##### 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 September 27, 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
    
    22-3461740(State or other jurisdiction of incorporation)
    
    (I.R.S. Employer Identification No.)
 100 Parsons Pond Drive, Franklin Lakes, NJ
    
    07417-2603(Address of principal executive offices)
    
    (Zip Code)
  
 þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-Accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



MEDCO HEALTH SOLUTIONS, INC.
 QUARTERLY REPORT ON FORM 10-Q
 INDEX
 PART I  FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets (Unaudited)  September 27, 2008 and
December 29, 2007
    
    1Condensed Consolidated Statements of Income (Unaudited)  Fiscal Quarters and Nine Months
Ended September 27, 2008 and September 29, 2007
    
    2Condensed Consolidated Statement of Stockholders Equity (Unaudited) 
Fiscal Nine Months Ended September 27, 2008
    
    3Condensed Consolidated Statements of Cash Flows (Unaudited)  Fiscal Nine Months Ended
September 27, 2008 and September 29, 2007
    
    4Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Conditionand Results of Operations
    
    19Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    40Item 4.
    
    Controls and Procedures
    
    41PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    41Item 1A.
    
    Risk Factors
    
    42Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    42Item 3.
    
    Defaults Upon Senior Securities
    
    43Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    43Item 5.
    
    Other Information
    
    43Item 6.
    
    Exhibits
    
    45SIGNATURES
    
    46EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION




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##### 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)
 September 27,
    
    
    December 29,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    440.8
    
    
    $
    774.1Short-term investments
    
    
    66.9
    
    
    
    70.3Manufacturer accounts receivable, net
    
    
    1,824.7
    
    
    
    1,516.2Client accounts receivable, net
    
    
    1,494.0
    
    
    
    1,340.3Income taxes receivable
    
    
    211.5
    
    
    
    216.0Inventories, net
    
    
    1,947.2
    
    
    
    1,946.0Prepaid expenses and other current assets
    
    
    73.4
    
    
    
    285.4Deferred tax assets
    
    
    163.4
    
    
    
    154.4Total current assets
    
    
    6,221.9
    
    
    
    6,302.7Property and equipment, net
    
    
    763.8
    
    
    
    725.5Goodwill
    
    
    6,335.5
    
    
    
    6,230.2Intangible assets, net
    
    
    2,738.1
    
    
    
    2,905.0Other noncurrent assets
    
    
    53.8
    
    
    
    54.5Total assets
    
    $
    16,113.1
    
    
    $
    16,217.9LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Claims and other accounts payable
    
    $
    2,173.6
    
    
    $
    2,812.9Client rebates and guarantees payable
    
    
    1,647.8
    
    
    
    1,092.2Accrued expenses and other current liabilities
    
    
    570.0
    
    
    
    624.1Short-term debt
    
    
    600.0
    
    
    
    600.0Total current liabilities
    
    
    4,991.4
    
    
    
    5,129.2Long-term debt, net
    
    
    3,985.0
    
    
    
    2,894.4Deferred tax liabilities
    
    
    1,103.1
    
    
    
    1,167.0Other noncurrent liabilities
    
    
    129.9
    
    
    
    152.0Total liabilities
    
    
    10,209.4
    
    
    
    9,342.6Commitments and contingencies (See Note 12)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: 651,712,143 shares at September 27, 2008 and
647,384,634 shares at December 29, 2007
    
    
    6.5
    
    
    
    6.4Accumulated other comprehensive income (loss)
    
    
    (21.0
    )
    
    
    6.4Additional paid-in capital
    
    
    7,736.4
    
    
    
    7,553.0Retained earnings
    
    
    3,655.0
    
    
    
    2,826.411,376.9
    
    
    
    10,392.2Treasury stock, at cost: 153,258,666 shares at September 27, 2008 and
111,445,348 shares at December 29, 2007
    
    
    (5,473.2
    )
    
    
    (3,516.9
    )Total stockholders equity
    
    
    5,903.7
    
    
    
    6,875.3Total liabilities and stockholders equity
    
    $
    16,113.1
    
    
    $
    16,217.9
 The accompanying notes are an integral part of these condensed consolidated financial statements.
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MEDCO HEALTH SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (UNAUDITED)
 (In millions, except for per share data)
 Quarters Ended
    
    
    Nine Months EndedSeptember
27, 2008
    
    

September 29, 2007
    
    

September
27, 2008
    
    

September 29, 2007Product net revenues (Includes retail co-payments
of $1,828 and $1,831 in the third quarters of 2008
and 2007, and $5,830 and $5,705 in the nine
months of 2008 and 2007)
    
    $
    12,390.3
    
    
    $
    10,783.1
    
    
    $
    37,804.3
    
    
    $
    32,721.7Service revenues
    
    
    168.8
    
    
    
    135.5
    
    
    
    492.3
    
    
    
    406.1Total net revenues
    
    
    12,559.1
    
    
    
    10,918.6
    
    
    
    38,296.6
    
    
    
    33,127.8Cost of operations:Cost of product net revenues (Includes retail
co-payments of $1,828 and $1,831 in the third
quarters of 2008 and 2007, and $5,830 and
$5,705 in the nine months of 2008 and 2007)
    
    
    11,580.7
    
    
    
    10,183.3
    
    
    
    35,391.5
    
    
    
    30,845.0Cost of service revenues
    
    
    53.6
    
    
    
    34.5
    
    
    
    146.7
    
    
    
    103.6Total cost of revenues
    
    
    11,634.3
    
    
    
    10,217.8
    
    
    
    35,538.2
    
    
    
    30,948.6Selling, general and administrative expenses
    
    
    347.2
    
    
    
    263.2
    
    
    
    1,044.0
    
    
    
    785.6Amortization of intangibles
    
    
    71.1
    
    
    
    54.6
    
    
    
    211.2
    
    
    
    163.9Interest and other (income) expense, net
    
    
    58.2
    
    
    
    25.5
    
    
    
    169.9
    
    
    
    62.3Total cost of operations
    
    
    12,110.8
    
    
    
    10,561.1
    
    
    
    36,963.3
    
    
    
    31,960.4Income before provision for income taxes
    
    
    448.3
    
    
    
    357.5
    
    
    
    1,333.3
    
    
    
    1,167.4Provision for income taxes
    
    
    152.6
    
    
    
    142.8
    
    
    
    504.7
    
    
    
    462.9Net income
    
    $
    295.7
    
    
    $
    214.7
    
    
    $
    828.6
    
    
    $
    704.5Basic earnings per share:Weighted average shares outstanding
    
    
    503.3
    
    
    
