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Executives

David Myers - VP IR

Edward J. Stiften - CFO and Sr. VP

George Paz - Chairman, CEO and President

Analysts

Tom Gallucci - Merrill Lynch

Lisa Gill - JPMorgan

Charles Boorady - Citigroup

Robert Willoughby - Banc of America Securities

Arthur Henderson - Jefferies & Company

Randall Stanicky - Goldman Sachs

Lawrence Marsh - Lehman Brothers

Ross Muken - Deutsche Bank

Express Scripts, Inc. (ESRX) Q4 FY07 Earnings call February 22, 2008 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Fourth Quarter 2007 Earnings Conference Call. At this time, all lines are in a listen-only mode. Later there will be an opportunity for questions, and instructions will be given at that time. [Operator Instructions]. And as a reminder, this conference is being recorded.

I will now turn the conference over to David Myers, Vice President, Investor Relations. Please go ahead sir.

David Myers - Vice President Investor Relations

Thank you and good morning everyone and welcome to our fourth quarter earnings call. With me today are George Paz, our CEO; and Ed Stiften, our CFO.

Before we begin, I need to read the following statements or comments made on this call, maybe forward-looking statements and they include, but are not necessarily limited to financial projections or other statements of the company's plan, objectives, expectations, or intentions. These matters involve certain risks and uncertainties. The company's actual results may differ significantly from those projected or suggested in the forward-looking statement due to a variety of factors, which are discussed in detail in our SEC filing. In addition, the reconciliation of EBITDA to net income and the net cash provided by operating activities can be found in our earnings release, which is posted on our website.

At this point, I will turn the call over to Ed.

Edward J. Stiften - Chief Financial Officer and Senior Vice President

Thank you David. Today, I am pleased to discuss Express Scripts fourth quarter performance. We reported record adjusted earnings per share of $0.68 represented of 33% increase over the $0.51 on an adjusted basis for the fourth quarter of last year. For 2007, we reported a 42% increased and adjusted earnings per share of $2.35. We initially guided that earnings would grow 20% to 24% in 2007 yet our actual earnings per share growth of 42% reflects a very successful year of delivering value to our clients and strong results for our shareholders.

For the year, we generated record cash flow of $827.3 million compared to $658.6 million last year. During 2007, Express Scripts repurchased 23.1 million shares of its common stock or just over $1.1 billion; and since 2004, the company has repurchased 74.2 million shares or $2.6 billion. Based on our stock prices of February 19th, these repurchases since 2004 have resulted in an annualized return of approximately 50%.

As a result our focus on efficient capital deployment and working capital management combined with strong earnings growth resulted in a return on invested capital excluding non-recurring items of 23.7% this year compared to 17.3% last year. During the quarter, we completed the review of the infusion business and determined that this unit did not fit strategically in our product portfolio. We are in the process of selling this business; and accordingly, we have classified infusions results in discontinued operations for all current and prior periods.

The sale of the infusion business will eliminate the distraction and will allow us to better focus our attention on delivering specialty services to our clients and their patients. Strong fourth quarter operating results were driven by the execution of our business model, which resulted in record, generic utilization and lower drug purchasing costs.

During the quarter, we completed the integration of the specialty operating and administrative functions into the PBM. The combination of our PBM and specialty platforms continues to drive strong adjusted operating income in the PBM segment, which reached 286.4 million, a 29% increase over the last year. Adjusted EBITDA for adjusted claim was $2.49, a 21% increase over last year. With respect to 2008 guidance, we believe that our 2008 diluted earnings per share to continuing operations will now be in the range of $2.92 to $3. Approximately, two thirds of this improvement comes from operating factors such as lower drug purchasing cost greater generic utilization and some important successful business renewals.

The other one third comes from interest rates being lower than we had budgeted and have included in our previous guidance. Our guidance with respect to generics assumes a limited supply of generic Protonix, so does not include up side yet for any opportunities that might exist there. With respect to infusion, until we well infusion, the income or loss from operating the business, which will be recorded in discontinued operations is expected to not be material. And by that, we would mean that if the business hypothetically were sold at the end of the first quarter the operating income or loss would be less than $0.05 per share.

