan

Lisa Gill-J.P. Morgan Securities Inc.

Hi, thanks very much and good morning.

Richard Rubino

Good morning.

Lisa Gill-J.P. Morgan Securities Inc.

Just a couple of quick follow on questions here. On United, perhaps Dave can you go through with us how it will look in 2009? I think you’ve talked about incentives being aligned, I think we’ve also talked about it in the past that the mail utilization has been very low for this account compared to some others. Then secondly, just wondering if Tim can just maybe talk a little bit about Specialty Pharmacy, clearly bringing on FEP a good growth opportunity, but can you talk about what you’re seeing with your other customers as far as pull through, 30% growth is a lot of growth; also, just maybe talk about what you’re seeing for underlying growth in the Specialty Pharmacy business? Then just lastly, when you talked about mix on the gross margin side of Specialty Pharmacy, is that due to customer or is it due to specific products of one being more profitable than the other? I know that’s a lot of questions, so thanks.

David Snow, Jr.

Thanks, Lisa, I’ll take the first one on United. I’ve mentioned in the past that this was a two-way discussion between us and United and that getting aligned was really important to us and I’m really happy that we are aligned. What that means to me is that we’ve structured our relationship such that the incentives are clearly there for better mail penetration, better generic utilization of mail, and also that we don’t get hurt tied to retail use. So, what we could expect is over the four years of this relationship, improved growth at mail, I would hope, and I think it will be better for our company. It is a renewal, so the pricing reflects our renewal, as we typically do, but because of the alignment we think it’s a great relationship now and I’m really looking forward to growing that relationship over time.

Lisa Gill-J.P. Morgan Securities Inc.

And, just as a follow on to that, so when we think about this, we think about the new programs that will go into place, does that start immediately or is that 01/01 of 2009?

David Snow, Jr.

There are some things that go into effect in ’08, the majority goes into affect 01/01/09.

Lisa Gill-J.P. Morgan Securities Inc.

And what about the pricing that you talked about Dave, is that immediate or is that also for 2009?

David Snow, Jr.

It’s 2009.

Lisa Gill-J.P. Morgan Securities Inc.

Okay great.

David Snow, Jr.

Then Tim, I’ll give it to Tim.

Timothy Wentworth

Yes, thanks for your questions, Lisa. Let me try to take them somewhat in order and as briefly as I can here. First of all the growth was probably less than half-driven by TCS and FEP, so we’re very pleased about the FEP win and installing and successfully caring for those members and also TCS performing at or above our expectations, so those are both strong, but they’re also, to your point the underlying growth even without those for us was very strong, probably stronger than the industry because I think we’ve done a very good job working with both Medco’s clients as well as continued to expand our Legacy business with health plans in a way both through new products as well as bringing out additional members; so good underlying growth for us. I think the industries, you know you’ve seen sort of 15% quoted out there, I think that’s probably roughly what it has in potential, but when you look at what’s the opportunity for a given specialty pharmacy, I think we’re getting more than our fair share; particularly when you realize that hemophilia is not growing as quickly as a lot of other areas just due to the unique dynamics there and that’s a significant portion of our business, so we have to sort of deal with that with the rest of our growth. In terms of mix, it’s both is the answer. So, the mix of products we see as a strong positive for us as we continue to go out and work on the products and the patients that require a great deal of high touch care, which as you know as Accredo’s traditional strike zone and continues to be our traditional strike zone, now with a whole broader book of business, with the access to the Medco book of business. But also as it relates to products, you know we have continued to see very strong growth in the new products that were launched in ’06 and now in ’07 there weren’t as many blockbusters for our products in ’07 but we’ve enjoyed access to those products and continued to have that contribution as well. As manufacturers, I think if anything see even more of the value of the specialty model versus certain products in buy and bill where I know all you need to do is look at what happened with MGEM and the airness [ph] product and Procrit as it relates to volumes where it was being managed by physicians versus specialty pharmacy to see the model in its strengths. And finally in terms of trends in our book of business, what we see is a continued narrowing of member choices as far as wide-open networks moving to a very managed network with Accredo and a preferred or exclusive position with our clients. They get in exchange for that the full range of management programs that the Medco/Accredo combination of the PBM specialty pharmacy can bring and they see substantial savings as a result of that. The drug trend that we see on specialty is lower than we see reported in other places because of that. We now see though , a number of plans moving into buy and bill more aggressively and beyond the obvious choices of things like airness [ph]and Procrit into things like Rotuxin or rather I’m sorry, Remicade, where Crohn’s disease and for rheumatoid arthritis, we have a client that we took 100 members out of buy and bill and moved into either delivery to the physicians office or administration or even into one of our TCS branches, so we’re able to bring a really great solution as it relates to some of the drugs that historically have been harder to get your hands around; lots of clients looking at that kind of thing now.

