##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 28, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 1-31312
 MEDCO HEALTH SOLUTIONS, INC.
  Delaware
(State or other jurisdiction of incorporation)
    
    22-3461740
(I.R.S. Employer Identification No.)
 100 Parsons Pond Drive, Franklin Lakes, NJ
(Address of principal executive offices)
    
    07417-2603
(Zip Code)
 
 þ o
  Large accelerated filer þAccelerated filer oNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company o o þ




---



##### 



MEDCO HEALTH SOLUTIONS, INC.
 QUARTERLY REPORT ON FORM 10-Q
 INDEX
 PART I  FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets (Unaudited)  June 28, 2008 andDecember 29, 2007
    
    1Condensed Consolidated Statements of Income (Unaudited)  Fiscal Quarters and Six MonthsEnded June 28, 2008 and June 30, 2007
    
    2Condensed Consolidated Statement of Stockholders' Equity (Unaudited) Fiscal Six Months Ended June 28, 2008
    
    3Condensed Consolidated Statements of Cash Flows (Unaudited)  Fiscal Six Months EndedJune 28, 2008 and June 30, 2007
    
    4Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Conditionand  Results of Operations
    
    18Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    39Item 4.
    
    Controls and Procedures
    
    39PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    40Item 1A.
    
    Risk Factors
    
    40Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    41Item 3.
    
    Defaults Upon Senior Securities
    
    41Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    42Item 5.
    
    Other Information
    
    42Item 6.
    
    Exhibits
    
    44SIGNATURES
    
    45EX-31.1: CERTIFICATIONEX-31.2: CETIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION




---



##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 MEDCO HEALTH SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In millions, except for share data)
 June 28,
    
    
    December 29,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    371.7
    
    
    $
    774.1Short-term investments
    
    
    70.9
    
    
    
    70.3Manufacturer accounts receivable, net
    
    
    1,772.3
    
    
    
    1,516.2Client accounts receivable, net
    
    
    1,594.2
    
    
    
    1,340.3Income taxes receivable
    
    
    210.0
    
    
    
    216.0Inventories, net
    
    
    2,090.0
    
    
    
    1,946.0Prepaid expenses and other current assets
    
    
    330.7
    
    
    
    285.4Deferred tax assets
    
    
    154.4
    
    
    
    154.4Total current assets
    
    
    6,594.2
    
    
    
    6,302.7Property and equipment, net
    
    
    734.6
    
    
    
    725.5Goodwill
    
    
    6,346.2
    
    
    
    6,230.2Intangible assets, net
    
    
    2,809.0
    
    
    
    2,905.0Other noncurrent assets
    
    
    61.6
    
    
    
    54.5Total assets
    
    $
    16,545.6
    
    
    $
    16,217.9LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Claims and other accounts payable
    
    $
    2,812.0
    
    
    $
    2,812.9Client rebates and guarantees payable
    
    
    1,267.6
    
    
    
    1,092.2Accrued expenses and other current liabilities
    
    
    561.1
    
    
    
    624.1Short-term debt
    
    
    600.0
    
    
    
    600.0Total current liabilities
    
    
    5,240.7
    
    
    
    5,129.2Long-term debt, net
    
    
    4,083.0
    
    
    
    2,894.4Deferred tax liabilities
    
    
    1,103.2
    
    
    
    1,167.0Other noncurrent liabilities
    
    
    173.8
    
    
    
    152.0Total liabilities
    
    
    10,600.7
    
    
    
    9,342.6Commitments and contingencies (See Note 10)Stockholders equity:Preferred stock, par value $0.01authorized: 10,000,000 shares;
issued and outstanding: 0
    
    
    
    
    
    
    Common stock, par value $0.01authorized: 2,000,000,000 shares;
issued: 650,609,218 shares at June 28, 2008 and
647,384,634 shares at December 29, 2007
    
    
    6.5
    
    
    
    6.4Accumulated other comprehensive income (loss)
    
    
    (10.9
    )
    
    
    6.4Additional paid-in capital
    
    
    7,670.2
    
    
    
    7,553.0Retained earnings
    
    
    3,359.3
    
    
    
    2,826.411,025.1
    
    
    
    10,392.2Treasury stock, at cost: 144,932,892 shares at June 28, 2008 and
111,445,348 shares at December 29, 2007
    
    
    (5,080.2
    )
    
    
    (3,516.9
    )Total stockholders equity
    
    
    5,944.9
    
    
    
    6,875.3Total liabilities and stockholders equity
    
    $
    16,545.6
    
    
    $
    16,217.9
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 1




---



##### Table of Contents



MEDCO HEALTH SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In millions, except for per share data)
 Quarters Ended
    
    
    Six Months EndedJune 28, 2008
    
    
    June 30, 2007
    
    
    June 28, 2008
    
    
    June 30, 2007Product net revenues (Includes retail co-payments
of $1,900 and $1,887 in the second quarters of
2008
and 2007, and $4,002 and $3,874 in the six
months of 2008 and 2007)
    
    $
    12,607.1
    
    
    $
    10,912.3
    
    
    $
    25,414.0
    
    
    $
    21,938.6Service revenues
    
    
    167.5
    
    
    
    137.3
    
    
    
    323.6
    
    
    
    270.6Total net revenues
    
    
    12,774.6
    
    
    
    11,049.6
    
    
    
    25,737.6
    
    
    
    22,209.2Cost of operations:Cost of product net revenues (Includes retail
co-payments of $1,900 and $1,887 in the second
quarters of 2008 and 2007, and $4,002 and
$3,874 in the six months of 2008 and 2007)
    
    
    11,794.0
    
    
    
    10,311.9
    
    
    
    23,810.8
    
    
    
    20,661.8Cost of service revenues
    
    
    47.1
    
    
    
    33.1
    
    
    
    93.0
    
    
    
    69.1Total cost of revenues
    
    
    11,841.1
    
    
    
    10,345.0
    
    
    
    23,903.8
    
    
    
    20,730.9Selling, general and administrative expenses
    
    
    368.4
    
    
    
    274.0
    
    
    
    696.8
    
    
    
    522.4Amortization of intangibles
    
    
    70.6
    
    
    
    54.6
    
    
    
    140.1
    
    
    
    109.3Interest and other (income) expense, net
    
    
    57.5
    
    
    
    21.9
    
    
    
    111.8
    
    
    
    36.8Total cost of operations
    
    
    12,337.6
    
    
    
    10,695.5
    
    
    
    24,852.5
    
    
    
    21,399.4Income before provision for income taxes
    
    
    437.0
    
    
    
    354.1
    
    
    
    885.1
    
    
    
    809.8Provision for income taxes
    
    
    174.3
    
    
    
    139.2
    
    
    
    352.2
    
    
    
    320.1Net income
    
    $
    262.7
    
    
    $
    214.9
    
    
    $
    532.9
    
    
    $
    489.7Basic earnings per share:Weighted average shares outstanding
    
    
    507.7
    
    
    
    554.4
    
    
    
    517.3
    
    
    
    564.0Earnings per share
    
    $
    0.52
    
    
    $
    0.39
    
    
    $
    1.03
    
    
    $
    0.87Diluted earnings per share:Weighted average shares outstanding
    
    
    517.6
    
    
    
    564.2
    
    
    
    527.7
    
    
    
    573.5Earnings per share
    
    $
    0.51
    
    
    $
    0.38
    
    
    $
    1.01
    
    
    $
    0.85
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 2




---



##### Table of Contents



MEDCO HEALTH SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(UNAUDITED)
(Shares in thousands; $ in millions, except for per share data)
 AccumulatedShares of Common
    
    
    Shares of
    
    
    $0.01 Par Value
    
    
    OtherStock
    
    
    Treasury
    
    
    Common
    
    
    Comprehensive
    
    
    Additional
    
    
    Retained
    
    
    TreasuryIssued
    
    
    Stock
    
    
    Stock
    
    
    Income (Loss)
    
    
    Paid-in Capital
    
    
    Earnings
    
    
    Stock
    
    
    TotalBalances at
December 29, 2007
    
    
    647,385
    
    
    
    111,445
    
    
    $
    6.4
    
    
    $
    6.4
    
    
    $
    7,553.0
    
    
    $
    2,826.4
    
    
    $
    (3,516.9
    )
    