EPS for the first quarter is expected to be slightly below the fourth quarter level. Volume, we are still expecting to be in the range of 2% to 3% over 2007. A little later, you will hear George talk about some exciting developments there that possibly could push us towards the higher end of that range, but at this point we are holding to that volume increase of 2% to 3% over 2007 actuals.

EBITDA per adjusted script for the year, we have previously told you, would be in the range of $2.50 to $2.60. You can move that range up a nickel, so from $2.55 to $2.65. Cash Flow from operations is expected to be in the range of $875 million to $975 million, and we anticipate using the majority of our free cash flow for share repurchases.

At this point, I would like to turn the call over to George Paz.

George Paz - Chairman, Chief Executive Officer and President

Thank you Ed, and good morning, everyone. As we began 2007, we were facing investor concerns over the Wal-Mart generics... Wal-Mart $4 generic program, the uncertainty around AWP and the CVS Caremark transaction.

During 2007, we consistently expressed our bullish outlook for the PBM space, and we maintain that optimism as we enter 2008. Our model of alignment allows us to outperform in a very competitive marketplace. In 2007, we continued to focus on driving down our client's prescriptions drug costs, while never compromising health outcomes.

We accomplished this by continuing to drive generics as we reached an industry leading generic fill rate of 63.7% in the fourth quarter, up 4 percentage points from last year. In addition, we continue to drive mail and specialty penetration in our book of business. These actions resulted in lower cost for our patients and clients and better value for our stockholders.

While it's great to look back and celebrate our success, we are far more interested in continuing to build the platform for solid growth in the future. Our differentiated offering and high level of customer service translated into strong client retention of successful selling season for new business in 2008. Our offer is differentiated due to our continuous focus on driving down drug trend without compromising health outcomes. We do this by focusing on each and every patient.

Our programs are designed in a manner that resonates with the patients. Through this engagement, we can unlock greater value for the client, the patient, and therefore our shareholders.

Our success in Medicare is not an accident. We set out on a deliberate course with a disciplined approach to the market that provides the focus on helping our clients achieve their objectives without competing against them. This value proposition in the Medicare space is being very well received and will continue to fuel our growth. Clients acknowledge the uniqueness of our best-in-class offering that is aligned with them.

You may recall that during 2007, we had a larger than normal portion of our business up for renewal for 01/01/08. During '08, the number of clients up for renewal are only about half of last year's level. We have every reason to believe that our strong performance around renewals will continue, and the second half of 2008 could even exceed our expectations.

With a very robust sales pipeline, we are well positioned to focus on new sales opportunities in the marketplace. Although our SAAS segment has underperformed our expectations, our specialty pharmacy business continues to perform very well. We are well positioned in the specialty market to help our clients manage both the cost and quality of care surrounding specialty therapies.

We also continue to take the lead in helping Congress create a biogenerics pathway. We are pleased by the renewed interest within the Beltway for passing legislation. For example, President Bush recently called for legislation enabling the FDA to approve generic versions of biotech medicines, which would unlock significant value for our clients.

Our increased earnings guidance is a tribute to our positioning in the marketplace, and our ability to continue driving our clients and patients cost down, while continue to create superior value for stockholders.

This concludes our prepared remarks. And I would be happy to answer questions. Operator?

Question And Answer

Operator

Thank you. [Operator Instructions]. Our first question is from line of Tom Gallucci with Merrill Lynch. Please go ahead.

Tom Gallucci - Merrill Lynch

Good morning, thank you very much. Just two quick ones if I could. I guess first, you mentioned some highlights about the selling season, I guess what you've got up for renewal and there has been a lot of talk about GHI contract in particular; so just curious if you could lend your perspective on that particular client. And then second question would be on the generics that you mentioned. Can you go into little more detail about exactly what's better there, relative penetration and purchasing, and sort of maybe the rate that you are saying in terms of generic deflation, if you will, if you are getting much better purchasing terms?

George Paz - Chairman, Chief Executive Officer and President

Sure. Let's start with the GHI situation. And I do this without a lot of... feeling good about this, because I really don't think it's appropriate to talk about client-by-client situations. Unfortunately, there has been an awful lot of noise around this situation. I know I was the client of a particular vendor, which I am in many cases, I sure what hate to hear down on their earnings call talking about my business and the impacts that may have. So this is a not a very pleasant situation. We have been very disciplined about not talking about specific client. We have a contract with GHI, they have the right to move business, but we also have very good relationships with underlying business in their contract.