Lisa Gill-J.P. Morgan Securities Inc.

Okay and just as a follow in to that, when you think about the gross margins and them being down 30 basis points versus last quarter, that’s probably a reflection of bringing on new bigger customers. Is there an opportunity to improve your gross margins over time because of the product mix? I mean that’s what I was really trying to ask on the gross margin side.

Timothy Wentworth

You bet you, is the answer. Yes, I think you’ll see as the year plays out that that is exactly what will happen.

Lisa Gill-J.P. Morgan Securities Inc.

Okay great. Thank you.

Timothy Wentworth

Thanks, Lisa.

Operator

Your next question comes from the line of Larry Marsh with Lehman Brothers.

Lawrence Marsh-Lehman Brothers

Thanks and good morning everyone. David, I appreciate the comments and the good news on United and also you know the update on your new named business up $200 million and net new I guess up 600 million. It sounds like you’re suggesting that part of the increment is bringing on GHI now, is that right and is that the vast majority of the net new named business for ’08 and when does that start?

Richard Rubino

GHI’s business will come online over time Larry, so what we’re counting is that that’s attributable to 2008. You know GHI has a fully insured book of business and they have an ASO book of business. The ASO book of business comes over more slowly than the fully insured, but it starts in the middle of 2008 and will continue over time. And it is the biggest, how we have one other business, but GHI would be the most, the biggest to name.

Lawrence Marsh-Lehman Brothers

Okay, so that’s the biggest contributor to the aptly named…

Richard Rubino

Yes.

Lawrence Marsh-Lehman Brothers

Okay. Then just a clarification if I could with United. Obviously you’re not really interested in getting into 2009 sort of metrics at this point and I know we sort of asked some of this…

Richard Rubino

You got that right.

Lawrence Marsh-Lehman Brothers

So is it just a no comment, because you’ve already sort of quantified it, potential impact if it’s lost in 2010 which is not going to happen, so is, does that give us any context to think about sort of parameters or no?

Richard Rubino

I think the way to think about this is we gave you a sense of what the current contract meant to us and what the issues were. This new contract is aligned in a way that is meaningful for us and for United and so therefore I would think about this as a strong win for Medco and we expect it to grow in value over time, as any new piece of business would. I think that the mail penetration that United is ─ is something that can grow and should grow and that’s nothing but good news for everybody involved. I think that that’s as much information as I can give you at this time. We’re not giving any ’09 guidance and we never do it as an account specific level anyway.

Lawrence Marsh-Lehman Brothers

Okay great and just a clarification of, if I could for Rich. You know it sounds like you’re communicating net interest expense now of I guess we’ll say 210 to 220 netting out the swap loss, so as you’d said that’s higher than your previous communication, because of fixing the debt of about a billion five in mid March, and that’s really a couple of cents of sort of a negative versus prior guidance, but do we think of that as just planned or unexpected or is it really just a function of taking advantage of fixing a lot of debt, am I doing the math right?

Richard Rubino

You’re doing it right. It is exactly what you said. We thought from a long-term capital structure perspective it made perfect sense to have some long-term debt on the balance sheet to fund our long-term uses of cash. As a result of that of course the interest rates on the bottoms are higher than the LIBOR based short-term debt that we have, so you do see an ongoing increase in the interest rate. But over time, ultimately you’ll end up with a better-balanced balance sheet, more long-term structured, capital structure in particular.

Lawrence Marsh-Lehman Brothers

And just another quick clarification and I’ll get off. The tick-outs from Q2 as you’d called with some erosion of Ohio and other things, is that leading us in directionally to sequentially slightly up per share results or are you not being that specific?

Richard Rubino

Yes, I was not being that specific.

Lawrence Marsh-Lehman Brothers

But directionally am I off in that suggestion?

Richard Rubino

I think what I’ll say is, instead of talking about sequential quarters, if you just want to have a view of what the second quarter of ’08 might look like compared to the second quarter of ’07, you should probably see something around low 29% growth.