    $
    6,875.3Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    532.9
    
    
    
    
    
    
    
    532.9Other comprehensive income, net of tax:Unrealized gain (loss) on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Unrealized loss on cash flow hedge, net of
tax of $10.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16.9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16.9
    )Amortization of effective portion of cash
flow hedge, net of tax of $0.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.6Defined benefit plans:Amortization of prior service cost
included in net periodic benefit cost,
net of tax of $0.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.3
    )Net gains (losses) included in net
periodic benefit cost,
net of tax of $(0.1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17.3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17.3
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17.3
    )
    
    
    
    
    
    
    532.9
    
    
    
    
    
    
    
    515.6Issuance of common stock for options
exercised, including tax benefit
    
    
    2,026
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    60.5
    
    
    
    
    
    
    
    
    
    
    
    60.6Issuance of common stock under employee
stock purchase plans
    
    
    184
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.7
    
    
    
    
    
    
    
    
    
    
    
    8.7Restricted stock and restricted stock unit
activity, including tax benefit
    
    
    1,014
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16.6
    
    
    
    
    
    
    
    
    
    
    
    16.6Stock-based compensation related to options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31.4
    
    
    
    
    
    
    
    
    
    
    
    31.4Treasury stock acquired
    
    
    
    
    
    
    33,488
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,563.3
    )
    
    
    (1,563.3
    )Balances at
June 28, 2008
    
    
    650,609
    
    
    
    144,933
    
    
    $
    6.5
    
    
    $
    (10.9
    )
    
    $
    7,670.2
    
    
    $
    3,359.3
    
    
    $
    (5,080.2
    )
    
    $
    5,944.9
 The accompanying notes are an integral part of this condensed consolidated financial statement.
 3




---



##### Table of Contents



MEDCO HEALTH SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
($ in millions)
 Six Months EndedJune 28, 2008
    
    
    June 30, 2007Cash flows from operating activities:Net income
    
    $
    532.9
    
    
    $
    489.7Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    79.0
    
    
    
    85.4Amortization of intangibles
    
    
    140.1
    
    
    
    109.3Deferred income taxes
    
    
    (80.6
    )
    
    
    (69.8
    )Stock-based compensation on employee stock plans
    
    
    63.7
    
    
    
    46.5Tax benefit on employee stock plans
    
    
    51.7
    
    
    
    59.1Excess tax benefits from stock-based compensation arrangements
    
    
    (31.4
    )
    
    
    (38.7
    )Other
    
    
    57.1
    
    
    
    25.3Net changes
in assets and liabilities (net of acquisition effects, 2008 only):Manufacturer accounts receivable, net
    
    
    (254.8
    )
    
    
    (89.1
    )Client accounts receivable, net
    
    
    (279.9
    )
    
    
    51.6Inventories, net
    
    
    (140.1
    )
    
    
    102.5Prepaid expenses and other current assets
    
    
    (43.7
    )
    
    
    (1.3
    )Income taxes receivable
    
    
    6.0
    
    
    
    (5.9
    )Other noncurrent assets
    
    
    3.2
    
    
    
    10.0Claims and other accounts payable
    
    
    (15.8
    )
    
    
    (305.5
    )Client rebates and guarantees payable
    
    
    175.4
    
    
    
    183.7Accrued expenses and other current and noncurrent liabilities
    
    
    (62.6
    )
    
    
    23.9Net cash provided by operating activities
    
    
    200.2
    
    
    
    676.7Cash flows from investing activities:Cash paid for Europa Apotheek Venlo B.V., net of cash acquired
    
    
    (126.2
    )
    
    
    Capital expenditures
    
    
    (87.6
    )
    
    
    (59.4
    )Purchases of securities and other investments
    
    
    (42.9
    )
    
    
    (75.1
    )Proceeds from sale of securities and other investments
    
    
    35.9
    
    
    
    80.3Net cash used by investing activities
    
    
    (220.8
    )
    
    
    (54.2
    )Cash flows from financing activities:Proceeds from long-term debt
    
    
    2,865.7
    
    
    
    1,000.0Repayments on long-term debt
    
    
    (1,680.0
    )
    
    
    (456.5
    )Proceeds under accounts receivable financing facility
    
    
    
    
    
    
    275.0Debt issuance costs
    
    
    (11.3
    )
    
    
    (1.6
    )Settlement of cash flow hedge
    
    
    (45.4
    )
    
    
    Purchase of treasury stock
    
    
    (1,563.3
    )
    
    
    (1,447.2
    )Excess tax benefits from stock-based compensation arrangements
    
    
    31.4
    
    
    
    38.7Proceeds from employee stock plans
    
    
    21.1
    
    
    
    134.3Net cash used by financing activities
    
    
    (381.8
    )
    
    
    (457.3
    )Net (decrease) increase in cash and cash equivalents
    
    
    (402.4
    )
    
    
    165.2Cash and cash equivalents at beginning of period
    
    
    774.1
    
    
    
    818.5Cash and cash equivalents at end of period
    
    $
    371.7
    
    
    $
    983.7
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 4




---



##### Table of Contents



MEDCO HEALTH SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 1. BASIS OF PRESENTATION
   2. RECENTLY ADOPTED FINANCIAL ACCOUNTING STANDARD
   Fair Value Hierarchy.
 
 5




---



##### Table of Contents



Medco Fair Value Measurements at Reporting Date
 Description
    
    June 28, 2008
    
    Level 1
    
    Level 2
    
    Level 3Money market mutual funds
    
    $
    218.0
    
    
    $
    218.0
    
    
    $
    
    
    
    $
    Available-for-sale investments
    
    
    5.8
    
    
    
    1.9
    
    
    
    3.9
    
    
    
    Fair value of interest rate swap agreements
    
    
    (0.7
    )
    
    
    
    
    
    
    (0.7
    )
    
    
    
  3. ACQUISITIONS
 Europa Apotheek Venlo B.V.
 PolyMedica.
 Quarter Ended
    
    Six Months EndedJune 30, 2007
    
    June 30, 2007Pro forma total net revenues
    
    $
    11,192.5
    
    
    $
    22,501.3Pro forma net income
    
    $
    211.2
    
    
    $
    480.8Pro forma basic earnings per common share
    
    $
    0.38
    
    
    $
    0.85Pro forma diluted earnings per common share
    
    $
    0.37
    
    
    $
    0.84
 6




---



##### Table of Contents



4. EARNINGS PER SHARE (EPS)
  Quarters Ended
    
    Six Months EndedJune 28, 2008
    
    June 30, 2007
    
    June 28, 2008
    
    June 30, 2007Weighted average shares outstanding
    
    
    507.7
    
    
    
    554.4
    
    
    
    517.3
    
    
    
    564.0Dilutive common stock equivalents:Outstanding stock options,
restricted stock units and restricted stock
    
    
    9.9
    
    
    
    9.8
    
    
    
    10.4
    
    
    
    9.5Weighted average shares outstanding
assuming dilution
    
    
    517.6
    
    
    
    564.2
    
    
    
    527.7
    
    
    
    573.5
  5. ACCOUNTS RECEIVABLE
   7




---



##### Table of Contents



6. GOODWILL AND INTANGIBLE ASSETS, NET
  June 28, 2008
    
    
    December 29, 2007Gross
    
    
    Accumulated
    
    
    
    

    
    
    Gross
    
    
    AccumulatedCarrying Value
    
    
    Amortization
    
    
    Net
    
    
    Carrying Value
    
    
    Amortization
    
    
    NetGoodwill:PBM(1)
    
    $
    5,244.0
    
    
    $
    813.4
    
    
    $
    4,430.6
    
    
    $
    5,131.6
    
    
    $
    813.4
    
    
    $
    4,318.2Specialty Pharmacy(2)
    
    
    1,915.6
    
    
    
    
    
    
    
    1,915.6
    
    
    
    1,912.0
    
    
    
    
    
    
    
    1,912.0Total(3)
    
    $
    7,159.6
    
    
    $
    813.4
    
    
    $
    6,346.2
    
    
    $
    7,043.6
    
    
    $
    813.4
    
    
    $
    6,230.2Intangible assets:PBM(1)
    
    $
    3,758.3
    
    
    $
    1,697.9
    
    
    $
    2,060.4
    
    
    $
    3,714.2
    
    
    $
    1,580.0
    
    
    $
    2,134.2Specialty Pharmacy(2)
    