As we do our guidance, we take into consideration that business opportunities and risks associated with that client, it's in fact we were able to... if GHI withdrew all of their business from us, it would not have a material impact on the numbers that we are providing for you in our guidance. I would really like to leave it at that and what GHI manage their business and allow my account management team and sales people to manage that relationship.

With respect to the generic situation, I think I will take part and let Ed answer a piece of this. I think as we've said many times in the past, it's not just about converting a drug to a generic, everybody does that. As you probably have seen recently, drugs are about to go generic, brand manufactures often put significant price of inflation in front of those generic launches. There is two reasons to do that as you would probably suspect. One is to make sure you've maximized your profits before the generic launch; and secondly, it's also to try to move shares, especially if you have a need to drug in the pipeline are coming that's already in the market place to move people on to the other drug, if you can get the price a little more reasonable.

So our job is not just to allow those events to occur. Our job is to work with the manufacturers, try to drive higher rebates in an inflationary period to make sure the members stay on the product, before it goes generic. And then more importantly, once the product goes generic, it's not only to get the full conversion, which everybody does rather quickly, but to do the therapeutic interchanges. Our programs, our approach on the web, our approach with our call center associates is not just to convert the drugs as they go generic, but to look at the other opportunities, and we are medically appropriate with the doctors involvement as it switches many members to the lower cost therapies again without ever compromising those outcomes.

I believe that's the testament or the tribute to our generic fill rate. I think when you start looking at 50 million, 60 million types of books of business, there is no difference overall with the relative make up of that population. I think the difference in generic fill rate is not because of some client or some situation, it's the approach to the marketplace and our focus on driving low cost therapies for our membership and that pays dividends to our clients, patients and shareholders for you.

So Ed, do you want to talk a little bit about the purchasing cost side?

Edward J. Stiften - Chief Financial Officer and Senior Vice President

Sure. Tom I would just give you a little bit of color on it. I mentioned about two-thirds of the guidance improvement was due to this operating factors, purchasing cost and generics. In generics, there is a little bit of expectation on the inside that we are moving more effectively than we thought, but most of the generic impact, which is roughly half of this two thirds is external factors, either an authorized generic becoming available or a launch moving up earlier than we had thought, so or the earlier than we had in the original guidance. So that's roughly half of the two thirds. The other thirds would be productivity improvements, purchasing costs, different suppliers, obviously we wouldn't go into who those would be, but does that help?

Tom Gallucci - Merrill Lynch

Yes, thank you very much.

Edward J. Stiften - Chief Financial Officer and Senior Vice President

Specifically also with respect to upsize, we still do not have any upside for Protonix or Effexor. So those would not yet have been included in our gains.

Tom Gallucci - Merrill Lynch

Right. Thank you.

Operator

Thank you. We'll go next to Lisa Gill with JPMorgan. Please go ahead.

Lisa Gill - JPMorgan

Thank you and good morning. Ed, I was wondering first if you could just comment on the guidance around cash flow. With bringing up guidance, I am just curious as to why you didn't bring up cash flow guidance as well. And then secondly George, you alluded to something around Medicare and some opportunities around Medicare; can you just elaborate and currently what's in your expectations and what you are currently seeing in the marketplace. And then just one last thing if I can throw it in there... just expectations originally around infusion and do you have a buyer for the infusion business at this point?

George Paz - Chairman, Chief Executive Officer and President

Ed wants to go first?

Edward J. Stiften - Chief Financial Officer and Senior Vice President

I am sorry, I forgot...

Lisa Gill - JPMorgan

Cash flow.

Edward J. Stiften - Chief Financial Officer and Senior Vice President

Cash flow, thank you. Yes, Lisa, we probably could have because the net income impact probably could have suggested that we could move that range up another 25 million, which is cash flow is pretty hard to predict, and we are just being a little conservative with that. I think it's possible we can move that up later in the year.