Lawrence Marsh-Lehman Brothers

Low 20% growth year-over year?

Richard Rubino

Right, Q2 ‘08 compared to Q2 ‘07.

Lawrence Marsh-Lehman Brothers

Right, which is comparing versus $0.43?

David Snow, Jr.

You know the other thing Larry that Rich said that you ought to think about relative to modeling is that you remember in ’07 we had an unusually strong first quarter which meant quarters after that that were less than that first quarter, which was good and bad relative to how people looked at our performance. This year’s a more normal year, where the bulk of our renewals, we don’t have the Plavix effect and we also, the 70% of our renewals are in the first quarter, so you’re more likely to see a normal progression versus what was a little unusual in ’07. Prior to that we really had a normal progression in the back three quarters of last year, so first quarter was 42, second was 43, third 44 and the fourth was 43, so the last three pretty much in the range.

Lawrence Marsh-Lehman Brothers

Okay, very good, thank you.

David Snow, Jr.

Thank you, Larry.

Operator

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

Robert Willoughby-Banc of America Securities LLC

Dave, what is a profile for a winning bidder for the diabetes supply for Medicare? I’m having a hard time understanding why you would not have been one of those as the largest supplier?

David Snow, Jr.

Well first of all, a couple of things to remember. PolyMedica was an independent company when they submitted that bid, so Medco didn’t really have influence over that, but I would also tell you and I really don’t want to get into a lot of details, but I’ll give you one important fact to think about. When you think about capacity in the space, three of the top four players in the space have been excluded from the awards and much of the winning bidders are based upon business plans with no real experience in the space; to me this is something that will need to be dealt with and it’s something we are working with CMS on and congress with. I don’t think this path will be sustained. It’s a little unusual to me; I’m left scratching my head, so I think this will evolve over time. We have a very aggressive effort going on inside the beltway. Tom Moriarty is leading that charge along with Laizer Kornwasser our executive that’s managing the PolyMedica asset and I’m pretty comfortable that we’re going to work this thing out over time.

Robert Willoughby-Banc of America Securities LLC

Have you given us any metrics or how we should think about accretion for many of the international investments and over what kinds of time frames we would expect to see a return there?

David Snow, Jr.

I would think about the two as immaterial for ’08 and that we would give you some more information when we give ’09 guidance.

Robert Willoughby-Banc of America Securities LLC

Okay and just lastly, any changes in your interaction with your supplier here, with the move to a more traditional type of distribution in a relationship?

David Snow, Jr.

No, no change.

Robert Willoughby-Banc of America Securities LLC

Okay, thank you.

Operator

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

Ricky Goldwasser-UBS Securities LLC

Yes, good morning.

David Snow, Jr.

Good morning.

Ricky Goldwasser-UBS Securities LLC

I have a number of questions. First of all on the [indiscernible] of the quarter for the remainder of the year, I think you answered Larry’s question by saying that we should expect low 205 growth in Q2 ’08 versus Q2 ’07.

David Snow, Jr.

That’s correct.

Ricky Goldwasser-UBS Securities LLC

So just to clarify, does that imply that we should expect for the fourth 40+ percentages growth in the fourth quarter, just to get in the guidance range and if that’s the case what are the drivers there? Are you going to model some new generic introductions and also on the line of generics, what are you assuming for a spitteral [ph] in any guidance or are you assuming that that will have exclusivity or are you assuming the markets going to be open for all theirs?

Richard Rubino

Okay as Dave mentioned earlier, the quarters this year are going to be fairly consistent relative to what you saw last year, again with the first quarter being a stand out so I think you are, in your math you were loading all of the, you were getting to the full year growth with a very strong fourth quarter, it’s not going to work that way. It’s going to be more evenly spread through out the year. Recognize that the fourth quarter of last year was a little bit softer because we had the $38 million in start-up expenses. With regard to our assumptions on generic Protonix, at this point we have a limited supply. It’s a week-to-week situation and our guidance just assumes this limited supply, so if anything gets changed on the road that would be ultimately a new assumption that we would make into our updated guidance.

Ricky Goldwasser-UBS Securities LLC

And as far as generic respiderol for the second half of the year?

Richard Rubino

Generic respiderol has a relatively small effect on Medco. That’s not a very large mail drug at Medco. As I had said previously, when you look at mail, which is of course where we generate the value for generics, Fosamax is by far the largest contributor.