    537.9
    
    
    
    512.7
    
    
    
    555.3Earnings per share
    
    $
    0.59
    
    
    $
    0.40
    
    
    $
    1.62
    
    
    $
    1.27Diluted earnings per share:Weighted average shares outstanding
    
    
    513.4
    
    
    
    547.9
    
    
    
    523.0
    
    
    
    565.3Earnings per share
    
    $
    0.58
    
    
    $
    0.39
    
    
    $
    1.58
    
    
    $
    1.25
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 2




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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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    828.6
    
    
    
    
    
    
    
    828.6Other comprehensive income, net of tax:Unrealized gain (loss) on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.2
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9.8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9.8
    )Unrealized 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 $0.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.2Defined benefit plans:Amortization of prior service cost
included in net periodic benefit cost,
net of tax of $1.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.9
    )Net gains (losses) includedin net
periodic benefit cost,
net of tax of $(0.2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27.4
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27.4
    )
    
    
    
    
    
    
    828.6
    
    
    
    
    
    
    
    801.2Issuance of common stock for options
exercised, including tax benefit
    
    
    2,898
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    86.8
    
    
    
    
    
    
    
    
    
    
    
    86.9Issuance of common stock under employee
stock purchase plans
    
    
    294
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13.8
    
    
    
    
    
    
    
    
    
    
    
    13.8Restricted stock and restricted stock unit
activity, including tax benefit
    
    
    1,135
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34.6
    
    
    
    
    
    
    
    
    
    
    
    34.6Stock-based compensation related to options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48.2
    
    
    
    
    
    
    
    
    
    
    
    48.2Treasury stock acquired
    
    
    
    
    
    
    41,814
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,956.3
    )
    
    
    (1,956.3
    )Balances at 

September 27, 2008
    
    
    651,712
    
    
    
    153,259
    
    
    $
    6.5
    
    
    $
    (21.0
    )
    
    $
    7,736.4
    
    
    $
    3,655.0
    
    
    $
    (5,473.2
    )
    
    $
    5,903.7
 The accompanying notes are an integral part of this condensed consolidated financial statement.
 3




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MEDCO HEALTH SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 ($ in millions)
 Nine Months EndedSeptember 27, 2008
    
    

September
29, 2007Cash flows from operating activities:Net income
    
    $
    828.6
    
    
    $
    704.5Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    117.7
    
    
    
    124.4Amortization of intangibles
    
    
    211.2
    
    
    
    163.9Deferred income taxes
    
    
    (89.4
    )
    
    
    (99.7
    )Stock-based compensation on employee stock plans
    
    
    97.8
    
    
    
    73.9Tax benefit on employee stock plans
    
    
    63.6
    
    
    
    87.4Excess tax benefits from stock-based compensation arrangements
    
    
    (39.3
    )
    
    
    (58.9
    )Other
    
    
    80.9
    
    
    
    45.7Net changes in assets and liabilities (net of acquisition effects, 2008 only):Manufacturer accounts receivable, net
    
    
    (306.8
    )
    
    
    (6.4
    )Client accounts receivable, net
    
    
    (203.9
    )
    
    
    67.4Inventories, net
    
    
    2.5
    
    
    
    31.1Prepaid expenses and other current assets
    
    
    213.6
    
    
    
    (10.8
    )Income taxes receivable
    
    
    4.5
    
    
    
    Deferred income taxes
    
    
    
    
    
    
    (8.9
    )Other noncurrent assets
    
    
    10.5
    
    
    
    (7.0
    )Claims and other accounts payable
    
    
    (651.5
    )
    
    
    (706.4
    )Client rebates and guarantees payable
    
    
    555.6
    
    
    
    408.1Accrued expenses and other current and noncurrent liabilities
    
    
    (98.4
    )
    
    
    8.1Net cash provided by operating activities
    
    
    797.2
    
    
    
    816.4Cash flows from investing activities:Cash paid for Europa Apotheek Venlo B.V., net of cash acquired
    
    
    (126.5
    )
    
    
    Capital expenditures
    
    
    (156.5
    )
    
    
    (93.5
    )Purchases of securities and other investments
    
    
    (73.0
    )
    
    
    (113.1
    )Proceeds from sale of securities and other investments
    
    
    69.0
    
    
    
    108.5Net cash used by investing activities
    
    
    (287.0
    )
    
    
    (98.1
    )Cash flows from financing activities:Proceeds from long-term debt
    
    
    3,235.7
    
    
    
    1,000.0Repayments on long-term debt
    
    
    (2,150.0
    )
    
    
    (456.5
    )Proceeds under accounts receivable financing facility
    
    
    
    
    
    
    275.0Debt issuance costs
    
    
    (11.3
    )
    
    
    (1.7
    )Settlement of cash flow hedge
    
    
    (45.4
    )
    
    
    Purchase of treasury stock
    
    
    (1,956.3
    )
    
    
    (1,960.6
    )Excess tax benefits from stock-based compensation arrangements
    
    
    39.3
    
    
    
    58.9Proceeds from employee stock plans
    
    
    44.5
    
    
    
    177.6Net cash used by financing activities
    
    
    (843.5
    )
    
    
    (907.3
    )Net decrease in cash and cash equivalents
    
    
    (333.3
    )
    
    
    (189.0
    )Cash and cash equivalents at beginning of period
    
    
    774.1
    
    
    
    818.5Cash and cash equivalents at end of period
    
    $
    440.8
    
    
    $
    629.5
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 4




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




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Medco Fair Value Measurements at Reporting Date
 Description
    

September 27, 2008
    
    Level 1
    
    Level 2
    
    Level 3Money market mutual funds
    
    $
    344.0
    
    
    $
    344.0
    
    
    $
    
    
    
    $
    Available-for-sale investments
    
    
    4.7
    
    
    
    1.9
    
    
    
    2.8
    
    
    
    Fair value of interest rate swap agreements
    
    
    1.0
    
    
    
    
    
    
    
    1.0
    
    
    
    
  3. ACQUISITIONS
 Europa Apotheek Venlo B.V.
 PolyMedica.
 Quarter Ended
    
    Nine Months EndedSeptember 29, 2007
    

September 29, 2007Pro forma total net revenues
    
    $
    11,063.2
    
    
    $
    33,565.0Pro forma net income
    
    $
    210.9
    
    
    $
    694.4Pro forma basic earnings per common share
    
    $
    0.39
    
    
    $
    1.25Pro forma diluted earnings per common share
    
    $
    0.38
    
    
    $
    1.23
 6




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4. EARNINGS PER SHARE (EPS)
  Quarters Ended
    