George Paz - Chairman, Chief Executive Officer and President

As the when we come on to our first quarter earnings release, we will revisit the cash flow situation and give your our best thoughts around that at that time. Medicare is an interesting situation. My two biggest competitors went into the business to try to sell to the direct marketplace. We made the decision not to do that. We thought it was in our best interest to help our clients continue to grow their books of business. As you know, we have some rather large managed care clients, who looked at that as a tremendous opportunity for them. We did not want to be at odds with our clients. We didn't think that was the right way to approach the marketplace. So instead of investing in marketing literature and individual programs, we took our resources and our people and devoted on building best-in-class services to support our clients. And I think we have that best-in-class service. We had significant wins in this space, both with Medicare only plans that have popped up as well as our plans that have gone deep into this space, and this is a very important, very significant growing component of our book of business. So we are very pleased with our Medicare business.

Lisa Gill - JPMorgan

Can you quantify that in any way, George, I mean, from a Script's perspective or a drug spend, I mean just to give us an idea of how big it is for you today?

George Paz - Chairman, Chief Executive Officer and President

I don't have those... that information readily available. I will do that for you on our next call.

Lisa Gill - JPMorgan

Okay. And then, on the infusion side, Ed, if you can just give us some thoughts around what was originally in the guidance and if you have a... if you do have a buyer on that business?

Edward J. Stiften - Chief Financial Officer and Senior Vice President

I will answer the first half of that. What's in the guidance... in the original guidance for infusion in terms of operations, we had zero in there for '08, we still have zero in there for '08. So, and we expected to be immaterial. In terms of the impairment that we took in the fourth quarter, Lisa, since we listed it for sale, we try to market down basically approximately to market value, those things could get tweaked a little bit up or down, when we sell it, but if there is a difference either up or down that would be in discontinued operations and in terms of buyers we won't speculate on that and talk about that.

Lisa Gill - JPMorgan

Okay, great. Thanks for the comments.

Operator

We have a question from Charles Boorady with Citigroup. Please go ahead.

Charles Boorady - Citigroup

Thanks. Good morning. My question is just on the outlook for 2008 of your expected growth and operating earnings. Can you tell us what is from same client growth versus growth form new client relationships?

Edward J. Stiften - Chief Financial Officer and Senior Vice President

I guess in general I would say, we expect utilization growth, still at this time it's going to be about 4% to remember. And so in terms of same client growth that's a pretty good factor to utilize and the rest would be net wins and losses.

Charles Boorady - Citigroup

And, if we take that down to the operating earnings line in light of the high renewals for 2008, would that look about the same or did you follow a similar pattern as in the past, where year one will sometime say reduction in the margins that you then than make up for the life of a contract?

Edward J. Stiften - Chief Financial Officer and Senior Vice President

It's generally true that year one is lower in terms of the three year contract, but all that's been reflected in our guidance. So as you can tell, we renewed an awful lot of our book of business and still achieve the kind of earnings growth we like to target.

Charles Boorady - Citigroup

Andso, we look at the bottom-line with the same client growth, can you bifurcate for us sort of same client versus new relationship contributions to earnings in '08?

George Paz - Chairman, Chief Executive Officer and President

I don't think we want to get to that level of detail.

Edward J. Stiften - Chief Financial Officer and Senior Vice President

That's earnings.

Charles Boorady - Citigroup

Based on the high rate of renewals, can we make inferences or can you give us any rough guidance for what to think about longer-term like the next two to three years, given what you've locked in for '08. You already took the step down, which has reflected in your guidance give the same kind of tailwind in '09 and '10 from those relationships or was there something about those contracts that will give you less benefit from the kind of trends that in the past have improved the profitability over time.

George Paz - Chairman, Chief Executive Officer and President

Let me try this. We have... we've given '08 guidance. We are not in a position to give '09 or '10 guidance at this time. We have a gentlemen, Ed Ignaczak, who runs sales and account management for us and his compensation is directly tied to his ability to upsell step therapy program, our authorization program, mail penetrations, specialty penetration and all of those program that drive value for our shareholders. I think if he was here with us right now, he would not want us to go out and tell you what he is going to pre-sell. I mean, obviously he has got a work plan and then goals. Well, we will refine that to the course of the year. Our job is to make sure services levels are at the maximum levels and that the clients are satisfied. If you don't have satisfied clients, it's very difficult to upsell programs. So, Pat McNamee, who runs our operations and technology, his job is to make sure that we deliver well to the clients, so that Ed Ignaczak can comeback and then introduce costs savings ideas. When that machine is working, you can go out with 24% type earnings growth. It's a very good machine that works very well and the team works together very well. So, we will continue to focus on that and will give you guidance in 2009 late in the year.