Ricky Goldwasser-UBS Securities LLC

Okay and lastly on the selling season, can you just give us an update? When should we expect a decision on GE and are you involved in the Coventry that are field [ph] their relationship with Caremark I think comes to an end at the end of ’09?

David Snow, Jr.

Ricky, GE will probably make their decision sometime in the second quarter and I don’t really want to comment on the pieces of business we’re competing for.

Ricky Goldwasser-UBS Securities LLC

Thank you.

Richard Rubino

Okay thanks.

Operator

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

Ross Muken-Deutsche Bank Securities, Inc.

Good morning.

David Snow, Jr.

Good morning.

Ross Muken-Deutsche Bank Securities, Inc.

A lot of talk this morning about sort of your movements into the international markets, Germany, Sweden, can you talk a bit more about the sort of potential size without sort of going into what the eventual accretion is, but sort of the addressable size of those markets and how we should think about some of the other countries in western Europe that potentially could be on the radar? And should we think of this as sort of a mix of inorganic and organic growth over there? And lastly, on the same topic, is there any sort of goal to get a percentage of revenue, you know of your total revenue in the international markets to some benchmark or is this sort of still too early in the stages to really put a number on it?

David Snow, Jr.

There will be a benchmark down the road Ross, but it’s too early at this point to have that as part of our announce-able goal. I think the way to think about Europe is that many people misunderstand what’s going on in Europe. Yes they have a lower base cost per person, but their rates of inflation are very similar to what’s going on here and it’s a real problem. They do less than we do in this country to manage those costs. On the drug side, pretty much none of Europe has something that we take for granted here, which is DUR at the point of care: meaning Medco and the other PBMs message, whether it’s retail or mail, all the drug-to-drug interactions so that big mistakes aren’t made. Over in Europe it’s not uncommon to see over 33% of the ER visits tied to drug-to-drug interaction because they don’t have that technology. So, our efforts in Sweden are relatively small, it’s about wiring that drug-to-drug interaction capability across retail. We’ll ─ you know that’s ─ you know we’re doing what happened here 20 years ago basically, that’s the way to think about it. It’s in its infancy, but it’s got enormous potential and it goes beyond Sweden. This is a European issue not just a Sweden issue. Germany’s interesting in that, as I said in my comments it’s becoming very progressive, they do have the equivalent of health plans in Germany and the funds that those health plans managed are very challenged to be self-sustaining right now and they’re looking for ways to manage the cost. More recently, in the past few years’ mail has become a viable alternative and the rate of growth of Apotheek Venlo was fairly strong. We think with our technology know how, our ability to drive the mail channel, coupled with that local knowledge that we acquired, we think we can accelerate the pace of growth and the size of the market is $35 billion and chronic and complex drugs can be up to 70% of that. So, that is the sizeable opportunity we have. Another unique aspect over in Germany that’s a little different than here is the company we bought the majority stake in has a very strong contractual relationship with the second largest retailer in Germany, so the central fill concept that we pioneered here with some of our clients a few years ago is directing all the technology we built to make that possible is directly applicable to those, it’s called Drogerymarts, that central fill technology can work at retail in a way that I think shows some promise for fairly rapid growth. I’m not going to size if for you now, but I think we will in our 2009 guidance, try to give you some parameters to think about for that new footprint we just created.

Ross Muken-Deutsche Bank Securities, Inc.

Great and congratulations on a very good quarter, thanks.

David Snow, Jr

Thank you.

Operator

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

Randall Stanicky-Goldman Sachs

Hey thanks for the question, I just have a very quick one. Rich did you talk about a $0.12 generic contribution again this quarter? That’s unchanged from last quarter, is that fair?

Richard Rubino

That’s correct.

Randall Stanicky-Goldman Sachs

And then and maybe if I missed this I apologize, but the $0.04 to $0.05 with adjusted Protonix/Effexor XR that we talked about at the analysts day, understanding there has probably been a penny or so Protonix comes through, does that still hold as we anticipate a potential mid year non-AB rated Effexor XR?

David Snow, Jr.