    Nine Months EndedSeptember 27, 2008
    

September
29, 2007
    

September 27, 2008
    

September
29, 2007Weighted average shares outstanding
    
    
    503.3
    
    
    
    537.9
    
    
    
    512.7
    
    
    
    555.3Dilutive common stock equivalents:Outstanding stock options,
restricted stock units and restricted stock
    
    
    10.1
    
    
    
    10.0
    
    
    
    10.3
    
    
    
    10.0Diluted weighted average shares outstanding
    
    
    513.4
    
    
    
    547.9
    
    
    
    523.0
    
    
    
    565.3
  5. ACCOUNTS RECEIVABLE
   7




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6. GOODWILL AND INTANGIBLE ASSETS, NET
  September 27, 2008
    
    
    December 29, 2007Gross
    
    
    Accumulated
    
    
    
    
    
    
    Gross
    
    
    AccumulatedCarrying Value
    
    
    Amortization
    
    
    Net
    
    

Carrying Value
    
    
    Amortization
    
    
    NetGoodwill:PBM(1)
    
    $
    5,232.1
    
    
    $
    813.4
    
    
    $
    4,418.7
    
    
    $
    5,131.6
    
    
    $
    813.4
    
    
    $
    4,318.2Specialty Pharmacy(2)
    
    
    1,916.8
    
    
    
    
    
    
    
    1,916.8
    
    
    
    1,912.0
    
    
    
    
    
    
    
    1,912.0Total(3)
    
    $
    7,148.9
    
    
    $
    813.4
    
    
    $
    6,335.5
    
    
    $
    7,043.6
    
    
    $
    813.4
    
    
    $
    6,230.2Intangible assets:PBM(1)
    
    $
    3,758.5
    
    
    $
    1,757.8
    
    
    $
    2,000.7
    
    
    $
    3,714.2
    
    
    $
    1,580.0
    
    
    $
    2,134.2Specialty Pharmacy(2)
    
    
    861.5
    
    
    
    124.1
    
    
    
    737.4
    
    
    
    861.5
    
    
    
    90.7
    
    
    
    770.8Total(4)
    
    $
    4,620.0
    
    
    $
    1,881.9
    
    
    $
    2,738.1
    
    
    $
    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 nine months ended September 27, 2008 primarily
represents a portion of the excess of the Europa Apotheek purchase price over tangible
net assets acquired and an adjustment resulting from 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 nine months ended September 27, 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 for additional information on the Europa Apotheek acquisition.  Fiscal Years Ending December2008 (remaining)
    
    $
    71.12009
    
    
    269.02010
    
    
    249.52011
    
    
    238.22012
    
    
    233.6Total
    
    $
    1,061.4
  8




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##### Table of Contents



7. DEBT
  September 27,
    
    
    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
    
    
    1,000.0
    
    
    
    1,400.0Senior unsecured term loan
    
    
    1,000.0
    
    
    
    1,000.07.25% senior notes due 2013, net of unamortized discount
    
    
    497.7
    
    
    
    497.46.125% senior notes due 2013, net of unamortized discount
    
    
    298.4
    
    
    
    7.125% senior notes due 2018, net of unamortized discount
    
    
    1,187.9
    
    
    
    Fair value of interest rate swap agreements
    
    
    1.0
    
    
    
    (3.0
    )Total long-term debt
    
    
    3,985.0
    
    
    
    2,894.4Total debt
    
    $
    4,585.0
    
    
    $
    3,494.4
 6.125% and 7.125% Senior Notes .
   9




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##### Table of Contents



7.25% Senior Notes.
  Five-Year Credit Facilities.
  Accounts Receivable Financing Facility .
 Covenants.
 10




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##### Table of Contents



Aggregate Maturities and Interest Expense.
 Fiscal Years Ending December2008 to 2011
    
    $
    2012
    
    
    2,000.02013
    
    
    800.02014 to 2017
    
    
    2018
    
    
    1,200.0Total
    
    $
    4,000.0
  8. PENSION AND OTHER POSTRETIREMENT BENEFITS
 Net Pension and Postretirement Benefit Cost.
 Quarters Ended
    
    
    Nine Months EndedSeptember 27, 2008
    
    
    September 29, 2007
    
    
    September 27, 2008
    
    
    September 29, 2007Service cost
    
    $
    5.9
    
    
    $
    4.5
    
    
    $
    18.5
    
    
    $
    13.6Interest cost
    
    
    2.4
    
    
    
    1.9
    
    
    
    7.2
    
    
    
    5.9Expected return on plan assets
    
    
    (3.3
    )
    
    
    (2.7
    )
    
    
    (9.8
    )
    
    
    (8.3
    )Amortization of prior service cost
    
    
    0.1
    
    
    
    
    
    
    
    0.2
    
    
    
    Net pension cost
    
    $
    5.1
    
    
    $
    3.7
    
    
    $
    16.1
    
    
    $
    11.2
    Quarters Ended
    
    
    Nine Months EndedSeptember 27, 2008
    
    
    September 29, 2007
    
    
    September 27, 2008
    
    
    September 29, 2007Service cost
    
    $
    0.2
    
    
    $
    0.2
    
    
    $
    0.6
    
    
    $
    0.6Interest cost
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.6
    
    
    
    0.5Amortization of prior service credit
    
    
    (1.1
    )
    
    
    (1.0
    )
    
    
    (3.2
    )
    
    
    (3.2
    )Net amortization of actuarial losses
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.4
    
    
    
    0.5Net postretirement benefit credit
    
    $
    (0.5
    )
    
    $
    (0.5
    )
    
    $
    (1.6
    )
    
    $
    (1.6
    )
 11




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##### Table of Contents



9. TAXES ON INCOME
    10. SHARE REPURCHASE PROGRAM
   11. SEGMENT REPORTING
 Reportable Segments.
  12




---



##### Table of Contents



Selected Segment Income and Asset Information.
 Quarterly Results:
 Quarter Ended September 27, 2008
    
    
    Quarter Ended September 29, 2007Specialty
    
    
    
    
    
    
    
    
    
    
    SpecialtyPBM(1)
    
    
    Pharmacy(2)
    
    
    Total
    
    
    PBM
    
    
    Pharmacy
    
    
    TotalProduct net revenues
    
    $
    10,393.4
    
    
    $
    1,996.9
    
    
    $
    12,390.3
    
    
    $
    9,300.1
    
    
    