Charles Boorady - Citigroup

All right, fair enough. Thanks.

Operator

Thank you. Our next question is from Robert Willoughby with Banc of America Securities. Please go ahead.

Robert Willoughby - Banc of America Securities

Hi, George is there any change in the profile of the kind of accounts you've won for '08? Is it more corporate or more TPAs or any comment on that whatsoever?

George Paz - Chairman, Chief Executive Officer and President

Our big win, Robert, which we disclosed was the Ohio program called ROC. And obviously that's a public sector account that was a takeaway from both Caremark and Medco. The business was bifurcated between the two of them. And that was our... the biggest sale. But in addition to that, we sold many Fortune 500 companies we had. We continue to have a very strong focus in the middle market account, the TPA marketplace and in the labor unions. And all those are hitting on all cylinders. So I think it's a... you can... we will continue to see tremendous opportunities to go to those clients as we upsell them as I just said and provide additional services and opportunity.

Robert Willoughby - Banc of America Securities

Okay. And just Ed, what is the current interest rate assumption then for the rest of the year that you are using?

Edward J. Stiften - Chief Financial Officer and Senior Vice President

I don't think we disclose the all-in rate, but I think you can see from our credit agreements the structure of the interest rate structure and go from there.

Robert Willoughby - Banc of America Securities

Okay. And just lastly, was there any major working...

Edward J. Stiften - Chief Financial Officer and Senior Vice President

Let me answer this way Bob. While we put our budget together the forward LIBOR curves predicted a very significant drop in interest rates. And we didn't quite bake all of that into our guidance, because we would never want to come to you all and misguidance and explain it, because we stick to our optimistic assumption on earnings rates... our interest rates. And so the interest rates have in fact moved down even beyond with the LIBOR curve had predicted. So that's why we took the guidance up and if your question is, have we taken the interest rates down as far as the today's LIBOR curves will suggest, we again we hedged just a little bit a penny or two, but no more than that.

Robert Willoughby - Banc of America Securities

Okay, that was the question. And just lastly, was there any major working capital impact from backing out the infusion therapy business? Was there a big receivable associated with that or was it all negligible?

Edward J. Stiften - Chief Financial Officer and Senior Vice President

A fair amount of receivables, but that a typical for infusion businesses, but which obviously carry more days AR than we see in the PBM, but kind of proportion as to what you've seen in the infusion business.

Robert Willoughby - Banc of America Securities

Okay. Knowing no infusion businesses directly, is that a $30 million number or $100 million number?

Edward J. Stiften - Chief Financial Officer and Senior Vice President

Closer to the former... closer to your first answer than the second.

Robert Willoughby - Banc of America Securities

Okay, that's great. Thank you.

Edward J. Stiften - Chief Financial Officer and Senior Vice President

$100 million.

Operator

Thank you. We will go next to Art Henderson with Jefferies & Company. Please go ahead.

Arthur Henderson - Jefferies & Company

Hi. George, you guys have done a lot of good work fixing this specialty business. Do you feel like the bulk of what you have been trying to do to reposition that business has done, and are we kind of coming out of the clouds sort to speak?

George Paz - Chairman, Chief Executive Officer and President

Yes, let me address that in two different fronts. Because what's embedded in our S-A-S-S segment or SASS segment is several businesses and I appreciate your comments on specialty. We really have had a focus on that. One of the hardest things you do as the manager is to what you want to do is to draw your best people at your problem. And if the problem isn't where your future is, that's not a good strategy. So we have taken our best people and have them focused on specialty pharmacy and making sure that it was running on all accounts. So that we could in fact continue to grow our business and be well positioned for the future.

But still inside of our SASS segment is two other businesses besides the infusion business, which is one of them is our pharmaceutical manufacturer programs, which are these PAP programs for the most part, where we provide assistance to individuals, who are unemployed or don't have access to medications, and we can get those medications from manufacturers on their behalf. And so we administer quite a few of those programs and that's the business that has been... this is by the way a very profitable business, but as you probably know with Medicare out there, anybody over age 65 is getting pushed over into the Medicare programs, because that's quite frankly for the manufactures of better outcome, the manufacture now gets paid as opposed to giving away the product.

