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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 29, 2007
 Commission File Number: 1-31312
 MEDCO HEALTH SOLUTIONS, INC.
  Delaware
(State or other jurisdiction of incorporation)100 Parsons Pond Drive, Franklin Lakes, NJ
(Address of principal executive offices)
    
    22-3461740
(I.R.S. Employer Identification No.)07417-2603
(Zip Code)
   Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, par value $0.01
7.25% Senior Notes Due 2013
    
    New York Stock Exchange
New York Stock Exchange
 None
 þ o
 o þ
 þ o
 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
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



MEDCO HEALTH SOLUTIONS, INC.
 ANNUAL REPORT ON FORM 10-K
  
 TABLE OF CONTENTS
 Form 10-K Item Number:
    
    Page No.PART IItem 1.
    
    Business
    
    1Item 1A.
    
    Risk Factors
    
    18Item 1B.
    
    Unresolved Staff Comments
    
    26Item 2.
    
    Properties
    
    26Item 3.
    
    Legal Proceedings
    
    27Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    27Executive Officers of the Company
    
    28PART IIItem 5.
    
    Market for Registrants Common Equity, Related Shareholder Mattersand  Issuer Purchases of Equity Securities
    
    31Item 6.
    
    Selected Financial Data
    
    34Item 7.
    
    Managements Discussion and Analysis of Financial Condition andResults of Operations
    
    36Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    65Item 8.
    
    Financial Statements and Supplementary Data
    
    65Item 9.
    
    Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure
    
    103Item 9A.
    
    Controls and Procedures
    
    103Item 9B.
    
    Other Information
    
    104PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    104Item 11.
    
    Executive Compensation
    
    104Item 12.
    
    Security Ownership of Certain Beneficial Owners and Managementand  Related Shareholder Matters
    
    104Item 13.
    
    Certain Relationships and Related Transactions, and DirectorIndependence
    
    106Item 14.
    
    Principal Accounting Fees and Services
    
    106PART IVItem 15.
    
    Exhibits, Financial Statement Schedules
    
    106Signatures
    
    
    
    111EX-3.1: SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATIONEX-10.22: FORM OF TERMS AND CONDITIONSEX-10.23: FORM OF TERMS AND CONDITIONSEX-10.24: DEFERRED COMPENSATION PLANEX-12.1: CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGESEX-21.1: SUBSIDIARIESEX-23.1: CONSENT OF PRICEWATERHOUSECOOPERS LLPEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION




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PART I
 
 Item 1. Business.
 Overview
 ®
     1




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
    
    Offering the cost-saving and clinical advantages of mail order to our
clients. Our clients benefit in the form of lower drug costs as a result of
operating efficiencies yielded by our significant level of automation
technology, the value from our scale in purchasing drugs at competitive
discounts, and our ability to offer up to a 90-day supply of drugs as compared
to a 30-day supply for most retail programs. Members benefit from the
convenience of mail order, the greater days supply, and generally lower
co-payment requirements.
    
    Actively identifying opportunities to increase the use of lower-cost
generic drugs as alternatives to brand-name medicines, particularly through
mail order.
    
    Offering a broad base of specialty medicines at competitive prices, and
with a comprehensive service model designed to ensure patient safety, product
integrity, and proper drug administration.
    
    Enhancing formulary compliance through physician, client and member
communications and education programs, including therapeutic brand-to-brand
interchange programs. The use of multi-tiered co-payment and other cost-sharing
payment structures, and the increased use of mail order further enhance
formulary compliance. In addition, our web-based tool called My Rx
Choices® provides members with a simplified and personalized menu of
medication choices, including generics and preferred brand-name medications,
based upon their personal drug benefit coverage. Higher levels of formulary
compliance, combined with our overall scale, allow us to generate higher
rebates on a per-prescription basis from brand-name pharmaceutical
manufacturers. The majority of these rebates are currently shared with our
clients, which contributes to client drug trend reduction.
    
    Providing high quality clinical care to patients with chronic and
complex conditions by providing access to specialized pharmacists that are
experts in the treatment of specific conditions, through Medcos Therapeutic
Resource Centers. This service benefits the patients from an overall healthcare
management perspective, and also assists them in making educated decisions
regarding their prescription healthcare and associated costs.
    
    Providing customized plan design. We offer ongoing consulting services and model
clinical and financial outcomes for clients based on a broad range of plan design and
formulary choices. Our advanced information
 2




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technologies allow our professionals to design with clients the plan structure that best
meets the clients benefit cost objectives while providing an optimized benefit to
members of the clients plans. These include EXPERxT Advisor®, an automated
tool that provides real-time plan design modeling capability for our clients, as well as
RationalMed®, through which medical data is integrated to affect better
overall health outcomes for patients. Recognizing the diverse plan design and
administrative needs of different payors, we are organized into customer groups designed
to collaborate with clients and ensure we provide solutions that satisfy the
industry-specific needs of our clients and their respective membership.
    