    $1,483.0
    
    
    
    $10,783.1Total service revenues
    
    
    151.0
    
    
    
    17.8
    
    
    
    168.8
    
    
    
    118.9
    
    
    
    16.6
    
    
    
    135.5Total net revenues
    
    
    10,544.4
    
    
    
    2,014.7
    
    
    
    12,559.1
    
    
    
    9,419.0
    
    
    
    1,499.6
    
    
    
    10,918.6Total cost of revenues
    
    
    9,782.8
    
    
    
    1,851.5
    
    
    
    11,634.3
    
    
    
    8,835.1
    
    
    
    1,382.7
    
    
    
    10,217.8Selling, general and administrative expenses
    
    
    273.1
    
    
    
    74.1
    
    
    
    347.2
    
    
    
    208.4
    
    
    
    54.8
    
    
    
    263.2Amortization of intangibles
    
    
    60.0
    
    
    
    11.1
    
    
    
    71.1
    
    
    
    45.0
    
    
    
    9.6
    
    
    
    54.6Operating income
    
    $
    428.5
    
    
    $
    78.0
    
    
    $
    506.5
    
    
    $
    330.5
    
    
    
    $52.5
    
    
    $
    383.0Reconciling item to income before provision for income taxes:Interest and other (income) expense, net
    
    
    
    
    
    
    
    
    
    
    58.2
    
    
    
    
    
    
    
    
    
    
    
    25.5Income before provision for income taxes
    
    
    
    
    
    
    
    
    
    $
    448.3
    
    
    
    
    
    
    
    
    
    
    $
    357.5Capital expenditures
    
    $
    64.3
    
    
    $
    4.6
    
    
    $
    68.9
    
    
    $
    27.7
    
    
    
    $6.4
    
    
    $
    34.1Year-to-Date Results:Nine Months Ended September 27, 2008
    
    
    Nine Months Ended September 29, 2007Specialty
    
    
    
    
    
    
    
    
    
    
    SpecialtyPBM(1)
    
    
    Pharmacy(2)
    
    
    Total
    
    
    PBM
    
    
    Pharmacy
    
    
    TotalProduct net revenues
    
    $
    31,972.4
    
    
    $
    5,831.9
    
    
    $
    37,804.3
    
    
    $
    28,322.9
    
    
    $
    4,398.8
    
    
    $
    32,721.7Total service revenues
    
    
    437.8
    
    
    
    54.5
    
    
    
    492.3
    
    
    
    360.8
    
    
    
    45.3
    
    
    
    406.1Total net revenues
    
    
    32,410.2
    
    
    
    5,886.4
    
    
    
    38,296.6
    
    
    
    28,683.7
    
    
    
    4,444.1
    
    
    
    33,127.8Total cost of revenues
    
    
    30,118.1
    
    
    
    5,420.1
    
    
    
    35,538.2
    
    
    
    26,856.5
    
    
    
    4,092.1
    
    
    
    30,948.6Selling, general and administrative expenses
    
    
    820.6
    
    
    
    223.4
    
    
    
    1,044.0
    
    
    
    623.0
    
    
    
    162.6
    
    
    
    785.6Amortization of intangibles
    
    
    177.8
    
    
    
    33.4
    
    
    
    211.2
    
    
    
    134.9
    
    
    
    29.0
    
    
    
    163.9Operating income
    
    $
    1,293.7
    
    
    $
    209.5
    
    
    $
    1,503.2
    
    
    $
    1,069.3
    
    
    $
    160.4
    
    
    $
    1,229.7Reconciling item to income before provision for income taxes:Interest and other (income) expense, net
    
    
    
    
    
    
    
    
    
    
    169.9
    
    
    
    
    
    
    
    
    
    
    
    62.3Income before provision for income taxes
    
    
    
    
    
    
    
    
    
    $
    1,333.3
    
    
    
    
    
    
    
    
    
    
    $
    1,167.4Capital expenditures
    
    $
    139.9
    
    
    $
    16.6
    
    
    $
    156.5
    
    
    $
    76.7
    
    
    $
    16.8
    
    
    $
    93.5Identifiable Assets:As of September 27, 2008
    
    As of December 29, 2007Specialty
    
    
    
    
    
    
    
    
    
    SpecialtyPBM
    
    Pharmacy
    
    Total
    
    PBM
    
    Pharmacy
    
    TotalTotal identifiable assets
    
    $
    12,390.8
    
    
    $
    3,722.3
    
    
    $
    16,113.1
    
    
    $
    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. 13




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12. 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. Gruer Gruer
 14




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##### Table of Contents



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.
 North Jackson Pharmacy, Inc., et al. v. Medco Health
Solutions, Inc., et al.
 15




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##### Table of Contents



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.,
 Contract Litigation .
 16




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##### Table of Contents



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
  Purchase Commitments
   17




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13. RECENT ACCOUNTING PRONOUNCEMENTS
      18




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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, either as a result of economic
conditions, increased competition or other factors, 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;
    
    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;
 19




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##### Table of Contents




    
    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®
  20




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##### Table of Contents



Key Indicators Reviewed by Management
 
 Financial Performance Summary for the Quarter and Nine Months Ended September 27, 2008
 Plavix ®
   21




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##### Table of Contents



Plavix
    
  Key Financial Statement Components
 Consolidated Statements of Income
  22




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##### Table of Contents



23




---



##### Table of Contents



Consolidated Balance Sheets
  24




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##### Table of Contents



Consolidated Statements of Cash Flows
  25




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##### Table of Contents



Client-Related Information
  Segment Discussion
   26




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##### Table of Contents



Consolidated Results of Operations
  Quarter
    
    
    
    
    
    
    
    
    
    Quarter
    
    Nine Months
    
    
    
    
    
    
    
    
    
    Nine MonthsEnded
    
    
    
    
    
    
    
    
    
    Ended
    
    Ended
    
    
    
    
    
    
    
    
    
    EndedSeptember 27,
    
    Increase
    
    September 29,
    
    September 27,
    
    Increase
    September 29,2008(1)
    
    (Decrease)
    
    2007
    
    2008(1)
    
    (Decrease)
    
    2007Net RevenuesRetail product(2)
    
    $
    6,946.0
    
    
    $
    494.1
    
    
    
    7.7
    %
    
    $
    6,451.9
    
    
    $
    21,518.3
    
    
    $
    1,750.8
    
    
    
    8.9
    %
    
    $
    19,767.5Mail-order product
    
    
    5,444.3
    
    
    