So there has been a tremendous drag on that business as it continues to decline. It should be close to stabilizing analysis we've had several years of Medicare. The manufactures had to continually reevaluate whether those programs are still wanted or not. So, we will stay focused on that business, but that businesses run okay, it's just that it's been into decline mode. The other business is a distribution business, and that... there is a couple of reason that businesses maybe strategic to us. We are still going through the process of evaluating it. The ROIC and the returns on that business are nowhere near what we get in the PBM, so that business is still under our analysis and investigation and we will keep you posted on that one.

Arthur Henderson - Jefferies & Company

Okay, that's very helpful. Just two quick questions for Ed; in your guidance, do you have any assumptions for share repurchases and what's your remaining authorization on your share repurchase?

Edward J. Stiften - Chief Financial Officer and Senior Vice President

In terms of the assumptions that's in our guidance, it's consistent with previous years, where we take free cash flow and assume that the vast majority that is used for share repurchases. And with respect to calculating free cash flow, I think if you see on a balance sheet, you see the current materials long-term debt is $260 million, and the way that plays out next year is 60, 60, 60 and 80 in terms of how it plays out by quarters. So that will be give you an idea of the free cash flow. And in terms of authorizations, we have 13.2 million shares remaining under the program. So we get plenty of room to get that program done.

Arthur Henderson - Jefferies & Company

Okay, great. Thanks very much.

Edward J. Stiften - Chief Financial Officer and Senior Vice President

Thank you.

Operator

We now have question from Randall Stanicky with Goldman Sachs. Go ahead, please.

Randall Stanicky - Goldman Sachs

Great, thanks very much for taking the question. Just a couple of short ones for Ed; first, it sounded like your authorized generic comment related to Fosamax, where there is a little bit more competitive pricing, but it's fair to you guys assume an AG with every generic launch at this point relative to your guidance. Is that a fair comment?

Edward J. Stiften - Chief Financial Officer and Senior Vice President

No. It varies by the drug, but certainly the trend is developing that way.

Randall Stanicky - Goldman Sachs

Okay. And just to be clear, as we think about Q1, I think you talked around, I just wasn't clear. Do you have any generic Protonix factored into your Q1 outlook?

Edward J. Stiften - Chief Financial Officer and Senior Vice President

As our competitors do have a limited supply of the authorized generic for Protonix and then we basically assume sort of brand for the rest of the year.

Randall Stanicky - Goldman Sachs

Got it, so after Q1, largely brand. And then the infusion business, it sounds like half of payee impact would have been the expectations for Q1. So it sounds like there is a previous and current expectation that would have turned profitable as you think about the back half?

Edward J. Stiften - Chief Financial Officer and Senior Vice President

I think we are expecting breakeven for the full year basically. We were hoping that we are on a positive trend building it towards the profitable for '09, but fairly modest.

Randall Stanicky - Goldman Sachs

Got it. And then lastly, I think we've... this question has been asked, and just to be clear. Is there any AWP question built into the current '08 numbers?

Edward J. Stiften - Chief Financial Officer and Senior Vice President

AWP risk became zero. That would not take us out of our current guidance range.

Randall Stanicky - Goldman Sachs

Are you able to quantify?

Edward J. Stiften - Chief Financial Officer and Senior Vice President

Just... no more than I just did.

Randall Stanicky - Goldman Sachs

Okay, that's helpful. Thanks very much.

Operator

We will go next to Larry Marsh with Lehman Brothers. Please go ahead.

Lawrence Marsh - Lehman Brothers

Thanks and good morning. Quick clarification first for Ed and then a question for George; you are guiding to first quarter as slightly down from Q4, and I guess that means versus $0.65, is that right? And are there any particular costs associated with the start-up of ROC that would be impacting the first quarter that would cause it to be down sequentially?

George Paz - Chairman, Chief Executive Officer and President

I would say, Larry that would be versus the 68 for continuing operation. So we think of the business now going forward using the continuing operations numbers. So when we say down, slightly it would be from that $0.68, not the $0.65.

Lawrence Marsh - Lehman Brothers

Great, okay.