    Providing Medicare Part D products to our clients and to individual Medicare-eligible
consumers nationwide by offering services in support of their Prescription Drug Program
(PDP) or federal subsidy, as well as through our own PDP offering.
    
    Effectively managing drug utilization, a key factor in controlling drug
trend, through a wide range of trend management tools, including drug
utilization review programs and rules governing the conditions under which
drugs are covered, consistent with the requirements established by our clients.
We also have clinically-based programs that identify particular categories of
questionable drug claims based on rules that our clients use for coverage
criteria. These rules are designed to reduce unnecessary prescription use and
monitor for potential abuse.
    Industry Overview
   3




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Business Strategy
  
    
    Generics:Optimizing the value of generics in light of significant brand-name patent
expirations expected over the next several years, and continued development of programs
designed to further drive down the cost of prescription healthcare.
    
    Mail Order:Maximizing the mail-order prescription opportunity through enhanced
communication and plan design.
    
    Specialty Pharmacy:Expanding further our specialty pharmacy model by providing new and
creative services that reduce drug cost, simplify the administrative process and further
enhance patient safety and convenience. On November 14, 2007, we acquired Critical Care
Systems, Inc. (Critical Care), one of the nations largest providers of home-based and
ambulatory specialty infusion services, which will expand Accredos capabilities and market
presence related to infused agents, which are important today and will grow even more
important with infusion drugs representing approximately 40% of the specialty drug
pipeline.
    
    Solutions for Seniors/Medicare Part D:Developing innovative and flexible approaches
that assist our health plan and employer clients in successfully managing a range of
opportunities available through the Medicare
Part D program, and delivering high quality pharmaceutical benefits to patients.
    
    New Business and Renewals:Retaining existing clients and winning new clients through
quality service, member engagement, leveraging technology and delivering new products and
services, all of which provide value to our clients and members, and are critical to our
business strategy.
    
    Clinical Innovation:Executing a next-generation clinical strategy that is designed to
establish a new benchmark for pharmacy healthcare by engaging members and modeling
behaviors to improve clinical outcomes and reduce costs. In 2007, we re-engineered our
pharmacy model around Medco Therapeutic Resource Centers that are designed around the
theory of population-based disease management. This includes providing patients with
chronic and complex conditions access to specialist pharmacists, who are trained in
specific disease states and have access to integrated patient data to help achieve more
positive clinical outcomes. We view personalized medicine as an opportunity in the future
to further our clinical programs by identifying a patients genetic profile through
laboratory testing to determine sensitivities to certain drugs and strengths, with the
potential to improve health outcomes and the overall healthcare cost.
    4




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Products and Services
  Plan Design
   Clinical Management
    
 Optimal Health ®
 5




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Clinical Services, Specialty Pharmacy
  Pharmacy Management
  Mail-Order Service
   Medco Therapeutic Resource Centers
 6




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Specialty Pharmacy Management.
 Retail Pharmacy Networks
 Call Center Pharmacies
 Reimbursement Services.
 7




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Physician Services
   Web-Based Services
  Member-Oriented Web Services
 Client-Oriented Web Services
 Pharmacist-Oriented Web Services
 Contractual Relationships
 Clients.
 8




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CMS.
 Pharmaceutical Manufacturers.
  Retail Pharmacies.
 Clients
  9




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Mail-Order Inventory Suppliers
   Competition
  
    
    Ability to differentiate ourselves in the marketplace through our
innovative member engagement model, which includes the specialized practice of
pharmacy through Medco Therapeutic Resource Centers and our strategies in the
field of personalized medicine, all designed to drive down the total cost of
healthcare;
    
    Ability to effectively provide innovative plan designs focused on the
specific needs of clients, patients and other payors;
    
    Capability and regional and national scale to provide a fully
integrated prescription benefit model, including effective mail order, retail
access, specialty pharmacy, and customer service;
    
    Quality and breadth of clinical services designed to provide a high
level of care and compliance;
    
    Proven history in managing drug trend, including the ability to
negotiate favorable discounts from pharmaceutical manufacturers and retail
pharmacies, rebates from brand-name pharmaceutical manufacturers, and the
ability to shift prescription volume to lower cost generics;
    
    Ability to effectively administer new programs, such as those
associated with Medicare Part D;
    
    Use of technology to deliver information and services to clients and members; and
    
    Financial stability.
  10




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Corporate Compliance and Government Regulation
 Corporate Compliance and Ethics Program
    
    
    Establishing and communicating compliance-related policies and procedures;
    
    Creating a high-level structure to oversee and implement compliance efforts;
    