    1,113.1
    
    
    
    25.7
    %
    
    
    4,331.2
    
    
    
    16,286.0
    
    
    
    3,331.8
    
    
    
    25.7
    %
    
    
    12,954.2Total product(2)
    
    $
    12,390.3
    
    
    $
    1,607.2
    
    
    
    14.9
    %
    
    $
    10,783.1
    
    
    $
    37,804.3
    
    
    $
    5,082.6
    
    
    
    15.5
    %
    
    $
    32,721.7Client and other service
    
    
    127.0
    
    
    
    31.3
    
    
    
    32.7
    %
    
    
    95.7
    
    
    
    360.3
    
    
    
    66.9
    
    
    
    22.8
    %
    
    
    293.4Manufacturer service
    
    
    41.8
    
    
    
    2.0
    
    
    
    5.0
    %
    
    
    39.8
    
    
    
    132.0
    
    
    
    19.3
    
    
    
    17.1
    %
    
    
    112.7Total service
    
    $
    168.8
    
    
    $
    33.3
    
    
    
    24.6
    %
    
    $
    135.5
    
    
    $
    492.3
    
    
    $
    86.2
    
    
    
    21.2
    %
    
    $
    406.1Total net revenues(2)
    
    $
    12,559.1
    
    
    $
    1,640.5
    
    
    
    15.0
    %
    
    $
    10,918.6
    
    
    $
    38,296.6
    
    
    $
    5,168.8
    
    
    
    15.6
    %
    
    $
    33,127.8Cost of RevenuesProduct(2)
    
    $
    11,580.7
    
    
    $
    1,397.4
    
    
    
    13.7
    %
    
    $
    10,183.3
    
    
    $
    35,391.5
    
    
    $
    4,546.5
    
    
    
    14.7
    %
    
    $
    30,845.0Service
    
    
    53.6
    
    
    
    19.1
    
    
    
    55.4
    %
    
    
    34.5
    
    
    
    146.7
    
    
    
    43.1
    
    
    
    41.6
    %
    
    
    103.6Total cost of revenues(2)
    
    $
    11,634.3
    
    
    $
    1,416.5
    
    
    
    13.9
    %
    
    $
    10,217.8
    
    
    $
    35,538.2
    
    
    $
    4,589.6
    
    
    
    14.8
    %
    
    $
    30,948.6Gross Margin(3)Product
    
    $
    809.6
    
    
    $
    209.8
    
    
    
    35.0
    %
    
    $
    599.8
    
    
    $
    2,412.8
    
    
    $
    536.1
    
    
    
    28.6
    %
    
    $
    1,876.7Product gross margin percentage
    
    
    6.5
    %
    
    
    0.9
    %
    
    
    
    
    
    
    5.6
    %
    
    
    6.4
    %
    
    
    0.7
    %
    
    
    
    
    
    
    5.7
    %Service
    
    $
    115.2
    
    
    $
    14.2
    
    
    
    14.1
    %
    
    $
    101.0
    
    
    $
    345.6
    
    
    $
    43.1
    
    
    
    14.2
    %
    
    $
    302.5Service gross margin percentage
    
    
    68.2
    %
    
    
    (6.3
    %)
    
    
    
    
    
    
    74.5
    %
    
    
    70.2
    %
    
    
    (4.3
    %)
    
    
    
    
    
    
    74.5
    %Total gross margin
    
    $
    924.8
    
    
    $
    224.0
    
    
    
    32.0
    %
    
    $
    700.8
    
    
    $
    2,758.4
    
    
    $
    579.2
    
    
    
    26.6
    %
    
    $
    2,179.2Gross margin percentage
    
    
    7.4
    %
    
    
    1.0
    %
    
    
    
    
    
    
    6.4
    %
    
    
    7.2
    %
    
    
    0.6
    %
    
    
    
    
    
    
    6.6
    %Volume InformationRetail prescriptions
    
    
    115.1
    
    
    
    2.6
    
    
    
    2.3
    %
    
    
    112.5
    
    
    
    361.8
    
    
    
    13.9
    
    
    
    4.0
    %
    
    
    347.9Mail-order prescriptions
    
    
    26.1
    
    
    
    2.6
    
    
    
    11.1
    %
    
    
    23.5
    
    
    
    79.1
    
    
    
    8.7
    
    
    
    12.4
    %
    
    
    70.4Total prescriptions
    
    
    141.2
    
    
    
    5.2
    
    
    
    3.8
    %
    
    
    136.0
    
    
    
    440.9
    
    
    
    22.6
    
    
    
    5.4
    %
    
    
    418.3Adjusted prescriptions(4)
    
    
    193.0
    
    
    
    10.3
    
    
    
    5.6
    %
    
    
    182.7
    
    
    
    597.8
    
    
    
    39.4
    
    
    
    7.1
    %
    
    
    558.4Adjusted mail-order
penetration(5)
    
    
    40.4
    %
    
    
    2.0
    %
    
    
    
    
    
    
    38.4
    %
    
    
    39.5
    %
    
    
    1.8
    %
    
    
    
    
    
    
    37.7
    %Other volume(6)
    
    
    1.6
    
    
    
    1.6
    
    
    
    N/M
    *
    
    
    
    
    
    
    4.3
    
    
    
    4.3
    
    
    
    N/M
    *
    
    
    Generic Dispensing Rate InformationRetail generic dispensing rate
    
    
    66.4
    %
    
    
    4.2
    %
    
    
    
    
    
    
    62.2
    %
    
    
    65.7
    %
    
    
    4.7
    %
    
    
    
    
    
    
    61.0
    %Mail-order generic dispensing rate
    
    
    55.8
    %
    
    
    4.9
    %
    
    
    
    
    
    
    50.9
    %
    
    
    54.7
    %
    
    
    5.0
    %
    
    
    
    
    
    
    49.7
    %Overall generic dispensing rate
    
    
    64.4
    %
    
    
    4.1
    %
    
    
    
    
    
    
    60.3
    %
    
    
    63.8
    %
    
    
    4.7
    %
    
    
    
    
    
    
    59.1
    %
 27




---



##### Table of Contents



*
    
    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 $1,828 million and $1,831 million for the third quarters of 2008
and 2007, and $5,830 million and $5,705 million for the nine 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 three,
plus retail prescriptions. These mail-order prescriptions are multiplied by three to adjust for
the fact that they include approximately three 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 Order.
    28




---



##### Table of Contents



Gross Margin
 Plavix
    Quarter
    
    
    