Let me just remind everybody what we said at analyst day in November. We said there are two drugs that were not in our original guidance to keep an eye on: one was Protonix, not knowing where that might go and the second was Effexor. We had indicated a value of those two drugs if Protonix went January 1 of this year, which it did not and Effexor if it went mid year, which is still yet to be determined. We said Protonix was the bigger contributor of the two, if it went. As Rick said, it went, but it didn’t really go, it just went with temporary supply, which is uncertain, so those are things to watch; they are not in our guidance and I would say that Protonix is really behind schedule relative to the number we talked about in November, to make the kind of contribution that was possible when we gave the up to $0.10 contribution for ’08. But they’re still worth watching because that number is still not yet in our guidance, other than what we’ve already realized in the first quarter with Protonix.

Randall Stanicky-Goldman Sachs

And I think you mentioned also respiderol, again I had to jump off, my apologies, but respiderol the, whether Tavec affects the subsidy or not does not have a fundamental impact to you outlook?

Richard Rubino

That’s correct.

Randall Stanicky-Goldman Sachs

Okay, that’s helpful, thanks very much.

David Snow, Jr.

Okay Randall.

Operator

Your next question comes from the line of Glenn Garmont with Broadpoint Capital.

Glenn Garmont-Broadpoint Capital

Thanks, good morning. Just with respect to the sequential in your rebate retention rate, is that purely the inclusion of SEP or is there something else, and then directionally how do think about that trending on a go-forward basis, will it start to again decline from here?

David Snow, Jr.

I think for now, you know this is all about client mix and the choices our clients make as Rich indicated in his comments. I think for now you should think about that number as a relatively stable number and it really depends on what comes on board and what our renewals do on a go-forward basis that determine where that number goes. And as we’ve said in the past Glenn, that number really isn’t a terribly important number, it’s a reference point, but it’s not terribly important, because we just structure our pricing around the preferences of our client, it really doesn’t affect our bottom-line profitability.

Glenn Garmont-Broadpoint Capital

Understood, thanks for the comments.

David Snow, Jr.

Okay, thanks.

Operator

Your next question comes from the line of Art Henderson with Jefferies & Company.

Arthur Henderson -Jefferies & Company, Inc.

Okay you touched on the therapeutic research group just a little bit, but how is that initiative playing out and was it helpful in securing the United contract again?

David Snow, Jr.

No, I first of all I would tell you that therapeutic resource centers and then the personalized medicine efforts on top of that, that seems leading. You know pharmacogenomics initiatives are extremely powerful in the marketplace, I couldn’t be happier with the power of where that’s going to take the practice of medicine. It’s really, I think, disruptive and extremely exciting. I would say that relative to United because United has a different approach to how they want to manage their business, I don’t think it was key to that renewal. I’m not saying they won’t adopt it and use it and embrace it, but I don’t think it was a powerful part of their decision making process. I think our current levels of service, our current ability to manage complex installs for customized individual customers was of fundamental importance, and I think some of the clinical initiatives were secondary.

Arthur Henderson -Jefferies & Company, Inc.

Okay that’s helpful, but your sense is at this juncture that it’s giving you a bit of an edge in the contracting opportunities that are out there?

David Snow, Jr.

There’s no question in my mind it’s been very important to our very successful sales year.

Arthur Henderson -Jefferies & Company, Inc.

Okay great. Also, in your guidance, do you have any sort of factor in there for a rise in unemployment that might hit some of your large employer groups that you’re working with/

David Snow, Jr.

Well you know, we always try to guess that, but what’s interesting and it came out in our formal comments, we’ve actually seen net new growth in our core employer, so unlike some of the others in the healthcare stakes that have noticed an organic decline tied to lay offs and what not, we showed that we grew on a net new basis from 4 billion to 4.6 billion, 200 million of that was new name business, the rest was organic growth within our existing customers, so we’re actually seeing a good news story there right now.

Arthur Henderson -Jefferies & Company, Inc.

Okay and let’s get in one last question. Rich you talked about use of cash flow focusing more on debt repayment going forward. I know your guidance has share repurchases in there. Should we anticipate some debt repayment this year and certainly, I guess, I know you’re not commenting on ’09, but it sounds to me like that’s going to take a higher priority to share repurchases going forward.

Timothy Wentworth

What you should expect is perhaps a slight increase in overall debt at the end of the second quarter and third quarter, just based on the timing of our cash cycles and then you should begin to see a downturn, some deleveraging in the fourth quarter and into 2009.

Arthur Henderson -Jefferies & Company, Inc.

Okay, that’s helpful. Thanks very much.