    Educating and training employees and consultants;
    
    Internal reporting mechanisms;
    
    Regular monitoring and auditing;
    
    Effective performance and disciplinary standards; and
    
    Procedures for promptly responding to potential misconduct.
  11




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Government Regulation
   Regulation of Our Pharmacy, Nursing, Home Health Agency, and Laboratory Operations.
   12




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Third-Party Administration and Other State Licensure Laws
 Consumer Protection Laws
 Network Access Legislation
 Proposals for Direct Regulation of PBMs
 ERISA Regulation
    13




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Fraudulent Billing, Anti- Kickback, Stark, Civil Monetary Penalties, and False Claims Laws and
Regulations.
 Billing.
 Anti-Kickback Laws and Regulations.
  The Ethics in Patient Referrals Law (Stark Law).
 The False Claims Act.
  14




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Regulation of Financial Risk Plans
  Regulation Relating to Data Transmission and Confidentiality of Patient Identifiable
Information.
  Regulation Applicable to Clients.
 
    
    Formulary Restrictions. A number of states have enacted laws that
regulate the establishment of formularies by insurers, HMOs and other
third-party payors. These laws relate to the development, review and update of formularies; the role and composition of pharmacy and
therapeutics committees; the availability of formulary listings; the disclosure
of formulary information to health plan members; and a process for allowing
members to obtain non-preferred drugs without additional cost-sharing where the
non-preferred drugs are medically necessary and the formulary drugs are
determined to be inappropriate. Increasing regulation of formularies by states
could significantly affect our ability to develop and administer formularies on
behalf of our insurer, HMO and other health plan clients.
    
    Industry Standards for PBM, Pharmacy, and Home Health Functions.The
National Committee on Quality Assurance, the American Accreditation Health Care
Commission, known as URAC, the Joint Commission on Accreditation of Healthcare
Organizations and other quasi-regulatory and accrediting bodies have developed
standards relating to services performed by PBMs and specialty pharmacies,
 15




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including mail order, formulary, drug utilization management, specialty
pharmacy and nursing care. While the actions of these bodies do not have the
force of law, PBMs and many clients for PBM services seek certification from
them, as do other third parties with which our subsidiaries may contract for
services. These bodies may influence the federal government or states to adopt
requirements or model acts that they promulgate. The federal government and
some states incorporate accreditation standards of these bodies, as well as the
standards of the National Association of Insurance Commissioners and the
National Association of Boards of Pharmacy, into their drug utilization review
regulation. Future initiatives of these bodies are uncertain, and resulting
standards or legislation could impose restrictions on us or our clients in a
manner that could significantly impact our business.
 Legislation and Regulation Affecting Drug Prices and Potentially Affecting the Market for
Prescription Benefit Plans and Reimbursement for Durable Medical Equipment.
    Medicare Part D and Part B.
  16




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State Prescription Drug Assistance Programs.
 Prompt Pay Regulations.
 Drug Importation.
 Health Management Services Regulation.
 Employees
  Available Information
  17




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Stock Split
  
 Item 1A. Risk Factors.
 This Annual Report on Form 10-K contains forward-looking statements as that term is defined
in the Private Securities Litigation Reform Act of 1995. These statements involve risks and
uncertainties that may cause results to differ materially from those set forth in the statements.
No forward-looking statement can be guaranteed, and actual results may differ materially from those
projected. We undertake no obligation to publicly update any forward-looking statement, whether as
a result of new information, future events, or otherwise. Forward-looking statements are not
historical facts, but rather are based on current expectations, estimates, assumptions and
projections about the business and future financial results of the PBM and specialty pharmacy
industries, and other legal, regulatory and economic developments. We use words such as
anticipates, believes, plans, expects, projects, future, intends, may, will,
should, could, estimates, predicts, potential, continue and similar expressions to
identify these forward-looking statements. Our actual results could differ materially from the
results contemplated by these forward-looking statements due to a number of factors, including
those discussed in this Item 1A, Risk Factors, Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations and other sections of this Annual Report on Form
10-K.
 18




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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 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.
   19




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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.
   20




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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.
  21




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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, Medicare Part D offerings and certain revenues from diabetes
testing supplies expose us to increased credit risk.
  22




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Changes in industry pricing benchmarks could adversely affect our financial performance.
  New England Carpenters Health
Benefits Fund, et al. v. First DataBank, et al.
 Legislation and Regulation Affecting Drug Prices and
Potentially Affecting the Market for Prescription Benefit Plans and Reimbursement for Durable
Medical Equipment,
 The terms and covenants relating to our existing indebtedness could adversely impact our financial
performance.
  23




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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.
 24




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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.
    25




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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.
    
 Item 1B. Unresolved Staff Comments.
  