    
    
    
    
    
    
    Quarter
    
    Nine Months
    
    
    
    
    
    
    
    
    
    Nine MonthsEnded
    
    
    
    
    
    
    
    
    
    Ended
    
    Ended
    
    
    
    EndedSeptember 27,
    
    Increase
    
    September 29,
    
    September 27,
    
    Increase
    
    September 29,2008(1)
    
    (Decrease)
    
    2007
    
    2008(1)
    
    (Decrease)
    
    2007Gross margin(2)
    
    $
    924.8
    
    
    $
    224.0
    
    
    
    32.0
    %
    
    $
    700.8
    
    
    $
    2,758.4
    
    
    $
    579.2
    
    
    
    26.6
    %
    
    $
    2,179.2Selling, general and
administrative expenses
    
    
    347.2
    
    
    
    84.0
    
    
    
    31.9
    %
    
    
    263.2
    
    
    
    1,044.0
    
    
    
    258.4
    
    
    
    32.9
    %
    
    
    785.6Amortization of intangibles
    
    
    71.1
    
    
    
    16.5
    
    
    
    30.2
    %
    
    
    54.6
    
    
    
    211.2
    
    
    
    47.3
    
    
    
    28.9
    %
    
    
    163.9Interest and other
(income) expense, net
    
    
    58.2
    
    
    
    32.7
    
    
    
    128.2
    %
    
    
    25.5
    
    
    
    169.9
    
    
    
    107.6
    
    
    
    172.7
    %
    
    
    62.3Income before provision for
income taxes
    
    
    448.3
    
    
    
    90.8
    
    
    
    25.4
    %
    
    
    357.5
    
    
    
    1,333.3
    
    
    
    165.9
    
    
    
    14.2
    %
    
    
    1,167.4Provision for income taxes
    
    
    152.6
    
    
    
    9.8
    
    
    
    6.9
    %
    
    
    142.8
    
    
    
    504.7
    
    
    
    41.8
    
    
    
    9.0
    %
    
    
    462.9Net income
    
    $
    295.7
    
    
    $
    81.0
    
    
    
    37.7
    %
    
    $
    214.7
    
    
    $
    828.6
    
    
    $
    124.1
    
    
    
    17.6
    %
    
    $
    704.5
 (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
  29




---



##### Table of Contents



Amortization of Intangibles
  Interest and Other (Income) Expense, Net
  
  Provision for Income Taxes
  Net Income and Earnings per Share
   30




---



##### Table of Contents



Segment Results of Operations
 PBM Segment
  Quarter
    
    
    
    
    
    
    
    
    
    Quarter
    
    Nine Months
    
    
    
    
    
    
    
    
    
    Nine MonthsEnded
    
    
    
    
    
    
    
    
    
    Ended
    
    Ended
    
    
    
    
    
    
    
    
    
    EndedSeptember 27,
    
    Increase
    
    September 29,
    
    September 27,
    
    Increase
    
    September 29,2008(1)
    
    (Decrease)
    
    2007
    
    2008(1)
    
    (Decrease)
    
    2007Product net revenues
    
    $
    10,393.4
    
    
    $
    1,093.3
    
    
    
    11.8
    %
    
    $
    9,300.1
    
    
    $
    31,972.4
    
    
    $
    3,649.5
    
    
    
    12.9
    %
    
    $
    28,322.9Total service revenues
    
    
    151.0
    
    
    
    32.1
    
    
    
    27.0
    %
    
    
    118.9
    
    
    
    437.8
    
    
    
    77.0
    
    
    
    21.3
    %
    
    
    360.8Total net revenues
    
    
    10,544.4
    
    
    
    1,125.4
    
    
    
    11.9
    %
    
    
    9,419.0
    
    
    
    32,410.2
    
    
    
    3,726.5
    
    
    
    13.0
    %
    
    
    28,683.7Total cost of revenues
    
    
    9,782.8
    
    
    
    947.7
    
    
    
    10.7
    %
    
    
    8,835.1
    
    
    
    30,118.1
    
    
    
    3,261.6
    
    
    
    12.1
    %
    
    
    26,856.5Total gross margin(2)
    
    $
    761.6
    
    
    $
    177.7
    
    
    
    30.4
    %
    
    $
    583.9
    
    
    $
    2,292.1
    
    
    $
    464.9
    
    
    
    25.4
    %
    
    $
    1,827.2Gross margin percentage
    
    
    7.2
    %
    
    
    1.0
    %
    
    
    
    
    
    
    6.2
    %
    
    
    7.1
    %
    
    
    0.7
    %
    
    
    
    
    
    
    6.4
    %Selling, general and administrative expenses
    
    
    273.1
    
    
    
    64.7
    
    
    
    31.0
    %
    
    
    208.4
    
    
    
    820.6
    
    
    
    197.6
    
    
    
    31.7
    %
    
    
    623.0Amortization of intangibles
    
    
    60.0
    
    
    
    15.0
    
    
    
    33.3
    %
    
    
    45.0
    
    
    
    177.8
    
    
    
    42.9
    
    
    
    31.8
    %
    
    
    134.9Operating income
    
    $
    428.5
    
    
    $
    98.0
    
    
    
    29.7
    %
    
    $
    330.5
    
    
    $
    1,293.7
    
    
    $
    224.4
    
    
    
    21.0
    %
    
    $
    1,069.3
 
 (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
   31




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##### Table of Contents



Specialty Pharmacy Segment
  Quarter
    
    
    
    
    
    
    
    
    
    Quarter
    
    Nine Months
    
    
    
    
    
    
    
    
    
    Nine MonthsEnded
    
    
    
    
    
    
    
    
    
    Ended
    
    Ended
    
    
    
    
    
    
    
    
    
    EndedSeptember 27,
    
    Increase
    
    September 29,
    
    September 27,
    
    Increase
    
    September 29,2008(1)
    
    (Decrease)
    
    2007
    
    2008(1)
    
    (Decrease)
    
    2007Product net revenues
    
    $
    1,996.9
    
    
    $
    513.9
    
    
    
    34.7
    %
    
    $
    1,483.0
    
    
    $
    5,831.9
    
    
    $
    1,433.1
    
    
    
    32.6
    %
    
    $
    4,398.8Total service revenues
    
    
    17.8
    
    
    
    1.2
    
    
    
    7.2
    %
    
    
    16.6
    
    
    
    54.5
    
    
    
    9.2
    
    
    
    20.3
    %
    
    
    45.3Total net revenues
    
    
    2,014.7
    
    
    