    
    861.5
    
    
    
    112.9
    
    
    
    748.6
    
    
    
    861.5
    
    
    
    90.7
    
    
    
    770.8Total(4)
    
    $
    4,619.8
    
    
    $
    1,810.8
    
    
    $
    2,809.0
    
    
    $
    4,575.7
    
    
    $
    1,670.7
    
    
    $
    2,905.0
 
 (1)
    
    Principally comprised of the push-down of the excess of acquisition costs over
the fair value of the Companys net assets from the acquisition of the Company by Merck &
Co., Inc. (Merck) in 1993, and the recorded value of Medcos client relationships at
the time of acquisition and, to a lesser extent, the Companys acquisitions of Europa
Apotheek in 2008, PolyMedica in 2007, and ProVantage Health Services, Inc. in 2000.(2)
    
    Represents the Specialty Pharmacy segment, primarily reflecting the portion of
the excess of the purchase price paid by the Company to acquire Accredo Health,
Incorporated (Accredo) in 2005 over tangible net assets acquired, and to a
significantly lesser extent, a portion of the excess of the purchase price paid by the
Company to acquire Critical Care Systems, Inc. (Critical Care) in 2007, and Pediatric
Services of America, Inc. in 2005.(3)
    
    The increase in goodwill for the six months ended June 28, 2008 primarily
represents a portion of the excess of the Europa Apotheek purchase price over tangible
net assets acquired and a final purchase price cash settlement associated with Critical
Care. See Note 3, Acquisitions, to the unaudited interim condensed consolidated
financial statements included in this Quarterly Report on Form 10-Q for additional
information on the Europa Apotheek acquisition.(4)
    
    The increase in intangible assets for the six months ended June 28, 2008
primarily represents a portion of the excess of the Europa Apotheek purchase price over
tangible net assets acquired. See Note 3, Acquisitions, to the unaudited interim
condensed consolidated financial statements included in this Quarterly Report on Form
10-Q.  Fiscal Years Ending December2008 (remaining)
    
    $
    141.72009
    
    
    268.02010
    
    
    248.92011
    
    
    237.92012
    
    
    233.3Total
    
    $
    1,129.8
  8




---



##### Table of Contents



7. DEBT
  June 28,
    
    
    December 29,2008
    
    
    2007Short-term debt:Accounts receivable financing facility
    
    $
    600.0
    
    
    $
    600.0Total short-term debt
    
    
    600.0
    
    
    
    600.0Long-term debt:Senior unsecured revolving credit facility
    
    
    1,100.0
    
    
    
    1,400.0Senior unsecured term loan
    
    
    1,000.0
    
    
    
    1,000.07.25% senior notes due 2013, net of unamortized discount
    
    
    497.6
    
    
    
    497.46.125% senior notes due 2013, net of unamortized discount
    
    
    298.4
    
    
    
    7.125% senior notes due 2018, net of unamortized discount
    
    
    1,187.7
    
    
    
    Fair value of interest rate swap agreements
    
    
    (0.7
    )
    
    
    (3.0
    )Total long-term debt
    
    
    4,083.0
    
    
    
    2,894.4Total debt
    
    $
    4,683.0
    
    
    $
    3,494.4
 6.125%
and 7.125% Senior Notes .
   7.25%
Senior Notes.
 9




---



##### Table of Contents



Five-Year Credit Facilities.
  Accounts Receivable Financing Facility .
 Covenants.
 10




---



##### Table of Contents



Aggregate Maturities and Interest Expense.
 Fiscal Years Ending December2008
    
    $
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2,100.0Thereafter
    
    
    2,000.0Total
    
    $
    4,100.0
  8. PENSION AND OTHER POSTRETIREMENT BENEFITS
 Net Pension and Postretirement Benefit Cost.
 Quarters Ended
    
    
    Six Months EndedJune 28, 2008
    
    
    June 30, 2007
    
    
    June 28, 2008
    
    
    June 30, 2007Service cost
    
    $
    6.9
    
    
    $
    4.7
    
    
    $
    12.6
    
    
    $
    9.1Interest cost
    
    
    2.5
    
    
    
    2.3
    
    
    
    4.8
    
    
    
    4.0Expected return on plan assets
    
    
    (3.3
    )
    
    
    (3.2
    )
    
    
    (6.5
    )
    
    
    (5.6
    )Net amortization of actuarial losses
    
    
    0.1
    
    
    
    (0.1
    )
    
    
    0.1
    
    
    
    Net pension cost
    
    $
    6.2
    
    
    $
    3.7
    
    
    $
    11.0
    
    
    $
    7.5
   Quarters Ended
    
    
    Six Months EndedJune 28, 2008
    
    
    June 30, 2007
    
    
    June 28, 2008
    
    
    June 30, 2007Service cost
    
    $
    0.2
    
    
    $
    0.2
    
    
    $
    0.4
    
    
    $
    0.4Interest cost
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.4Amortization of prior service credit
    
    
    (1.0
    )
    
    
    (1.1
    )
    
    
    (2.1
    )
    
    
    (2.2
    )Net amortization of actuarial losses
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.3Net postretirement benefit credit
    
    $
    (0.6
    )
    
    $
    (0.6
    )
    
    $
    (1.1
    )
    
    $
    (1.1
    )
  9. SEGMENT REPORTING
 Reportable Segments.
 11




---



##### Table of Contents



Selected Segment Income and Asset Information.
 Quarterly Results:
 Quarter Ended June 28, 2008
    
    
    Quarter Ended June 30, 2007Specialty
    
    
    
    
    
    
    
    
    
    
    SpecialtyPBM(1)
    
    
    Pharmacy(2)
    
    
    Total
    
    
    PBM
    
    
    Pharmacy
    
    
    TotalProduct net revenues
    
    $
    10,646.7
    
    
    $
    1,960.4
    
    
    $
    12,607.1
    
    
    $
    9,431.5
    
    
    $
    1,480.8
    
    
    $
    10,912.3Total service revenues
    
    
    146.0
    
    
    
    21.5
    
    
    
    167.5
    
    
    
    123.3
    
    
    
    14.0
    
    
    
    137.3Total net revenues
    
    
    10,792.7
    
    
    
    1,981.9
    
    
    
    12,774.6
    
    
    
    9,554.8
    
    
    
    1,494.8
    
    
    
    11,049.6Total cost of revenues
    
    
    10,017.1
    
    
    
    1,824.0
    
    
    
    11,841.1
    
    
    
    8,969.1
    
    
    
    1,375.9
    
    
    
    10,345.0Selling, general and administrative expenses
    
    
    289.5
    
    
    
    78.9
    
    
    
    368.4
    
    
    
    219.1
    
    
    
    54.9
    
    
    
    274.0Amortization of intangibles
    
    
    59.4
    
    
    
    11.2
    
    
    
    70.6
    
    
    
    45.0
    
    
    
    9.6
    
    
    
    54.6Operating income
    
    $
    426.7
    
    
    $
    67.8
    
    
    $
    494.5
    
    
    $
    321.6
    
    
    $
    54.4
    
    
    $
    376.0Reconciling item to income before provision for income taxes:Interest and other (income) expense, net
    
    
    
    
    
    
    
    
    
    
    57.5
    
    
    
    
    
    
    
    
    
    
    
    21.9Income before provision for income taxes
    
    
    
    
    
    
    
    
    
    $
    437.0
    
    
    
    
    
    
    
    
    
    
    $
    354.1Capital expenditures
    
    $
    42.9
    
    
    $
    5.6
    
    
    $
    48.5
    
    
    $
    29.0
    
    
    $
    5.4
    
    
    $
    34.4
 Year-to-Date Results:
 Six Months Ended June 28, 2008
    
    
    Six Months Ended June 30, 2007Specialty
    
    
    
    
    
    
    
    
    
    
    SpecialtyPBM(1)
    
    
    Pharmacy(2)
    
    
    Total
    
    
    PBM
    
    
    Pharmacy
    
    
    TotalProduct net revenues
    
    $
    21,579.0
    
    
    $
    3,835.0
    
    
    $
    25,414.0
    
    
    $
    19,022.8
    
    
    $
    2,915.8
    
    
    $
    21,938.6Total service revenues
    
    
    287.0
    
    
    