George Paz - Chairman, Chief Executive Officer and President

And, certainly with the volume that ROC brings on, there would obviously be some additional call center folks and so forth for sometime, but nothing extraordinary.

Lawrence Marsh - Lehman Brothers

Okay, all right, very good. Secondly, just to elaborate, which is biggest kudos on the selling season; it seems like as I looked back, this is the best selling season you have had since at least '04. George, I know you have expanded Ed Ignaczak's role, now head of sales and marketing. And I am curious, besides the obvious value proposition you bring to your customers, are there other specific factors that have really resonated in the marketplace this year that have allowed you to see such an uptick in the gross on selling season? And along with that, is there any... are there any particular big accounts that have been known in the market that would cause you to think about some upside in your second half on selling season.

George Paz - Chairman, Chief Executive Officer and President

I think that Ed does a bring a tremendous discipline to our marketplace. It's easy to have a sales person. And I am not talking about Ed, I am talking about lower in the organization, to want to compete merely on price, i.e. the competition may have deeper discounts than we do, and therefore the logical move is to try to match those rates. At the end of day, if you go down on the rates, you may say the clients a few pennies here or there, but the way you really save a client money is by getting the mix right. In our speech and our talk to our clients and what we put in practice, is all about mix matters. And Ed has done a tremendous job of getting the sales and account management team totally focused. I think one of the reasons we do have such a high renewal rate is because we do deliver results in the marketplace.

When we go out to our clients and I am fortunate not to get to do this in a quite few occasions and we can show what financial institutions actual drug trends are as benchmark to that... to their industry versus to the country at large. And those clients as they put in progressive steps and take affirmative actions, it pays. I think where the real rubber meets roads, though, is it's not only driving the programs, anybody can put in on step therapy program. It's how you will administer it with the least amount of noise and disruption. That's the key, that's what we talk about; and we'll get into a lot more specifics as the year unfolds. But it's the messaging to the member and is the way you approach the marketplace. Because think about what happens if you walk into a pharmacy and you just found out that you've got a disease and that there is a step therapy program. So first of all, we are not really excited about the fact that you are hopefully not be... what you thought it was a couple of days earlier, and now you walk into the pharmacy and the pharmacy can't dispense the prescription because of a step therapy program. It's aggregation on top of disappointment.

The whole idea that we take to this is to try to minimize all that through physician outreach, through client contact, through calling numbers directly, and I think we are the premiere company in achieving those goals. Again it's not just about taking care of a handful of diseases states, each and every member. Keep in mind that when you have member disruption or member dissatisfaction, those people are calling the HR Department, when the HR Departments phone are lit up like Christmas tree that is not a good thing. That's not what the clients are paying for and that's not what they want. Of course they want to drug trend down, but when we can do it in a very meaningful manner without the member disruption, minimizing member disruption, that's what we get paid our dividends.

Keep in mind when we did this for the statin class two years ago and were able to prove that we could actually drive up member satisfaction and also at the same time we draw over $100 million cost per quarter to our client savings. Then the clients become more and more open to more and more programs, which enables us to lever a better value and create a stick rate. That's what I think the reason in our model works, and what we do provide significant value for our patients, our clients and our shareholders.

Edward J. Stiften - Chief Financial Officer and Senior Vice President

Larry, this is Ed again. Back to your earlier question about the first quarter; I answered the question you asked. I probably should have also answered the other questions you are asking, which is: okay, first quarter is going to be down slightly from fourth quarter. Then how should I think about... how we work away our way to the numbers for the rest of the year? And what I would tell you is that for the third year in a row, the generics again are much stronger in the second half of the year than they are in the first half of the year. And it makes me wonder if the PBMs should move their fiscal years to July 1st and start the year with a bang. But anyway we are seeing the same thing in this year, much generic improvement in the second half of the year.

Lawrence Marsh - Lehman Brothers

I got it, just to clarify, are there any particular larger accounts that are known in the market place that are up for renewal in the second half of '08 that you could go after, George?

George Paz - Chairman, Chief Executive Officer and President

I am sorry, I didn't catch that.

Edward J. Stiften - Chief Financial Officer and Senior Vice President

The second half renewal prospect large one that we might be able to go after and win.

George Paz - Chairman, Chief Executive Officer and President

For our renewal or for new business?