    515.1
    
    
    
    34.3
    %
    
    
    1,499.6
    
    
    
    5,886.4
    
    
    
    1,442.3
    
    
    
    32.5
    %
    
    
    4,444.1Total cost of revenues
    
    
    1,851.5
    
    
    
    468.8
    
    
    
    33.9
    %
    
    
    1,382.7
    
    
    
    5,420.1
    
    
    
    1,328.0
    
    
    
    32.5
    %
    
    
    4,092.1Total gross margin(2)
    
    $
    163.2
    
    
    $
    46.3
    
    
    
    39.6
    %
    
    $
    116.9
    
    
    $
    466.3
    
    
    $
    114.3
    
    
    
    32.5
    %
    
    $
    352.0Gross margin percentage
    
    
    8.1
    %
    
    
    0.3
    %
    
    
    
    
    
    
    7.8
    %
    
    
    7.9
    %
    
    
    
    
    
    
    
    
    
    
    7.9
    %Selling, general and
administrative expenses
    
    
    74.1
    
    
    
    19.3
    
    
    
    35.2
    %
    
    
    54.8
    
    
    
    223.4
    
    
    
    60.8
    
    
    
    37.4
    %
    
    
    162.6Amortization of intangibles
    
    
    11.1
    
    
    
    1.5
    
    
    
    15.6
    %
    
    
    9.6
    
    
    
    33.4
    
    
    
    4.4
    
    
    
    15.2
    %
    
    
    29.0Operating income
    
    $
    78.0
    
    
    $
    25.5
    
    
    
    48.6
    %
    
    $
    52.5
    
    
    $
    209.5
    
    
    $
    49.1
    
    
    
    30.6
    %
    
    $
    160.4
 
 (1)
    
    Includes Critical Cares operating results commencing on the November 14, 2007 acquisition date.(2)
    
    Defined as net revenues minus cost of revenues.     32




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##### Table of Contents



Liquidity
and Capital Resources
 Cash Flows
  Nine Months Ended
    
    
    
    
    
    
    Nine Months EndedSeptember 27,
    
    
    
    
    
    
    September 29,2008(1)
    
    
    Variance
    
    
    2007Net cash provided by operating activities
    
    $
    797.2
    
    
    $
    (19.2
    )
    
    $
    816.4Net cash used by investing activities
    
    
    (287.0
    )
    
    
    (188.9
    )
    
    
    (98.1
    )Net cash used by financing activities
    
    
    (843.5
    )
    
    
    63.8
    
    
    
    (907.3
    )Net decrease in cash and cash equivalents
    
    
    (333.3
    )
    
    
    (144.3
    )
    
    
    (189.0
    )Cash and cash equivalents at beginning of period
    
    
    774.1
    
    
    
    (44.4
    )
    
    
    818.5Cash and cash equivalents at end of period
    
    $
    440.8
    
    
    $
    (188.7
    )
    
    $
    629.5
 
 (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.
  33




---



##### Table of Contents



Looking Forward
     34




---



##### Table of Contents



Financing Facilities
 Five-Year Credit Facilities
   Accounts Receivable Financing Facility
  Interest Rates
  Swap Agreements
   35




---



##### Table of Contents



Covenants
  Debt Ratings
  EBITDA
   36




---



##### Table of Contents



Quarters Ended
    
    
    Nine Months EndedSeptember 27,
    
    
    September 29,
    
    
    September 27,
    
    
    September 29,2008(1)
    
    
    2007
    
    
    2008(1)
    
    
    2007Net income
    
    $
    295.7
    
    
    $
    214.7
    
    
    $
    828.6
    
    
    $
    704.5Add:Interest and other (income) expense, net
    
    
    58.2
    
    
    
    25.5
    
    
    
    169.9
    (2)
    
    
    62.3Provision for income taxes
    
    
    152.6
    (3)
    
    
    142.8
    
    
    
    504.7
    (3)
    
    
    462.9Depreciation expense
    
    
    38.6
    
    
    
    39.1
    
    
    
    117.7
    
    
    
    124.4Amortization expense
    
    
    71.1
    
    
    
    54.6
    
    
    
    211.2
    
    
    
    163.9EBITDA
    
    $
    616.2
    
    
    $
    476.7
    
    
    $
    1,832.1
    
    
    $
    1,518.0Adjusted prescriptions(4)
    
    
    193.0
    
    
    
    182.7
    
    
    
    597.8
    
    
    
    558.4EBITDA per adjusted prescription
    
    $
    3.19
    
    
    $
    2.61
    
    
    $
    3.06
    
    
    $
    2.72
 
 (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)
    
    Includes a third-quarter 2008 nonrecurring state income tax
benefit of $28 million primarily resulting from statute of
limitations expirations in certain states.(4)
    
    Adjusted prescription volume equals the majority of
mail-order prescriptions multiplied by three, plus retail
prescriptions. These mail-order prescriptions are
multiplied by three to adjust for the fact that they
include approximately three times the amount of product
days supplied compared with retail prescriptions. Plavix
 Commitments and Contractual Obligations
  Payments Due By Period
 RemainderTotal
    
    of 2008
    
    2009-2010
    
    2011-2012
    
    ThereafterLong-term debt obligations(1)
    
    $
    4,000.0
    
    
    $
    
    
    
    $
    
    
    
    $
    2,000.0
    
    
    $
    2,000.0Interest payments on long-term debt obligations(2)
    
    
    1,349.1
    
    
    
    54.7
    
    
    
    437.5
    
    
    
    385.1
    
    
    
    471.8Operating lease obligations(3)
    
    
    111.9
    
    
    
    10.5
    
    
    
    68.0
    
    
    
    23.9
    
    
    
    9.5Purchase commitments(4)
    
    
    58.2
    
    
    
    54.0
    
    
    
    4.2
    
    
    
    
    
    
    
    Other(5)
    
    
    34.7
    
    
    
    
    
    
    
    10.0
    
    
    
    24.7
    
    
    
    Total
    
    $
    5,553.9
    
    
    $
    119.2
    
    
    $
    519.7
    
    
    $
    2,433.7
    
    
    $
    2,481.3
 37




---



##### Table of Contents



(1)
    
    Long-term debt obligations exclude $16.0 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 $1.0 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 third-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 September
27, 2008, these purchase commitments amounted to $49.5
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 September 27, 2008, these
commitments amounted to $8.7 million through 2010, of which
$4.5 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 $24.7 million anticipated to
be settled in 2012, which is included in other noncurrent
liabilities in the consolidated balance sheet as of
September 27, 2008.     Off-Balance Sheet Arrangements
  Share Repurchase Program
   38




---



##### Table of Contents



Recently Adopted Financial Accounting Standards
    Fair Value Hierarchy.
 