Timothy Wentworth

Thank you.

Operator

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

John Kreger-William Blair & Company

Thanks. Dave a question about EBITDA per claim, the last couple years I think you’ve had growth in that metric of about 18 to 19%.What’s your latest thinking about what sort of growth you can deliver for the full year in ’08?

David Snow, Jr.

You want to answer that, Rich?

Richard Rubino

I think the easiest way to answer that is to model it with EBITDA growth on a year-over-year basis. So what you should do is we’ve given you the volume projection for mail, you could estimate the associated retail effect, and then look at our EBITDA growth year-over-year adjusting for the special items and based on those elements you should be able to calculate. We don’t give specific EBITDA per adjusted RX guidance, but you should have enough factors to calculate it reasonably on your own.

John Kreger-William Blair & Company

Okay would it be reasonable to expect kind of mid teens or higher as a trend?

Richard Rubino

Probably, I’d rather not give you that percentage, I’d really rather you calculate it because I know next quarter you’ll ask me why we didn’t achieve that percentage.

John Kreger-William Blair & Company

Okay. I think you’ve had some unusually high start up costs over the last couple of quarters, can we assume that those are pretty much behind you now?

David Snow, Jr.

Yes. They are very much behind us and having start-up costs is a high-class problem because it just means we’ve been very successful on the sales front and frankly if I had my druthers I’d have high start-up costs every fourth quarter bleeding into first quarter that would be nothing but good news to me.

Richard Rubino

And further to that point, the nature of the fourth quarter start-up costs were different than the fourth quarter, so the fourth quarter we had hired a lot of employees, but the business hadn’t come yet, plus we did a lot of software development preparing for the new client plan designs that we’re coming on board. In the first quarter of this year it’s more operational start-up, so the prescriptions are coming in, as is usually the case with a new client, the customer service volumes pick up at the beginning of the year as the members have questions and so forth and that always tapers off and that’s what we’ll expect, that’s what we do expect in the second quarter.

David Snow, Jr.

Just to refresh your memory, in the fourth quarter we hired actually 3000 people to cover all the new business that came on board, so that was a big number in preparation for the GEN 1 enrollment.

John Kreger-William Blair & Company

Okay, thank you.

Operator

Your next question comes from the line of Steven Halper-ThomasWeisel Partners.

Steven Halper-ThomasWeisel Partners, LLC

Yes, hi, on the two contract losses that you talked about, Bell South seems like a consolidation. Have you been able to dissect the Texas employee’s contract and I wonder what you could have done better to retain that contract or was something there that you just couldn’t overcome?

David Snow, Jr.

You know it’s interesting, you’re absolutely right relative to Bell South, it was a consolidation under one larger incumbent in that new constellation, post all the acquisitions so that’s how you should think about it. It was the incumbent winning the business. Relative TRS, I just think it was a fair competition. The only factor I would point to that made it interesting is that it is a very retail friendly state. The legislator, this is very ─ accounts very sensitive to the legislature and retail has a heavy influence on that legislator relative to this and so it wasn’t, it was politics entered into this a little bit, but I would say it was a well thought competition and I would say that, you know it was one jet tied to great competition and that’s really all there is to it.

Steven Halper-ThomasWeisel Partners, LLC

Great, thanks.

Operator

Your next question comes from the line of Kemp Dolliver with Cowen & Co.

Kemp Dolliver-SG Cowen & Co.

Hi, thanks. Question relates to the, I’m sorry, the cholesterol category. What are you seeing in the subscribing trends relative to generic Zocor compared to Vitorin and Zetia, particularly since the full release of the enhanced study?

Timothy Wentworth

Sure, I can give you some high level information in that regard. You might recall JoAnne addressed some statistics on the last call and I can tell you that the level of decline in Zetia and Vytorin new scripts, that pace of decline had slowed. So, for the four weeks, which was basically early January to the middle of February, the decline that we saw in new Zetia and Vytorin scripts was higher than we saw for the ten-week period thereafter. So, for the period from February 9 to April 19, that rate of decline has slowed, though there still is decline and we see that. That statement is valid for both mail and retail.

Kemp Dolliver-SG Cowen & Co.

Okay . So, that’d be somewhat more akin to what we’ve seen in the broader IMS data?

Timothy Wentworth

Yes.

Kemp Dolliver-SG Cowen & Co.