    36.6
    
    
    
    323.6
    
    
    
    241.9
    
    
    
    28.7
    
    
    
    270.6Total net revenues
    
    
    21,866.0
    
    
    
    3,871.6
    
    
    
    25,737.6
    
    
    
    19,264.7
    
    
    
    2,944.5
    
    
    
    22,209.2Total cost of revenues
    
    
    20,335.2
    
    
    
    3,568.6
    
    
    
    23,903.8
    
    
    
    18,021.5
    
    
    
    2,709.4
    
    
    
    20,730.9Selling, general and administrative expenses
    
    
    547.5
    
    
    
    149.3
    
    
    
    696.8
    
    
    
    414.5
    
    
    
    107.9
    
    
    
    522.4Amortization of intangibles
    
    
    117.9
    
    
    
    22.2
    
    
    
    140.1
    
    
    
    90.0
    
    
    
    19.3
    
    
    
    109.3Operating income
    
    $
    865.4
    
    
    $
    131.5
    
    
    $
    996.9
    
    
    $
    738.7
    
    
    $
    107.9
    
    
    $
    846.6Reconciling item to income before provision for income taxes:Interest and other (income) expense, net
    
    
    
    
    
    
    
    
    
    
    111.8
    
    
    
    
    
    
    
    
    
    
    
    36.8Income before provision for income taxes
    
    
    
    
    
    
    
    
    
    $
    885.1
    
    
    
    
    
    
    
    
    
    
    $
    809.8Capital expenditures
    
    $
    75.6
    
    
    $
    12.0
    
    
    $
    87.6
    
    
    $
    49.0
    
    
    $
    10.4
    
    
    $
    59.4
 12




---



##### Table of Contents



Identifiable Assets:
 As of June 28, 2008
    
    
    As of December 29, 2007Specialty
    
    
    
    
    
    
    
    
    
    
    SpecialtyPBM
    
    
    Pharmacy
    
    
    Total
    
    
    PBM
    
    
    Pharmacy
    
    
    TotalTotal identifiable assets
    
    $
    12,866.7
    
    
    $
    3,678.9
    
    
    $
    16,545.6
    
    
    $
    12,597.7
    
    
    $
    3,620.2
    
    
    $
    16,217.9
 
 (1)
    
    Includes PolyMedicas and Europa Apotheeks operating results commencing on the October 31, 2007 and April 28, 2008 acquisition dates, respectively.(2)
    
    Includes Critical Cares operating results commencing on the November 14, 2007 acquisition date. 10. COMMITMENTS AND CONTINGENCIES
 Legal Proceedings
    Government Proceedings and Requests for Information. qui tam qui tam qui tam
 ERISA and Similar Litigation . Gruer v. Merck-Medco
Managed Care, L.L.C.
 13




---



##### Table of Contents



Gruer Gruer
 Gruer Blumenthal v. Merck-Medco Managed Care, L.L.C.,
et al.,
 Gruer Betty Jo Jones v. Merck-Medco Managed Care, L.L.C., et al., Gruer Jones Gruer United Food and Commercial Workers Local Union No. 1529 and Employers
Health and Welfare Plan Trust v. Medco Health Solutions, Inc. and Merck & Co., Inc.
 Miles v. Merck-Medco Managed Care, L.L.C., Miles
  Antitrust and Related Litigation . Brady Enterprises, Inc.,
et al. v. Medco Health Solutions, Inc., et al.
 14




---



##### Table of Contents



North Jackson Pharmacy, Inc., et al. v. Medco Health
Solutions, Inc., et al.
 Mikes Medical Center Pharmacy, et al. v. Medco Health
Solutions, Inc., et al Alameda Drug Company
 Brady North Jackson, Brady, Mikes Medical Center In re Pharmacy Benefit Managers Antitrust Litigation.
 Alameda Drug Company, Inc., et al. v. Medco Health
Solutions, Inc., et al.
 Chelsea Family Pharmacy, PLLC v. Medco Health Solutions,
Inc.,
 15




---



##### Table of Contents



Contract Litigation .
 Bankruptcy Preference Litigation. Berman
v. Paid Prescriptions, LLC (In re HNRC Dissolution Co.)
 Accredo .
  PolyMedica Shareholder Litigation. Groen v. PolyMedica Corp. et al.,
   Other Matters
  16




---



##### Table of Contents



Purchase Obligations
   11. RECENT ACCOUNTING PRONOUNCEMENTS
     17




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  
    
    Competition in the PBM, specialty pharmacy and the broader healthcare industry is
intense and could impair our ability to attract and retain clients;
    
    Failure to retain key clients and their members could result in significantly decreased
revenues and could harm our profitability;
    
    If we do not continue to earn and retain purchase discounts and rebates from
manufacturers at current levels, our gross margins may decline;
    
    Our acquisition activity has increased recently and if we are unable to effectively
integrate acquired businesses into ours, our operating results may be adversely affected.
Even if we are successful, the integration of these businesses has required, and will
likely continue to require, significant resources and management attention;
    
    If we fail to comply with complex and rapidly evolving laws and regulations, we could
suffer penalties, or be required to pay substantial damages or make significant changes to
our operations;
    
    Government efforts to reduce healthcare costs and alter healthcare financing practices
could lead to a decreased demand for our services or to reduced profitability;
    
    Failure to execute our Medicare Part D prescription drug benefits strategy could
adversely impact our business and financial results;
    
    PBMs could be subject to claims under ERISA if they are found to be a fiduciary of a
health benefit plan governed by ERISA;
    
    Pending litigation could adversely impact our business practices and have a material
adverse effect on our business, financial condition, liquidity and operating results;
    
    We are subject to corporate integrity agreements and noncompliance may impede our
ability to conduct business with the federal government;
 18




---



##### Table of Contents




    
    Legislative or regulatory initiatives that restrict or prohibit the PBM industrys
ability to use patient identifiable medical information could limit our ability to use
information that is critical to the operation of our business;
    
    Our specialty pharmacy business is highly dependent on our relationships with a limited
number of biopharmaceutical suppliers and the loss of any of these relationships could
significantly impact our ability to sustain or increase our revenues;
    
    Our ability to grow our specialty pharmacy business could be limited if we do not expand
our existing base of drugs or if we lose patients;
    
    Our specialty pharmacy business, certain revenues from diabetes testing supplies and our
Medicare Part D offerings expose us to increased credit risk;
    
    Changes in industry pricing benchmarks could adversely affect our financial performance;
    
    The terms and covenants relating to our existing indebtedness could adversely impact our
financial performance;
    
    Prescription volumes may decline, and our net revenues and profitability may be
negatively impacted, if products are withdrawn from the market, if prescription drugs
transition to over-the-counter products, or if increased safety risk profiles of specific
drugs result in utilization decreases;
    
    We may be subject to liability claims for damages and other expenses that are not
covered by insurance;
    
    The success of our business depends on maintaining a well-secured pharmacy operation and
technology infrastructure and failure to execute could adversely impact our business;
    
    We could be required to record a material non-cash charge to income if our recorded
intangible assets or goodwill are impaired, or if we shorten intangible asset useful lives;
    
    Changes in reimbursement rates, including competitive bidding for durable medical
equipment suppliers, could negatively affect our PolyMedica diabetes testing supplies
revenues and profits under our Liberty brand; and
    
    Anti-takeover provisions of the Delaware General Corporation Law (DGCL), our
certificate of incorporation and our bylaws could delay or deter a change in control and
make it more difficult to remove incumbent officers and directors.
  Overview
 Medco Therapeutic Resource
Centers ®
 19




---



##### Table of Contents



Medco Therapeutic Resource Centers ®
    Key Indicators Reviewed by Management
 
 Financial Performance Summary for the Quarter and Six Months Ended June 28, 2008
 Plavix ®
  20




---



##### Table of Contents



Plavix
    
  21




---



##### Table of Contents



Key Financial Statement Components
 Consolidated Statements of Income
      22




---



##### Table of Contents



23




---



##### Table of Contents



Consolidated Balance Sheets
      24




---



##### Table of Contents



Consolidated Statements of Cash Flows
    Client-Related Information
  Segment Discussion
  25




---



##### Table of Contents



Consolidated Results of Operations
  Quarter
    
    
    
    
    