Lawrence Marsh - Lehman Brothers

New business.

George Paz - Chairman, Chief Executive Officer and President

There is significant business out there; it's not as much for 7/1 through. The majority of the big accounts we are seeing right now are 1/1/09. There are obviously and of course there is some renewal activity for 7/1. But the big, big companies that are out right now are 1/1/09.

Edward J. Stiften - Chief Financial Officer and Senior Vice President

And Larry in terms of mid year renewals, what we have renewed this year has turned out be a little better than we had anticipated in our guidance for mid year renewals, not huge, but in terms of renewing our own accounts for mid year, we have done a little better than we thought.

Lawrence Marsh - Lehman Brothers

Right. A final quick clarification, T-Pharma RSP [Ph] finally came out and I guess you are using WAC. It looks like everything else is pretty similar to what's already in the contract. Is that a fair way to look it? Doesn't look like there is any major changes in that RSP, George?

George Paz - Chairman, Chief Executive Officer and President

Yes, I think the only real substantive change and that's probably not call that substantive as they combine the retail and the mail program under one contract. Historically those were two separate contracts, which we were fortunate enough to win independently, but this time it's a... it's both retail and mail.

Lawrence Marsh - Lehman Brothers

Okay, very good. Thank you.

Operator

Your next question is from Ross Muken with Deutsche Bank. Please go ahead.

Ross Muken - Deutsche Bank

George, I just want to see if you could expand a little on the biogeneric talk you had. Obviously, a lot of legislation going on right now and there is a still bit of uncertainty. And do we have any sense and sort of timing or do you have any thoughts on when we could potentially expect or what the actual sort of road to having a clear plan for approval in that process, could be in this year and do you think sort of with the overhang of the election that that's likely to get delayed probably into '09.

George Paz - Chairman, Chief Executive Officer and President

I will give you my best guess and that's probably not worth a whole lot. But I can tell you because this is a very... these are somewhat uncertain times. You've got a President, who is reaching the end of their term certainly would love to make some in road... some big changes on his way out, but at the same time you've got Congress that's run, it's a Democratic... both houses of Congress are Democratic. So they would certainly like to... they think they can win the President seat for next year. They would certainly like to move the legislation in to that situation.

My guess is that there will be a lot of conversation. The cost in Medicare as you know is phenomenal. The cost of Medicaid is significant, very large. And so there is a huge need for this legislation. We are big performance and backers, the reality is though, I believe it is all probably happen next year and not this year. Although Dr. Miller who is our Chief Medical Officer puts in significant amount of time in this area and as well seen on the... well respected and seen often on the Hill, [ph] because we are trying to move this as quickly as possible. But I think the political realities are for next year.

Ross Muken - Deutsche Bank

Great, thank you very much.

George Paz - Chairman, Chief Executive Officer and President

How about one more question?

Operator

Thank you. That will come from the line of Ricky Goldwasser with UBS. Please go ahead.

Unidentified Analyst

Hi this is actually Brandon Henry [ph] for Ricky. Looking ahead to '08 guidance and possible for subside, are there at risk launches in '08 that you think could provide some upside for example with like or Nexium or Prevacid or Aricept? If you could maybe put some probably around that?

Edward J. Stiften - Chief Financial Officer and Senior Vice President

As George said earlier, we try not to talk too much about specific clients or drugs, because there is somebody on the side of that equation, but we do see some upside in terms of launches, but won't probably won't into, which drugs. But I wouldn't think that be hugely material pennies rather than nickels. That helps?

Unidentified Analyst

Okay, thanks.

George Paz - Chairman, Chief Executive Officer and President

Okay. Well, again I appreciate everyone joining us this morning for our call. We are very excited and optimistic about PBM space. I think what the PBMs do to drive down costs is significant. What we do in particular is a step ahead and we are very excited about our influence. I would also like to just say before you get off the call, that this is Ed Stiften's last earnings call and it's with a mixed heart there. Because I am glad to see he is probably going to finally break a four handicap, and so I am very happy for him to be able to retire, but at the same time he will be sorely missed by this management team. We will keep you posted on our progress as we getting close on CFO situations, and will keep you posted on that and again I appreciate everybody's attention to our call. Thank you.

Operator

Thank you, and ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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