 Item 2. Properties.
     26




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Insurance
  
 Item 3. Legal Proceedings.
  Contract Litigation
 
 Item 4. Submission of Matters to a Vote of Security Holders.
  27




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Executive Officers of the Company
  Name
    
    Age
    
    PositionDavid B. Snow, Jr.
    
    
    53
    
    
    Chairman of the Board and Chief Executive OfficerBryan D. Birch
    
    
    42
    
    
    Group President, Employer AccountsJohn P. Driscoll
    
    
    48
    
    
    President, New MarketsRobert S. Epstein, M.D., M.S.
    
    
    52
    
    
    Senior Vice President, Medical and Analytical
Affairs and Chief Medical OfficerBrian T. Griffin
    
    
    49
    
    
    Group President, Health PlansKenneth O. Klepper
    
    
    54
    
    
    President and Chief Operating OfficerLaizer Kornwasser
    
    
    37
    
    
    President, Liberty Medical and Senior Vice
President, Channel and Generic StrategyDavid S. Machlowitz
    
    
    54
    
    
    Senior Vice President, General Counsel and SecretaryThomas M. Moriarty
    
    
    44
    
    
    Senior Vice President, Pharmaceutical ContractingKarin Princivalle
    
    
    51
    
    
    Senior Vice President, Human ResourcesJoAnn A. Reed
    
    
    52
    
    
    Senior Vice President, Finance and Chief Financial
OfficerRichard J. Rubino
    
    
    50
    
    
    Senior Vice President, Controller and Chief
Accounting OfficerJack A. Smith
    
    
    60
    
    
    Senior Vice President, Chief Marketing OfficerGlenn C. Taylor
    
    
    56
    
    
    Group President, Key AccountsTimothy C. Wentworth
    
    
    47
    
    
    President and Chief Executive Officer of Accredo
Health Group, Inc.
 Bryan D. Birch
 John P. Driscoll
 Robert S. Epstein, M.D., M.S.
 Brian T. Griffin
 28




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Kenneth O. Klepper
 Laizer Kornwasser
 David S. Machlowitz
 Thomas M. Moriarty
 Karin Princivalle
 JoAnn A. Reed
 29




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Richard J. Rubino
 Jack A. Smith
 Glenn C. Taylor
 Timothy C. Wentworth
  30




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PART II
 
 Item 5.
    
    Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities.
 Market Information
  Fourth Quarter
    
    Third Quarter
    
    Second Quarter
    
    First Quarter2007High
    
    $
    51.67
    
    
    $
    45.83
    
    
    $
    40.82
    
    
    $
    36.33Low
    
    $
    43.52
    
    
    $
    38.45
    
    
    $
    35.12
    
    
    $
    26.262006High
    
    $
    30.32
    
    
    $
    32.07
    
    
    $
    28.94
    
    
    $
    30.32Low
    
    $
    23.54
    
    
    $
    28.07
    
    
    $
    25.05
    
    
    $
    26.00
   Holders
  Dividend Policy
  Securities Authorized for Issuance under Equity Compensation Plans
  31




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Comparative Stock Performance
  COMPARISON OF 52 MONTH CUMULATIVE TOTAL RETURN
 
 
   Comparison of 52-Month Cumulative Total Return8/20/03
    
    12/03
    
    12/04
    
    12/05
    
    12/06
    
    12/07Medco Health Solutions, Inc.
    
    $
    100.00
    
    
    $
    134.77
    
    
    $
    164.95
    
    
    $
    221.25
    
    
    $
    211.90
    
    
    $
    402.06S&P 500
    
    $
    100.00
    
    
    $
    113.15
    
    
    $
    125.46
    
    
    $
    131.63
    
    
    $
    152.42
    
    
    $
    160.79S&P Health Care
    
    $
    100.00
    
    
    $
    104.88
    
    
    $
    106.64
    
    
    $
    113.53
    
    
    $
    122.08
    
    
    $
    130.81
  32




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Share Repurchase Program
      33




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Item 6. Selected Financial Data.
  December 29,
    
    December 30,
    
    December 31,
    
    December 25,
    
    December 27,As of and for Fiscal Years Ended
    
    2007(1)
    
    2006(2)
    
    2005(3) (4)
    
    2004
    
    2003Consolidated statement of income data:Total product net revenues(5)
    
    $
    43,961.9
    
    
    $
    42,022.6
    
    
    $
    37,455.0
    
    
    $
    35,024.4
    
    
    $
    33,913.1Total service net revenues
    
    
    544.3
    
    
    
    521.1
    
    
    
    415.9
    
    
    
    327.5
    
    
    
    351.4Total net revenues(5)
    
    
    44,506.2
    
    
    
    42,543.7
    
    
    
    37,870.9
    
    
    
    35,351.9
    
    
    