    
    
    
    
    Quarter
    
    Six Months
    
    
    
    
    
    
    
    
    
    Six MonthsEnded
    
    
    
    
    
    
    
    
    
    Ended
    
    Ended
    
    
    
    
    
    
    
    
    
    EndedJune 28,
    
    Increase
    
    June 30,
    
    June 28,
    
    Increase
    
    June 30,2008(1)
    
    (Decrease)
    
    2007
    
    2008(1)
    
    (Decrease)
    
    2007Net RevenuesRetail product(2)
    
    $
    7,156.8
    
    
    $
    553.5
    
    
    
    8.4
    %
    
    $
    6,603.3
    
    
    $
    14,572.3
    
    
    $
    1,256.7
    
    
    
    9.4
    %
    
    $
    13,315.6Mail-order product
    
    
    5,450.3
    
    
    
    1,141.3
    
    
    
    26.5
    %
    
    
    4,309.0
    
    
    
    10,841.7
    
    
    
    2,218.7
    
    
    
    25.7
    %
    
    
    8,623.0Total product(2)
    
    $
    12,607.1
    
    
    $
    1,694.8
    
    
    
    15.5
    %
    
    $
    10,912.3
    
    
    $
    25,414.0
    
    
    $
    3,475.4
    
    
    
    15.8
    %
    
    $
    21,938.6Client and other service
    
    
    118.4
    
    
    
    17.6
    
    
    
    17.5
    %
    
    
    100.8
    
    
    
    233.3
    
    
    
    35.7
    
    
    
    18.1
    %
    
    
    197.6Manufacturer service
    
    
    49.1
    
    
    
    12.6
    
    
    
    34.5
    %
    
    
    36.5
    
    
    
    90.3
    
    
    
    17.3
    
    
    
    23.7
    %
    
    
    73.0Total service
    
    $
    167.5
    
    
    $
    30.2
    
    
    
    22.0
    %
    
    $
    137.3
    
    
    $
    323.6
    
    
    $
    53.0
    
    
    
    19.6
    %
    
    $
    270.6Total net revenues(2)
    
    $
    12,774.6
    
    
    $
    1,725.0
    
    
    
    15.6
    %
    
    $
    11,049.6
    
    
    $
    25,737.6
    
    
    $
    3,528.4
    
    
    
    15.9
    %
    
    $
    22,209.2Cost of RevenuesProduct(2)
    
    $
    11,794.0
    
    
    $
    1,482.1
    
    
    
    14.4
    %
    
    $
    10,311.9
    
    
    $
    23,810.8
    
    
    $
    3,149.0
    
    
    
    15.2
    %
    
    $
    20,661.8Service
    
    
    47.1
    
    
    
    14.0
    
    
    
    42.3
    %
    
    
    33.1
    
    
    
    93.0
    
    
    
    23.9
    
    
    
    34.6
    %
    
    
    69.1Total cost of revenues(2)
    
    $
    11,841.1
    
    
    $
    1,496.1
    
    
    
    14.5
    %
    
    $
    10,345.0
    
    
    $
    23,903.8
    
    
    $
    3,172.9
    
    
    
    15.3
    %
    
    $
    20,730.9Gross Margin(3)Product
    
    $
    813.1
    
    
    $
    212.7
    
    
    
    35.4
    %
    
    $
    600.4
    
    
    $
    1,603.2
    
    
    $
    326.4
    
    
    
    25.6
    %
    
    $
    1,276.8Product gross margin percentage
    
    
    6.4
    %
    
    
    0.9
    %
    
    
    
    
    
    
    5.5
    %
    
    
    6.3
    %
    
    
    0.5
    %
    
    
    
    
    
    
    5.8
    %Service
    
    $
    120.4
    
    
    $
    16.2
    
    
    
    15.5
    %
    
    $
    104.2
    
    
    $
    230.6
    
    
    $
    29.1
    
    
    
    14.4
    %
    
    $
    201.5Service gross margin percentage
    
    
    71.9
    %
    
    
    (4.0
    %)
    
    
    
    
    
    
    75.9
    %
    
    
    71.3
    %
    
    
    (3.2
    %)
    
    
    
    
    
    
    74.5
    %Total gross margin
    
    $
    933.5
    
    
    $
    228.9
    
    
    
    32.5
    %
    
    $
    704.6
    
    
    $
    1,833.8
    
    
    $
    355.5
    
    
    
    24.0
    %
    
    $
    1,478.3Gross margin percentage
    
    
    7.3
    %
    
    
    0.9
    %
    
    
    
    
    
    
    6.4
    %
    
    
    7.1
    %
    
    
    0.4
    %
    
    
    
    
    
    
    6.7
    %
 26




---



##### Table of Contents



Quarter
    
    
    
    
    
    
    
    
    
    Quarter
    
    Six Months
    
    
    
    
    
    
    
    
    
    Six MonthsEnded
    
    
    
    
    
    
    
    
    
    Ended
    
    Ended
    
    
    
    
    
    
    
    
    
    EndedJune 28,
    
    Increase
    
    June 30,
    
    June 28,
    
    Increase
    
    June 30,2008(1)
    
    (Decrease)
    
    2007
    
    2008(1)
    
    (Decrease)
    
    2007Volume InformationRetail prescriptions
    
    
    119.6
    
    
    
    3.7
    
    
    
    3.2
    %
    
    
    115.9
    
    
    
    246.8
    
    
    
    11.4
    
    
    
    4.8
    %
    
    
    235.4Mail-order prescriptions
    
    
    26.3
    
    
    
    2.8
    
    
    
    11.9
    %
    
    
    23.5
    
    
    
    52.9
    
    
    
    5.9
    
    
    
    12.6
    %
    
    
    47.0Total prescriptions
    
    
    145.9
    
    
    
    6.5
    
    
    
    4.7
    %
    
    
    139.4
    
    
    
    299.7
    
    
    
    17.3
    
    
    
    6.1
    %
    
    
    282.4Adjusted prescriptions(4)
    
    
    198.1
    
    
    
    11.9
    
    
    
    6.4
    %
    
    
    186.2
    
    
    
    404.8
    
    
    
    29.1
    
    
    
    7.7
    %
    
    
    375.7Adjusted mail-order
penetration(5)
    
    
    39.7
    %
    
    
    2.0
    %
    
    
    
    
    
    
    37.7
    %
    
    
    39.0
    %
    
    
    1.7
    %
    
    
    
    
    
    
    37.3
    %Other volume(6)
    
    
    1.5
    
    
    
    1.5
    
    
    
    N/M
    *
    
    
    
    
    
    
    2.7
    
    
    
    2.7
    
    
    
    N/M
    *
    
    
    Generic Dispensing Rate InformationRetail generic dispensing rate
    
    
    65.6
    %
    
    
    4.8
    %
    
    
    
    
    
    
    60.8
    %
    
    
    65.4
    %
    
    
    4.9
    %
    
    
    
    
    
    
    60.5
    %Mail-order generic dispensing rate
    
    
    54.9
    %
    
    
    5.0
    %
    
    
    
    
    
    
    49.9
    %
    
    
    54.2
    %
    
    
    5.1
    %
    
    
    
    
    
    
    49.1
    %Overall generic dispensing rate
    
    
    63.7
    %
    
    
    4.8
    %
    
    
    
    
    
    
    58.9
    %
    
    
    63.5
    %
    
    
    4.9
    %
    
    
    
    
    
    
    58.6
    %
 
 *
    
    Not meaningful.(1)
    
    Includes PolyMedicas, Critical Cares, and Europa Apotheeks operating results commencing on the
October 31, 2007, November 14, 2007, and April 28, 2008 acquisition dates, respectively.(2)
    
    Includes retail co-payments of $1,900 million and $1,887 million for the second quarters of 2008
and 2007, and $4,002 million and $3,874 million for the six months of 2008 and 2007.(3)
    
    Defined as net revenues minus cost of revenues.(4)
    
    Adjusted prescription volume equals the majority of mail-order prescriptions multiplied by 3,
plus retail prescriptions. These mail-order prescriptions are multiplied by 3 to adjust for the
fact that they include approximately 3 times the amount of product days supplied compared with
retail prescriptions.(5)
    
    The percentage of adjusted mail-order prescriptions to total adjusted prescriptions.(6)
    