  Medco Fair Value Measurements at Reporting DateDescription
    

September 27, 2008
    
    Level 1
    
    Level 2
    
    Level 3Money market mutual funds
    
    $
    344.0
    
    
    $
    344.0
    
    
    $
    
    
    
    $
    Available-for-sale investments
    
    
    4.7
    
    
    
    1.9
    
    
    
    2.8
    
    
    
    Fair value of interest rate swap agreements
    
    
    1.0
    
    
    
    
    
    
    
    1.0
    
    
    
    
  Recent Accounting Pronouncements
  39




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  40




---



##### Table of Contents



Item 4. Controls and Procedures
     
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  Antitrust and Related Litigation. Chelsea Family Pharmacy, PLLC
v. Medco Health Solutions, Inc.
 Bankruptcy Preference Litigation. Berman v. Paid Prescriptions,
LLC (In re HNRC Dissolution Co.)
 Contract Litigation .
 41




---



##### Table of Contents



Accredo .
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Issuer Purchases of Equity Securities (1)
 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(4)Fiscal Period
    
    purchased
    
    
    per share(2)
    
    
    inception(3)
    
    
    (in thousands)Balances at June 28, 2008
    
    
    
    
    
    
    
    
    
    
    144,887,205
    
    
    $
    421,448Fiscal July 2008
    
    
    1,359,000
    
    
    $
    45.61
    
    
    
    1,359,000
    
    
    
    $359,460Fiscal August 2008
    
    
    1,542,100
    
    
    $
    47.76
    
    
    
    1,542,100
    
    
    
    $285,812Fiscal September 2008
    
    
    5,392,855
    
    
    $
    47.49
    
    
    
    5,392,855
    
    
    
    $29,731Third quarter 2008 totals
    
    
    8,293,955
    
    
    $
    47.23
    
    
    
    8,293,955
 
 (1)
    
    All information set forth in the table above relates to the
Companys 2005 Plan. This plan was first announced in
August 2005, and then subsequent announcements were made
when the plan was amended in December 2005, November 2006
and February 2007. The 2005 Plan was scheduled to expire
in December 2008. The Company completed the 2005 Plan in
October 2008 and no further purchases will be made pursuant
to this plan.(2)
    
    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 September 27, 2008. The
average price paid per share for repurchases initiated
since inception through September 27, 2008 is $35.71.(3)
    
    The Company repurchased all of the above-referenced shares
of its common stock through its publicly announced 2005
Plan.(4)
    
    These amounts reflect the remaining authorized repurchases
under the 2005 Plan based on the increase in the authorized
repurchases.   42




---



##### Table of Contents



Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
 Rule 10b5-1 Sales
Plans.
   43




---



##### Table of Contents



(1)
 Number of Shares to
    
    
    
    Number of Shares
    
    Projected
    
    Projectedbe Sold Under the
    
    
    
    Sold Under the
    
    Beneficial
    
    AggregateName and Position
    
    Plan(2)
    
    Timing of Sales Under the Plan
    
    Plan(3)
    
    Ownership(4)
    
    Holdings(5)John P. Driscoll 
President, New Markets
    
    
    26,934
    
    
    Option exercise of 18,934 shares shall trigger
if stock reaches specific price; sale of 8,000
previously acquired shares shall trigger if
stock reaches specified price.
    
    
    0
    
    
    
    119,147
    
    
    
    376,035Robert S. Epstein 
Senior Vice President, Medical
and Analytical Affairs and
Chief
Medical Officer
    
    
    37,766
    
    
    Option exercise of 26,000 shall trigger if
stock reaches specific price; sale of
previously acquired shares shall trigger in
tranches of 19,752 and 11,766 if stock
reaches specified price.
    
    
    19,752
    
    
    
    117,341
    
    
    
    395,141Kenneth O. Klepper 
President and Chief Operating
Officer
    
    
    192,733
    
    
    Option exercise in tranches of 53,333 and
99,400 shall trigger if stock reaches specific
prices; sale of previously acquired shares in
two tranches of 20,000 shares each shall
trigger if stock reaches specific prices.
    
    
    0
    
    
    
    216,523
    
    
    
    606,231Thomas M. Moriarty 
General Counsel, Secretary and
Senior Vice President,
Pharmaceutical Contracting
    
    
    20,958
    
    
    Option exercise of 20,958 shall trigger if
stock reaches specific price; sale of 8,120
previously acquired shares shall trigger if
stock reaches specified price.
    
    
    8,120
    
    
    
    13,718
    
    
    
    197,488Karin V. Princivalle 
Senior Vice President, Human
Resources
    
    
    25,218
    
    
    Option exercise of 14,200 shall trigger if
stock reaches specific price; sale of 11,018
previously acquired shares shall trigger if
stock reaches specified price.
    
    
    0
    
    
    
    65,440
    
    
    
    192,774Jack A. Smith 
Senior Vice President,
Marketing
    
    
    78,600
    
    
    Option exercise in tranches of 15,000, 15,000
and 12,600 shares shall trigger if stock
reaches specific prices; sale of previously
acquired shares shall trigger in three
tranches
of 12,000 each if stock reaches specific
prices.
    
    
    0
    
    
    
    88,154
    
    
    
    223,502
 
 (1)
    
    This table does not include any trading plans entered into by any executive
officer that have been terminated or expired by their terms or have been fully executed
through November 4, 2008.(2)
    
    This column reflects the number of shares remaining to be sold as of November
4, 2008.(3)
    
    This column reflects the number of shares sold under the plan through November
4, 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 November 4, 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 November 4, 2008 outside of the plan.(5)
    
    This column reflects an estimate of the total aggregate number of whole shares
each identified executive officer will have an interest in 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 November 4, 2008, and includes shares of our
common stock subject to options (whether or not currently exercisable) or restricted stock
units (whether or not vested). 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 November 4, 2008 outside of the plan. 44




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##### 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.
 45




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##### Table of Contents



Signatures
  MEDCO HEALTH SOLUTIONS, INC.
(Registrant)Date: November 5, 2008
    By:
    /s/ David B. Snow, Jr.Name:
    David B. Snow, Jr.Title:
    Chairman and

Chief Executive Officer Date: November 5, 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 46




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##### 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.