Okay great. And you know Dave, this might be a kind of a long answer, but in terms of the issues at CMS is it mainly your point’s going to be that the winning bidders here aren’t going to qualify, I mean doesn’t CMS have a quality screen in place as part of the contract negotiations that would address that or do we, do you think there’s something on top of that they need to do?

David Snow, Jr.

I think there’s concern. We’re finding that individuals who are two person shops working out of a garage were given the ten, it’s not an MSA, but it’s equivalent of an MSA area, what we found is a large number of calls to us. Basically with the statement, you know we have the lucky winning ticket, do you want to buy us now? Then we also had another set of calls where “can we outsource the actual work to you?” So, I mean it’s a little crazy and a little bit unsettling. The fundamental issue for me, honestly, is that retail is left alone and that only mail competitively bid and what I think that CMS is ultimately going to do is squeeze the balloon for this specific category and just drive it all back to retail, which doesn’t serve any purpose at all. They’re driving it to a more expensive setting, they do not achieve the savings, they’re talking about, they really degrade the quality of the mail channel by what they’re doing because, and then the knowledgeable long-term players aren’t even in the process. So, I actually feel some optimism that we ultimately can sort this out. Maybe not in time for the pilot but really for the longer-term play, I think this can be sorted out in a way that makes sense for the people who need the service.

Kemp Dolliver-SG Cowen & Co.

And any clarity on when next month CMS will make their final announcements?

David Snow, Jr.

I’ll ask Tom to give his comments; he’s been much more involved in our efforts down in Washington.

Thomas Moriarty

I think one of the important things to keep in mind is the level of angst that is out there on capital hill. It’s recorded in the media, recorded elsewhere in terms of the number of lawmakers and significant lawmakers on both side of the isle in both house and the senate, who were weighing in with concerns about competitive bidding overall and specifically on diabetes. The lack of a true quality profile, the lack of a bidder being required to actually adhere to that bid is part of the bidding process, the exclusion of retail, a number of other deficiencies in the process are being seen by these key legislators and they are all starting to weigh in and we anticipate that there will be hearings over the next several weeks where these specific issues will be addressed. So it will be a process that we’ll run through and the timing of that solution is hard to predict, but there is an awful lot of focus on both sides, both republican and democratic side as well as the house and the senate on competitive bidding overall.

Kemp Dolliver-SG Cowen & Co.

That’s great, thank you.

David Snow, Jr.

Thank you.

Operator

Your next question comes from the line of Tony Perkins-First Analysis Securities Corporation.

Tony Perkins-First Analysis Securities Corporation

Hi, I just wanted to follow up on the percentage of granted rebates, which you mentioned that significantly increased, but then Dave pointed out that price inflation on brand of drugs affected your numbers, I assume gross margin. Does the trend, we should assume, will continue to affect your profitability on branded drugs as branded manufacturers react to generic pressures?

David Snow, Jr.

We historically, I swear ever since 2003 when we took the company public we’ve always mentioned the inflationary affect of price increases in the branded drug category and it is consistent, it hasn’t changed. Frankly, I would say that we expected to see less of it this year, because it is a presidential election year and usually you see brand manufacturers lie a little lower, but we’re actually seeing it as a relatively normal year in terms of that inflationary effect, but it’s been very consistent for the last five years.

Tony Perkins-First Analysis Securities Corporation

Thank you.

Thomas Moriarty

Thanks, Tony.

Operator

Your next question comes from the line of Barbara Ryan with Deutsche Bank.

Barbara Ryan-Deutsche Bank

Oh good morning and thank you for taking my question. Most of this has been covered, but I guess I was just wondering, two things: one on United, I think you’ve spoken in the past that at one point early on when you took on the contract that mail penetration was like 19% and maybe it’s around 14 now, and I’m just wondering in terms of order of magnitude if there’s any deterrent to that basically going to new highs over the course of this contract life and then my second question was, away from that topic. I’m just wondering , on your comments about Protonix, obviously have had an initial bolus of product into the trade and then hasn’t had anything since then, you know, if you have any competitive information or are hearing anything from the trade as to whether there may be, or when there may be any additional product from Teva. Thank you.

David Snow, Jr.