    Represents over-the-counter drugs, as well as diabetic supplies primarily dispensed by PolyMedica. Net Revenues
 Retail.
 Mail.
   27




---



##### Table of Contents



Gross Margin
 Plavix
    Quarter
    
    
    
    
    
    
    
    
    
    Quarter
    
    Six Months
    
    
    
    
    
    
    
    
    
    Six MonthsEnded
    
    
    
    
    
    
    
    
    
    Ended
    
    Ended
    
    
    
    
    
    
    
    
    
    EndedJune 28,
    
    Increase
    
    June 30,
    
    June 28,
    
    Increase
    
    June 30,2008(1)
    
    (Decrease)
    
    2007
    
    2008(1)
    
    (Decrease)
    
    2007Gross margin(2)
    
    $
    933.5
    
    
    $
    228.9
    
    
    
    32.5
    %
    
    $
    704.6
    
    
    $
    1,833.8
    
    
    $
    355.5
    
    
    
    24.0
    %
    
    $
    1,478.3Selling, general and
administrative expenses
    
    
    368.4
    
    
    
    94.4
    
    
    
    34.5
    %
    
    
    274.0
    
    
    
    696.8
    
    
    
    174.4
    
    
    
    33.4
    %
    
    
    522.4Amortization of intangibles
    
    
    70.6
    
    
    
    16.0
    
    
    
    29.3
    %
    
    
    54.6
    
    
    
    140.1
    
    
    
    30.8
    
    
    
    28.2
    %
    
    
    109.3Interest and other
(income) expense, net
    
    
    57.5
    
    
    
    35.6
    
    
    
    162.6
    %
    
    
    21.9
    
    
    
    111.8
    
    
    
    75.0
    
    
    
    203.8
    %
    
    
    36.8Income before provision for
income taxes
    
    
    437.0
    
    
    
    82.9
    
    
    
    23.4
    %
    
    
    354.1
    
    
    
    885.1
    
    
    
    75.3
    
    
    
    9.3
    %
    
    
    809.8Provision for income taxes
    
    
    174.3
    
    
    
    35.1
    
    
    
    25.2
    %
    
    
    139.2
    
    
    
    352.2
    
    
    
    32.1
    
    
    
    10.0
    %
    
    
    320.1Net income
    
    $
    262.7
    
    
    $
    47.8
    
    
    
    22.2
    %
    
    $
    214.9
    
    
    $
    532.9
    
    
    $
    43.2
    
    
    
    8.8
    %
    
    $
    489.7
 28




---



##### Table of Contents



(1)
    
    Includes PolyMedicas, Critical Cares, and Europa Apotheeks operating results commencing on the October 31, 2007, November 14, 2007,
and April 28, 2008 acquisition dates, respectively.(2)
    
    Defined as net revenues minus cost of revenues. Selling, General and Administrative Expenses
  Amortization of Intangibles
  Interest and Other (Income) Expense, Net
  
  Provision for Income Taxes
  Net Income and Earnings per Share
  29




---



##### Table of Contents



Segment Results of Operations
 PBM Segment
  Quarter
    
    
    
    
    
    
    
    
    
    Quarter
    
    Six Months
    
    
    
    
    
    
    
    
    
    Six MonthsEnded
    
    
    
    
    
    
    
    
    
    Ended
    
    Ended
    
    
    
    
    
    
    
    
    
    EndedJune 28,
    
    Increase
    
    June 30,
    
    June 28,
    
    Increase
    
    June 30,2008(1)
    
    (Decrease)
    
    2007
    
    2008(1)
    
    (Decrease)
    
    2007Product net revenues
    
    $
    10,646.7
    
    
    $
    1,215.2
    
    
    
    12.9
    %
    
    $
    9,431.5
    
    
    $
    21,579.0
    
    
    $
    2,556.2
    
    
    
    13.4
    %
    
    $
    19,022.8Total service revenues
    
    
    146.0
    
    
    
    22.7
    
    
    
    18.4
    %
    
    
    123.3
    
    
    
    287.0
    
    
    
    45.1
    
    
    
    18.6
    %
    
    
    241.9Total net revenues
    
    
    10,792.7
    
    
    
    1,237.9
    
    
    
    13.0
    %
    
    
    9,554.8
    
    
    
    21,866.0
    
    
    
    2,601.3
    
    
    
    13.5
    %
    
    
    19,264.7Total cost of revenues
    
    
    10,017.1
    
    
    
    1,048.0
    
    
    
    11.7
    %
    
    
    8,969.1
    
    
    
    20,335.2
    
    
    
    2,313.7
    
    
    
    12.8
    %
    
    
    18,021.5Total gross margin(2)
    
    $
    775.6
    
    
    $
    189.9
    
    
    
    32.4
    %
    
    $
    585.7
    
    
    $
    1,530.8
    
    
    $
    287.6
    
    
    
    23.1
    %
    
    $
    1,243.2Gross margin percentage
    
    
    7.2
    %
    
    
    1.1
    %
    
    
    
    
    
    
    6.1
    %
    
    
    7.0
    %
    
    
    0.5
    %
    
    
    
    
    
    
    6.5
    %Selling, general and administrative expenses
    
    
    289.5
    
    
    
    70.4
    
    
    
    32.1
    %
    
    
    219.1
    
    
    
    547.5
    
    
    
    133.0
    
    
    
    32.1
    %
    
    
    414.5Amortization of intangibles
    
    
    59.4
    
    
    
    14.4
    
    
    
    32.0
    %
    
    
    45.0
    
    
    
    117.9
    
    
    
    27.9
    
    
    
    31.0
    %
    
    
    90.0Operating income
    
    $
    426.7
    
    
    $
    105.1
    
    
    
    32.7
    %
    
    $
    321.6
    
    
    $
    865.4
    
    
    $
    126.7
    
    
    
    17.2
    %
    
    $
    738.7
 (1)
    
    Includes PolyMedicas and Europa Apotheeks operating results commencing on the October 31, 2007 and April 28, 2008 acquisition dates,
respectively.(2)
    
    Defined as net revenues minus cost of revenues.  Plavix
  30




---



##### Table of Contents



Specialty Pharmacy Segment
  Quarter
    
    
    
    
    
    
    
    
    
    Quarter
    
    Six Months
    
    
    
    
    
    
    
    
    
    Six MonthsEnded
    
    
    
    
    
    
    
    
    
    Ended
    
    Ended
    
    
    
    
    
    
    
    
    
    EndedJune 28,
    
    Increase
    
    June 30,
    
    June 28,
    
    Increase
    
    June 30,2008(1)
    
    (Decrease)
    
    2007
    
    2008(1)
    
    (Decrease)
    
    2007Product net revenues
    
    $
    1,960.4
    
    
    $
    479.6
    
    
    
    32.4
    %
    
    $
    1,480.8
    
    
    $
    3,835.0
    
    
    $
    919.2
    
    
    
    31.5
    %
    
    $
    2,915.8Total service revenues
    
    
    21.5
    
    
    
    7.5
    
    
    
    53.6
    %
    
    
    14.0
    
    
    
    36.6
    
    
    
    7.9
    
    
    
    27.5
    %
    
    
    28.7Total net revenues
    
    
    1,981.9
    
    
    
    487.1
    
    
    
    32.6
    %
    
    
    1,494.8
    
    
    
    3,871.6
    
    
    
    927.1
    
    
    
    31.5
    %
    
    
    2,944.5Total cost of revenues
    
    
    1,824.0
    
    
    
    448.1
    
    
    
    32.6
    %
    
    
    1,375.9
    
    
    
    3,568.6
    
    
    
    859.2
    
    
    
    31.7
    %
    
    
    2,709.4Total gross margin(2)
    
    $
    157.9
    
    
    $
    39.0
    
    
    
    32.8
    %
    
    $
    118.9
    
    
    $
    303.0
    
    
    $
    67.9
    
    
    
    28.9
    %
    
    $
    235.1Gross margin percentage
    
    
    8.0
    %
    
    
    
    
    
    
    
    
    
    
    8.0
    %
    
    
    7.8
    %
    
    
    (0.2
    %)
    
    
    
    
    
    
    8.0
    %Selling, general and
administrative expenses
    
    
    78.9
    
    
    
    24.0
    
    
    