    34,264.5Cost of revenues:Cost of product net revenues(5)
    
    
    41,402.6
    
    
    
    40,012.5
    
    
    
    35,827.8
    
    
    
    33,496.6
    
    
    
    32,552.7Cost of service revenues
    
    
    158.3
    
    
    
    125.8
    
    
    
    100.2
    
    
    
    132.8
    
    
    
    189.7Total cost of revenues(5)
    
    
    41,560.9
    
    
    
    40,138.3
    
    
    
    35,928.0
    
    
    
    33,629.4
    
    
    
    32,742.4Selling, general and administrative
expenses
    
    
    1,114.1
    
    
    
    1,109.2
    
    
    
    757.6
    
    
    
    676.4
    
    
    
    686.4Amortization of intangibles
    
    
    228.1
    
    
    
    218.5
    
    
    
    192.5
    
    
    
    179.9
    
    
    
    94.3Interest and other (income) expense, net
    
    
    99.8
    
    
    
    65.9
    
    
    
    39.9
    
    
    
    59.9
    
    
    
    12.7Total cost of operations
    
    
    43,002.9
    
    
    
    41,531.9
    
    
    
    36,918.0
    
    
    
    34,545.6
    
    
    
    33,535.8Income before provision for income taxes
    
    
    1,503.3
    
    
    
    1,011.8
    
    
    
    952.9
    
    
    
    806.3
    
    
    
    728.7Provision for income taxes(9) (e)
    
    
    591.3
    
    
    
    381.6
    
    
    
    350.9
    
    
    
    324.7
    
    
    
    302.9Net income
    
    $
    912.0
    
    
    $
    630.2
    
    
    $
    602.0
    
    
    $
    481.6
    
    
    $
    425.8Earnings per share data(6):Basic earnings per share
    
    $
    1.66
    
    
    $
    1.06
    
    
    $
    1.04
    
    
    $
    0.89
    
    
    $
    0.79Shares used in computing basic earnings per
share
    
    
    550.2
    
    
    
    594.5
    
    
    
    576.1
    
    
    
    543.8
    
    
    
    540.2Diluted earnings per share
    
    $
    1.63
    
    
    $
    1.04
    
    
    $
    1.03
    
    
    $
    0.88
    
    
    $
    0.79Shares used in computing diluted earnings per
share
    
    
    560.9
    
    
    
    603.3
    
    
    
    587.1
    
    
    
    549.4
    
    
    
    541.6Consolidated balance sheet data:Working capital(7)
    
    $
    1,173.5
    
    
    $
    1,028.2
    
    
    $
    1,300.1
    
    
    $
    1,675.9
    
    
    $
    1,155.0Goodwill
    
    $
    6,230.2
    
    
    $
    5,108.7
    
    
    $
    5,152.3
    
    
    $
    3,310.2
    
    
    $
    3,310.2Intangible assets, net
    
    $
    2,905.0
    
    
    $
    2,523.1
    
    
    $
    2,741.6
    
    
    $
    2,140.6
    
    
    $
    2,320.5Total assets
    
    $
    16,217.9
    
    
    $
    14,388.1
    
    
    $
    14,447.7
    
    
    $
    11,113.2
    
    
    $
    11,044.6Total debt(8)
    
    $
    3,494.4
    
    
    $
    1,266.7
    
    
    $
    1,469.4
    
    
    $
    1,192.9
    
    
    $
    1,396.1Deferred tax liabilities
    
    $
    1,167.0
    
    
    $
    1,161.3
    
    
    $
    1,213.8
    
    
    $
    1,030.2
    
    
    $
    1,177.5Total noncurrent liabilities
    
    $
    4,213.4
    
    
    $
    2,057.8
    
    
    $
    2,218.0
    
    
    $
    2,177.6
    
    
    $
    2,577.7Total stockholders equity
    
    $
    6,875.3
    
    
    $
    7,503.5
    
    
    $
    7,724.2
    
    
    $
    5,719.4
    
    
    $
    5,080.0Supplemental information:EBITDA(9)
    
    $
    2,000.1
    
    
    $
    1,469.8
    
    
    $
    1,350.3
    
    
    $
    1,243.7
    
    
    $
    1,035.7EBITDA per adjusted prescription(9)
    
    $
    2.67
    
    
    $
    2.01
    
    
    $
    1.89
    
    
    $
    1.83
    
    
    $
    1.50Net cash provided by operating activities
    
    $
    1,367.0
    
    
    $
    1,241.0
    
    
    $
    1,040.8
    
    
    $
    711.5
    
    
    $
    1,123.9Net cash used by investing activities
    
    $
    (1,713.8
    )
    
    $
    (155.5
    )
    
    $
    (1,186.3
    )
    
    $
    (101.9
    )
    