Sure, thanks Barbara, we’ve got nothing new that we are hearing right now. I don’t see anything big on the horizon that I’m hearing. Relative to UHG, we are at about 17% mail pen and it’s been fairly stable there for a while. I will tell you there is opportunity, but clearly it is up to United how it’s driven, but at least the contracts align so that there’s a reason that they should want it and honestly their clients on the ASO side particularly should want it as well. I will tell you that you could almost double that to get to where many other health plans are relative to mail pen, so I would say that that’s probably what a reasonable opportunity is. Not necessarily the definitive outcome but it certainly defines the opportunity.

Barbara Ryan-Deutsche Bank

Thank you so much, I appreciate it.

David Snow, Jr.

Thank you.

Operator

Your next question comes from the line of Michael Baker with Raymond James.

Michael Baker-Raymond James

Thanks, I just wanted to get your thoughts on Marilyn from the perspective of it, it looks like they passed some PBM legislation. I was wondering whether you thought there was anything particularly onerous there and then I just wanted to get an update in terms of what your clients plan to do with respect to their retiree populations in terms of taking the subsidy or going any other route.

David Snow, Jr.

Okay, I’ll answer not the second, but I’ll ask Tom the answer to the Marilyn question first.

Thomas Moriarty

On Marilyn, we don’t see any real significance in the developments there. In terms of what was ultimately passed, our current business practices conform to that and I do not see that as a significant development.

David Snow, Jr.

And relative to client’s opinions on Medicare, you know we pull our existing clients each and every year relative to how they’re thinking over a three-year horizon about their commitments to their retired population and I would say for the most part it’s very stable. You have occasional company’s making decisions to move out from under, but it’s the exception rather than the rule, it’s a very, very slow process and I would just describe the current sentiment as staying the course and stable.

Michael Baker-Raymond James

And then I just had one follow up on that, in cases where they opt to not take the subsidy, can you just give us a sense for what your retention rate’s been in terms of keeping some of those employee’s whether it be Part D or other options?

David Snow, Jr.

Yes, it’s actually quite good. One of the reasons, since we don’t do B to C marketing, because we’re off the Intel inside for a lot of health plans who do the B to C marketing for Medicare PDP customers, we built our PDP so that we could serve our employers with customized designs, depending on how they decided to handle their retirees over time. Those examples I have, that where clients have decided to get out, we’ve done really well. We have programs working with those customers to create continuity for the people as they moved to the independent PDPs. The people who know Medco at mail are the ones who come because they know our brand. It’s a little harder to attract those who only use retail, because they use our card, but they don’t necessarily know we’re the Intel inside, but I’d say we’re very successful at keeping the most valuable members to us and that’s those who are our mail users.

Michael Baker-Raymond James

Thanks a lot.

David Snow, Jr.

Thank you.

Operator

Your final question comes from the line of Charles Boorady with Citi.

Charles Boorady-Citigroup

My question is really to help find clients. For UHG is that contract alignment on mail that you’ve talked about a change, and if so, is it effective immediately or on the new contract?

David Snow, Jr.

It’s obviously ─ we’ve talked alignment in the past Charles, it’s always been about mail and you know the relative mail pen, so this fixes that and it’s effective 01/1/09.

Charles Boorady-Citigroup

I got it and any other changes in the contract that might facilitate cross sale of say Accredo services or some of the PolyMedica products or services or other expansions of the relationship?

David Snow, Jr.

No, our focus was on our core relationship because you need a solid core relationship before you build out the things you do together, but those are clearly opportunities for a dialogue down the road, now that I think about it.

Charles Boorady-Citigroup

Was there an opportunity to pick up their seniors business and was that a potential longer-term or were they pretty content on keeping that in house?

David Snow, Jr.

They’ve been content with it in house for now and obviously we were focused again on the foundational relationship with what we’re doing together today. We wanted to get that right and then my feeling is when you have your foundation right you can start building upon that foundation. We’ll see what the next four years brings.

Charles Boorady-Citigroup

Just finally and respecting you don’t want to mention Coventry specifically, but can you size up generally for us a backlog or the potential that you see for other new health plan clients, either those who have already carved out the PBM and maybe putting it out for bid, or those who have in house PPMs that may be more willing in this environment given the challenges managed care is facing, to explore a relationship with you?

David Snow, Jr.

I think I’m going to pass on that opportunity, Charles. I’d rather not talk about those opportunities right now.

Charles Boorady-Citigroup

Okay, thanks.

David Snow, Jr.

Okay, thank you. Thanks everybody, we really appreciate your time and look forward to talking to you again next quarter.

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