    43.7
    %
    
    
    54.9
    
    
    
    149.3
    
    
    
    41.4
    
    
    
    38.4
    %
    
    
    107.9Amortization of intangibles
    
    
    11.2
    
    
    
    1.6
    
    
    
    16.7
    %
    
    
    9.6
    
    
    
    22.2
    
    
    
    2.9
    
    
    
    15.0
    %
    
    
    19.3Operating income
    
    $
    67.8
    
    
    $
    13.4
    
    
    
    24.6
    %
    
    $
    54.4
    
    
    $
    131.5
    
    
    $
    23.6
    
    
    
    21.9
    %
    
    $
    107.9
 (1)
    
    Includes Critical Cares operating results commencing on the November 14, 2007 acquisition date.(2)
    
    Defined as net revenues minus cost of revenues.    31




---



##### Table of Contents



Liquidity and Capital Resources
 Cash Flows
  Six Months Ended
    
    
    
    
    
    
    Six Months EndedJune 28,
    
    
    
    
    
    
    June 30,2008(1)
    
    
    Variance
    
    
    2007Net cash provided by operating activities
    
    $
    200.2
    
    
    $
    (476.5
    )
    
    $
    676.7Net cash used by investing activities
    
    
    (220.8
    )
    
    
    (166.6
    )
    
    
    (54.2
    )Net cash used by financing activities
    
    
    (381.8
    )
    
    
    75.5
    
    
    
    (457.3
    )Net (decrease) increase in cash and cash equivalents
    
    
    (402.4
    )
    
    
    (567.6
    )
    
    
    165.2Cash and cash equivalents at beginning of period
    
    
    774.1
    
    
    
    (44.4
    )
    
    
    818.5Cash and cash equivalents at end of period
    
    $
    371.7
    
    
    $
    (612.0
    )
    
    $
    983.7
 
 (1)
    
    Includes PolyMedicas, Critical Cares, and Europa
Apotheeks operating results commencing on the October 31,
2007, November 14, 2007, and April 28, 2008 acquisition
dates, respectively. Operating Activities.
  Investing Activities.
 Financing Activities.
 32




---



##### Table of Contents



Financing Facilities
 Five-Year Credit Facilities
   Accounts Receivable Financing Facility
  33




---



##### Table of Contents



Credit Lines
  Interest Rates
  Swap Agreements
    Covenants
  Debt Ratings
  34




---



##### Table of Contents



EBITDA
    Quarters Ended
    
    
    Six Months EndedJune 28,
    
    
    June 30,
    
    
    June 28,
    
    
    June 30,2008(1)
    
    
    2007
    
    
    2008(1)
    
    
    2007Net income
    
    $
    262.7
    
    
    $
    214.9
    
    
    $
    532.9
    
    
    $
    489.7Add:Interest and other (income) expense, net
    
    
    57.5
    
    
    
    21.9
    
    
    
    111.8
    (2)
    
    
    36.8Provision for income taxes
    
    
    174.3
    
    
    
    139.2
    
    
    
    352.2
    
    
    
    320.1Depreciation expense
    
    
    39.0
    
    
    
    43.9
    
    
    
    79.0
    
    
    
    85.4Amortization expense
    
    
    70.6
    
    
    
    54.6
    
    
    
    140.1
    
    
    
    109.3EBITDA
    
    $
    604.1
    
    
    $
    474.5
    
    
    $
    1,216.0
    
    
    $
    1,041.3Adjusted prescriptions(3)
    
    
    198.1
    
    
    
    186.2
    
    
    
    404.8
    
    
    
    375.7EBITDA per adjusted prescription
    
    $
    3.05
    
    
    $
    2.55
    
    
    $
    3.00
    
    
    $
    2.77
 
 (1)
    
    Includes PolyMedicas, Critical Cares, and Europa
Apotheeks operating results commencing on the October 31,
2007, November 14, 2007, and April 28, 2008 acquisition
dates, respectively.(2)
    
    Includes a $9.8 million charge for the ineffective portion
of the forward-starting interest rate swap agreements
associated with the March 2008 issuance of senior notes as
discussed above in Liquidity and Capital ResourcesSwap
Agreements.(3)
    
    Adjusted prescription volume equals the majority of
mail-order prescriptions multiplied by 3, plus retail
prescriptions. These mail-order prescriptions are
multiplied by 3 to adjust for the fact that they include
approximately 3 times the amount of product days supplied
compared with retail prescriptions.  35




---



##### Table of Contents



Plavix
 Commitments
 Contractual Obligations
  Payments Due By Period
 RemainderTotal
    
    of 2008
    
    2009-2010
    
    2011-2012
    
    ThereafterLong-term debt obligations(1)
    
    $
    4,100.0
    
    
    $
    
    
    
    $
    
    
    
    $
    2,100.0
    
    
    $
    2,000.0Interest expense on long-term debt obligations(2)
    
    
    1,376.8
    
    
    
    103.1
    
    
    
    412.5
    
    
    
    370.8
    
    
    
    490.4Operating lease obligations(3)
    
    
    114.6
    
    
    
    20.5
    
    
    
    62.8
    
    
    
    21.9
    
    
    
    9.4Purchase commitments(4)
    
    
    137.7
    
    
    
    132.9
    
    
    
    4.8
    
    
    
    
    
    
    
    Other(5)
    
    
    34.3
    
    
    
    
    
    
    
    10.0
    
    
    
    24.3
    
    
    
    Total
    
    $
    5,763.4
    
    
    $
    256.5
    
    
    $
    490.1
    
    
    $
    2,517.0
    
    
    $
    2,499.8
 (1)
    
    Long-term debt obligations exclude $16.3 million in total
unamortized discounts on our 7.25%, 6.125% and 7.125%
senior notes and the fair value of interest rate swap
agreements of $0.7 million on $200 million of the 7.25%
senior notes.(2)
    
    The variable component of interest expense for the senior
unsecured credit facility is based on the second-quarter
2008 LIBOR. The LIBOR fluctuates and may result in
differences in the presented interest expense on long-term
debt obligations.(3)
    
    Reflects contractual operating lease commitments to lease
pharmacy and call center pharmacy facilities, offices and
warehouse space throughout the United States, as well as
pill dispensing and counting devices and other operating
equipment for use in our mail-order pharmacies and computer
equipment for use in our data centers.(4)
    
    Primarily represents contractual commitments to purchase
inventory from certain biopharmaceutical manufacturers and
a brand-name pharmaceutical manufacturer. As of June 28,
2008, these purchase obligations amounted to $124.1 million
for the remainder of 2008, the majority of which is
associated with Accredos specialty pharmacy business. In
addition, PolyMedica has entered into purchase commitments
for advertising and other media to obtain favorable
advertising rates. As of June 28, 2008, these commitments
amounted to $13.6 million through 2010, of which $8.8
million is committed for the remainder of 2008.(5)
    
    As part of the PolyMedica acquisition, we assumed a $10
million note payable associated with a previous PolyMedica
acquisition, which is included in other noncurrent
liabilities in the consolidated balance sheets. In
addition, as part of the Europa Apotheek acquisition, we
have a purchase obligation of $24.3 million anticipated to
be settled in 2012, which is included in other noncurrent
liabilities in the consolidated balance sheet as of June
28, 2008.     36




---



##### Table of Contents



Off-Balance Sheet Arrangements
  Share Repurchase Program
  Looking Forward
    Recently Adopted Financial Accounting Standard
   Fair Value Hierarchy.
 
 37




---



##### Table of Contents



Medco Fair Value Measurements at Reporting DateDescription
    
    June 28, 2008
    
    Level 1
    
    Level 2
    
    Level 3Money market mutual funds
    
    $
    218.0
    
    
    $
    218.0
    
    
    $
    
    
    
    $
    Available-for-sale investments
    
    
    5.8
    
    
    
    1.9
    
    
    
    3.9
    
    
    
    Fair value of interest rate swap agreements
    
    
    (0.7
    )
    
    
    
    
    
    
    (0.7
    )
    
    
    
  Recent Accounting Pronouncements
     38




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
   
 Item 4. Controls and Procedures
  39




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  Bankruptcy Preference Litigation. Berman
v. Paid Prescriptions, LLC (In re HNRC Dissolution Co.)
 Accredo .
  PolyMedica Shareholder Litigation .
 