    $
    (119.1
    )Net cash provided by (used by) financing
activities
    
    $
    302.4
    
    
    $
    (1,155.2
    )
    
    $
    (111.8
    )
    
    $
    (102.6
    )
    
    $
    (380.7
    )Prescriptions administered
    
    
    559.8
    
    
    
    553.4
    
    
    
    540.1
    
    
    
    502.9
    
    
    
    532.0Retail
    
    
    465.0
    
    
    
    464.4
    
    
    
    452.8
    
    
    
    415.2
    
    
    
    453.9Mail-order
    
    
    94.8
    
    
    
    89.0
    
    
    
    87.3
    
    
    
    87.7
    
    
    
    78.1Adjusted prescriptions(9) (h)
    
    
    748.3
    
    
    
    729.9
    
    
    
    714.1
    
    
    
    678.3
    
    
    
    688.2Adjusted mail-order penetration(10)
    
    
    37.9
    %
    
    
    36.4
    %
    
    
    36.6
    %
    
    
    38.8
    %
    
    
    34.0
    %Overall generic dispensing rate
    
    
    59.7
    %
    
    
    55.2
    %
    
    
    51.5
    %
    
    
    46.3
    %
    
    
    43.8
    %Retail generic dispensing rate
    
    
    61.7
    %
    
    
    57.2
    %
    
    
    53.3
    %
    
    
    48.1
    %
    
    
    45.2
    %Mail-order generic dispensing rate
    
    
    50.0
    %
    
    
    44.8
    %
    
    
    41.7
    %
    
    
    37.9
    %
    
    
    36.0
    %
 34




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##### Table of Contents



Notes to Selected Financial Data:(1)
    
    The consolidated statement of income data for 2007 includes the operating results of
PolyMedica Corporation (PolyMedica) and Critical Care Systems, Inc. (Critical Care)
commencing October 31, 2007 and November 14, 2007, the dates of acquisition, respectively.(2)
    
    The consolidated statement of income data for 2006 includes a pre-tax legal
settlements charge of $162.6 million recorded in the first quarter of 2006, with a $99.9
million after-tax effect, or $0.17 per diluted share on a split-adjusted basis (see note 6
below). This charge reflects an agreement with the U.S. Attorneys Office for the Eastern
District of Pennsylvania to settle three previously disclosed federal legal matters. The
settlement agreements for these three matters were signed and approved by the District Court
on October 23, 2006.(3)
    
    Fiscal 2005 represents a 53-week fiscal year. All other fiscal years are comprised
of 52 weeks.(4)
    
    The consolidated statement of income data for 2005 includes the results of
operations of Accredo Health, Incorporated (Accredo) commencing August 18, 2005, the date of
acquisition, and for the subsequent periods.(5)
    
    Includes retail co-payments of $7,553 for 2007, $7,394 for 2006, $7,436 for 2005,
$6,773 for 2004 and $6,850 for 2003.(6)
    
    Common share and per share amounts have been retrospectively adjusted for the
two-for-one stock split. See Note 1, Background and Basis of Presentation, to our
consolidated financial statements included in Part II, Item 8 of this Annual Report on Form
10-K.(7)
    
    Calculated as current assets less current liabilities.(8)
    
    We had no debt outstanding prior to August 12, 2003.(9)
    
    EBITDA consists of earnings before interest income/expense, taxes, depreciation and
amortization. We calculate and use EBITDA and EBITDA per adjusted prescription as indicators
of our ability to generate cash from our reported operating results. These measurements are
used in concert with net income and cash flows from operations, which measure actual cash
generated in the period. In addition, we believe that EBITDA and EBITDA per adjusted
prescription are supplemental measurement tools used by analysts and investors to help
evaluate overall operating performance and the ability to incur and service debt and make
capital expenditures. EBITDA does not represent funds available for our discretionary use and
is not intended to represent or to be used as a substitute for net income or cash flows from
operations data as measured under U.S. generally accepted accounting principles. The items
excluded from EBITDA, but included in the calculation of reported net income, are significant
components of the consolidated statements of income, and must be considered in performing a
comprehensive assessment of overall financial performance. EBITDA, and the associated
year-to-year trends, should not be considered in isolation. Our calculation of EBITDA may not
be consistent with calculations of EBITDA used by other companies. Additionally, we have
calculated the 2006 EBITDA excluding the legal settlements charge recorded in the first
quarter, as the charge is not considered an indicator of ongoing performance.EBITDA per adjusted prescription is calculated by dividing EBITDA by the adjusted prescription
volume for the period. This measure is used as an indicator of EBITDA performance on a per-unit
basis, providing insight into the cash-generating potential of each prescription. EBITDA per
adjusted prescription is affected by the changes in prescription volumes between retail and
mail-order, the relative representation of brand-name, generic and specialty drugs, as well as
the level of efficiency in the business. 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.The following table reconciles our reported net income to EBITDA and presents EBITDA per
adjusted prescription for each of the respective periods (in millions, except for EBITDA per
adjusted prescription data): December 29,
    
    December 30,
    
    December 31,
    
    December 25,
    
    December 27,For Fiscal Years Ended
    
    2007(a)
    
    2006
    
    2005(b) (c)
    
    2004
    
    2003Net income
    
    $
    912.0
    
    
    $
    630.2
    
    
    $
    602.0
    
    
    $
    481.6
    
    
    $
    425.8Add:Interest and other (income) expense, net
    
    
    99.8
    
    
    
    65.9
    
    
    
    39.9
    
    
    
    59.9
    
    
    
    23.7
    (d)Provision for income taxes
    
    
    591.3
    
    
    
    381.6
    (e)
    
    
    350.9
    (e)
    
    
    324.7
    
    
    
    302.9Depreciation expense
    
    
    168.9
    
    
    
    173.6
    
    
    
    165.0
    
    
    
    197.6
    (f)
    
    
    189.0
    (f)Amortization expense
    
    
    228.1
    
    
    
    218.5
    
    
    
    192.5
    
    
    
    179.9
    
    
    
    94.3EBITDA
    
    $
    2,000.1
    
    
    $
    1,469.8
    
    
    $
    1,350.3
    
    
    $
    1,243.7
    
    
    $
    1,035.7Adjustment for the 2006 legal settlements
charge
    
    
    
    
    
    
    162.6
    (g)
    
    
    
    
    
    
    
    
    
    
    EBITDA, excluding the 2006 legal
settlements charge
    
    $
    2,000.1
    
    
    $
    1,632.4
    
    
    $
    1,350.3
    
    
    $
    1,243.7
    
    
    $
    1,035.7Adjusted prescriptions(h)
    
    
    748.3
    
    
    
    729.9
    
    
    
    714.1
    
    
    
    678.3
    
    
    
    688.2EBITDA per adjusted prescription
    
    $
    2.67
    
    
    $
    2.01
    
    
    $
    1.89
    
    
    $
    1.83
    
    
    $
    1.50EBITDA per adjusted prescription,
excluding the 2006 legal settlements
charge
    
    $
    2.67
    
    
    $
    2.24
    
    
    $
    1.89
    
    
    $
    1.83
    
    
    $
    1.50
 35




---



##### Table of Contents



(a)
    
    Includes PolyMedicas and Critical Cares operating results commencing
October 31, 2007 and November 14, 2007, the dates of acquisition, respectively.(b)
    
    Fiscal 2005 represents a 53-week fiscal year. All other fiscal years are
comprised of 52 weeks.(c)
    
    Includes Accredos operating results commencing August 18, 2005, the date of
acquisition, and for the subsequent periods.(d)
    
    2003 excludes a one-time gain of $11 million from the sale of a minority equity
investment in a nonpublic company.(e)
    
    2006 and 2005 include non-recurring tax benefits of $20.0 million and $25.7
million, respectively. See Note 10, Taxes on Income, to our consolidated financial
statements included in Part II, Item 8 of this Annual Report on Form 10-K.(f)
    
    2004 and 2003 include accelerated depreciation of $24.5 million and $13.3
million, respectively, associated with facility closures that occurred in 2004.(g)
    
    Represents a pre-tax legal settlements charge of $162.6 million recorded in the
first quarter of 2006. See(2) above.(h)
    
    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.(10)
    
    The percentage of adjusted mail-order prescriptions to total adjusted
prescriptions. 
 Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Overview
 ®
    36




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##### Table of Contents



Key Indicators Reviewed By Management
 
 2007 Financial Performance Summary
         37




---



##### Table of Contents



Key Financial Statement Components
 Consolidated Statements of Income
     38




---



##### Table of Contents



39




---



##### Table of Contents



Consolidated Balance Sheets
      40




---



##### Table of Contents



Consolidated Statements of Cash Flows
    Client-Related Information
  Segment Discussion
  41




---



##### Table of Contents



Consolidated Results of Operations
  December 29,
    
    Increase
    
    December 30,
    
    Increase
    
    December 31,For Fiscal Years Ended
    
    2007(1)
    
    (Decrease)
    
    2006
    
    (Decrease)
    
    2005(2)(3)Net RevenuesRetail product(4)
    
    $
    26,424.1
    
    
    $
    544.0
    
    
    
    2.1
    %
    
    $
    25,880.1
    
    
    $
    2,443.6
    
    
    
    10.4
    %
    
    $
    23,436.5Mail-order product
    
    
    17,537.8
    
    
    
    1,395.3
    
    
    
    8.6
    %
    
    
    16,142.5
    
    
    