 Item 1A. Risk Factors
  Changes in reimbursement rates, including competitive bidding for durable medical equipment
suppliers, could negatively affect our PolyMedica diabetes testing supplies revenues and profits
under our Liberty brand.
   40




---



##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   Issuer Purchases of Equity Securities
 Total number of
    
    
    Approximateshares purchased
    
    
    dollar value ofas part of a
    
    
    sharespublicly
    
    
    that may yet beAverage
    
    
    announced
    
    
    purchased underTotal number of shares
    
    
    price paid
    
    
    program since
    
    
    the program(3)Fiscal Period
    
    purchased
    
    
    per share(1)
    
    
    inception(2)
    
    
    (in thousands)Balances at March 29, 2008
    
    
    
    
    
    
    
    
    
    
    132,450,405
    
    
    $
    983,864Fiscal April 2008
    
    
    10,890,300
    
    
    $
    44.53
    
    
    
    10,890,300
    
    
    $
    498,922Fiscal May 2008
    
    
    1,546,500
    
    
    $
    50.10
    
    
    
    1,546,500
    
    
    $
    421,448Fiscal June 2008
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    421,448Second quarter 2008 totals
    
    
    12,436,800
    
    
    $
    45.22
    
    
    
    12,436,800
 
 (1)
    
    Dollar amounts include transaction costs. The total average price paid per share in the table above represents
the average price paid per share for repurchases initiated during the three months ended June 28, 2008. The
average price paid per share for repurchases initiated since inception is $35.05.(2)
    
    The Company repurchased all of the above-referenced shares of its common stock through its publicly announced
share repurchase program.(3)
    
    These amounts reflect the remaining authorized repurchases based on the increase in the authorized repurchases. 
 Item 3. Defaults Upon Senior Securities
  41




---



##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
   For
    
    
    Against
    
    
    AbstainJohn L. Cassis
    
    
    438,279,444
    
    
    
    6,561,634
    
    
    
    4,902,130Michael Goldstein, CPA
    
    
    437,404,353
    
    
    
    7,655,882
    
    
    
    4,682,973Blenda J.
Wilson, Ph.D.
    
    
    438,882,916
    
    
    
    6,289,593
    
    
    
    4,570,700
  Ratification of Auditors
 Amendment to Certificate of Incorporation
 Shareholder Proposal
 
 Item 5. Other Information
 Rule 10b5-1 Sales Plans.
  42




---



##### Table of Contents



(1)
 Number of Shares to
    
    
    
    Number of Shares
    
    Projectedbe Sold Under the
    
    
    
    Sold Under the
    
    BeneficialName and Position
    
    Plan(2)
    
    Timing of Sales Under the Plan
    
    Plan(3)
    
    Ownership(4)Bryan D. Birch
    
    60,000
    
    Sale of previously acquired
    
    0
    
    152,322Group President, Employer Accounts
    
    
    
    shares shall trigger intranches of 20,000; 20,000and 20,000 if stock reachesspecified prices.John P. Driscoll
    
    27,934
    
    Option exercise in tranches
    
    0
    
    105,215President, New Markets
    
    
    
    of 18,934 and 1,000 sharesshall trigger if stockreaches specific prices; saleof 8,000 previously acquiredshares shall trigger if stockreaches specified price.Robert S. Epstein
    
    57,518
    
    Option exercise of 26,000
    
    0
    
    111,941Senior Vice President, Medical and
    
    
    
    shall trigger if stockAnalytical Affairs and Chief Medical
    
    
    
    reaches specific price; saleOfficer
    
    
    
    of previously acquired sharesshall trigger in tranches of19,752 and 11,766 if stockreaches specified prices.Kenneth O. Klepper
    
    53,334
    
    Sale of 11,000 previously
    
    11,000
    
    349,550President and Chief Operating Officer
    
    
    
    acquired shares if stockreaches a specified price andsales related to exercise of53,334 options shall triggerif stock reaches specifiedprice.Thomas M. Moriarty
    
    20,958
    
    Option exercise of 20,958
    
    8,120
    
    13,716General Counsel, Secretary and
    
    
    
    shall trigger if stockSenior Vice President, Pharmaceutical
    
    
    
    reaches specific price; saleContracting
    
    
    
    of 8,120 previously acquiredshares shall trigger if stockreaches specified price.Karin Princivalle
    
    25,218
    
    Option exercise of 14,200
    
    0
    
    61,952Senior Vice President, Human Resources
    
    
    
    shall trigger if stockreaches specific price; saleof 11,018 previously acquiredshares shall trigger if stockreaches specified price.David B. Snow, Jr.
    
    200,000
    
    Sale of 200,000 previously
    
    0
    
    1,550,828Chairman and Chief Executive Officer
    
    
    
    acquired shares if stockreaches a specified price.David D. Stevens
    
    70,000
    
    Sale of 70,000 previously
    
    0
    
    96,630Director
    
    
    
    acquired shares shall triggerif stock reaches specifiedprice.
 
 (1)
    
    This table does not include any trading plans entered into by any executive
officer that have expired by their terms or have been fully executed through July 24, 2008.
No plans entered into by executive officers have been voluntarily terminated.(2)
    
    This column reflects the number of shares remaining to be sold as of July 24,
2008.(3)
    
    This column reflects the number of shares sold under the plan through July 24,
2008.(4)
    
    This column reflects an estimate of the number of whole shares each identified
executive officer will beneficially own following the sale of all shares under the Rule
10b5-1 sales plans currently in effect. This information reflects the beneficial ownership
of our common stock as of July 24, 2008, and includes shares of our common stock subject to
options or restricted stock units that were then vested or exercisable and unvested options
and restricted stock units that are included in a current trading plan for sales periods
that begin after the applicable vesting date. Options cannot be exercised and restricted
stock units cannot be converted prior to vesting. The estimates reflect option exercises
and sales under the plan, but do not reflect any changes to beneficial ownership that may
have occurred since July 24, 2008 outside of the plan. 43




---



##### Table of Contents



Item 6. Exhibits
 Number
    
    Description
    
    Method of Filing3.1
    
    Third Amended and Restated
Articles of Incorporation of Medco
Health Solutions, Inc.
(incorporated by reference to
Exhibit 3.1 to the Registrants
Current Report on Form 8-K filed
May 23, 2008).
    
    Incorporated by reference.3.2
    
    Third Amended and Restated Bylaws
of Medco Health Solutions, Inc.
(incorporated by reference to
Exhibit 3.1 to the Registrants
Current Report on Form 8-K filed
February 5, 2008).
    
    Incorporated by reference.31.1
    
    Certification of Chief Executive
Officer pursuant to Exchange Act
Rules 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
    
    Filed with this document.31.2
    
    Certification of Chief Financial
Officer pursuant to Exchange Act
Rules 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
    
    Filed with this document.32.1
    
    Certification of Chief Executive
Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant
to Section 906 of the
Sarbanes-Oxley Act of 2002.
    
    Filed with this document.32.2
    
    Certification of Chief Financial
Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant
to Section 906 of the
Sarbanes-Oxley Act of 2002.
    
    Filed with this document.
 44




---



##### Table of Contents



Signatures
  MEDCO HEALTH SOLUTIONS, INC.
(Registrant)Date: July 24, 2008
    By:
    /s/ David B. Snow, Jr.Name:
    David B. Snow, Jr.Title:
    Chairman and
Chief Executive OfficerDate: July 24, 2008
    By:
    /s/ Richard J. Rubino, C.P.A.Name:
    Richard J. Rubino, C.P.A.Title:
    Senior Vice President, Finance and
Chief Financial Officer 45




---



##### Table of Contents



Index to Exhibits
 Number
    
    Description3.1
    
    
    Third Amended and Restated Articles of Incorporation of Medco
Health Solutions, Inc. (incorporated by reference to Exhibit 3.1 to
the Registrants Current Report on Form 8-K filed May 23, 2008).3.2
    
    
    Third Amended and Restated Bylaws of Medco Health Solutions, Inc.
(incorporated by reference to Exhibit 3.1 to the Registrants
Current Report on Form 8-K filed February 5, 2008).31.1
    
    
    Certification of Chief Executive Officer pursuant to Exchange Act
Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of Chief Financial Officer pursuant to Exchange Act
Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.32.1
    
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.