    2,124.0
    
    
    
    15.2
    %
    
    
    14,018.5Total product(4)
    
    $
    43,961.9
    
    
    $
    1,939.3
    
    
    
    4.6
    %
    
    $
    42,022.6
    
    
    $
    4,567.6
    
    
    
    12.2
    %
    
    $
    37,455.0Client and other service
    
    
    391.0
    
    
    
    46.9
    
    
    
    13.6
    %
    
    
    344.1
    
    
    
    99.9
    
    
    
    40.9
    %
    
    
    244.2Manufacturer service
    
    
    153.3
    
    
    
    (23.7
    )
    
    
    (13.4
    )%
    
    
    177.0
    
    
    
    5.3
    
    
    
    3.1
    %
    
    
    171.7Total service
    
    $
    544.3
    
    
    $
    23.2
    
    
    
    4.5
    %
    
    $
    521.1
    
    
    $
    105.2
    
    
    
    25.3
    %
    
    $
    415.9Total net revenues(4)
    
    $
    44,506.2
    
    
    $
    1,962.5
    
    
    
    4.6
    %
    
    $
    42,543.7
    
    
    $
    4,672.8
    
    
    
    12.3
    %
    
    $
    37,870.9Cost of RevenuesProduct(4)
    
    $
    41,402.6
    
    
    $
    1,390.1
    
    
    
    3.5
    %
    
    $
    40,012.5
    
    
    $
    4,184.7
    
    
    
    11.7
    %
    
    $
    35,827.8Service
    
    
    158.3
    
    
    
    32.5
    
    
    
    25.8
    %
    
    
    125.8
    
    
    
    25.6
    
    
    
    25.5
    %
    
    
    100.2Total cost of revenues(4)
    
    $
    41,560.9
    
    
    $
    1,422.6
    
    
    
    3.5
    %
    
    $
    40,138.3
    
    
    $
    4,210.3
    
    
    
    11.7
    %
    
    $
    35,928.0Gross Margin(5)Product
    
    $
    2,559.3
    
    
    $
    549.2
    
    
    
    27.3
    %
    
    $
    2,010.1
    
    
    $
    382.9
    
    
    
    23.5
    %
    
    $
    1,627.2Product gross margin percentage
    
    
    5.8
    %
    
    
    1.0
    %
    
    
    
    
    
    
    4.8
    %
    
    
    0.5
    %
    
    
    
    
    
    
    4.3
    %Service
    
    $
    386.0
    
    
    $
    (9.3
    )
    
    
    (2.4
    )%
    
    $
    395.3
    
    
    $
    79.6
    
    
    
    25.2
    %
    
    $
    315.7Service gross margin percentage
    
    
    70.9
    %
    
    
    (5.0
    )%
    
    
    
    
    
    
    75.9
    %
    
    
    
    
    
    
    
    
    
    
    75.9
    %Total gross margin
    
    $
    2,945.3
    
    
    $
    539.9
    
    
    
    22.4
    %
    
    $
    2,405.4
    
    
    $
    462.5
    
    
    
    23.8
    %
    
    $
    1,942.9Gross margin percentage
    
    
    6.6
    %
    
    
    0.9
    %
    
    
    
    
    
    
    5.7
    %
    
    
    0.6
    %
    
    
    
    
    
    
    5.1
    %Volume InformationRetail
    
    
    465.0
    
    
    
    0.6
    
    
    
    0.1
    %
    
    
    464.4
    
    
    
    11.6
    
    
    
    2.6
    %
    
    
    452.8Mail-order
    
    
    94.8
    
    
    
    5.8
    
    
    
    6.5
    %
    
    
    89.0
    
    
    
    1.7
    
    
    
    1.9
    %
    
    
    87.3Total volume
    
    
    559.8
    
    
    
    6.4
    
    
    
    1.2
    %
    
    
    553.4
    
    
    
    13.3
    
    
    
    2.5
    %
    
    
    540.1Adjusted prescriptions(6)
    
    
    748.3
    
    
    
    18.4
    
    
    
    2.5
    %
    
    
    729.9
    
    
    
    15.8
    
    
    
    2.2
    %
    
    
    714.1Adjusted mail-order penetration(7)
    
    
    37.9
    %
    
    
    1.5
    %
    
    
    
    
    
    
    36.4
    %
    
    
    (0.2
    )%
    
    
    
    
    
    
    36.6
    %
 42




---



##### Table of Contents



Generic Dispensing Rate InformationRetail generic dispensing rate
    
    
    61.7
    %
    
    
    4.5
    %
    
    
    
    
    
    
    57.2
    %
    
    
    3.9
    %
    
    
    
    
    
    
    53.3
    %Mail-order generic dispensing rate
    
    
    50.0
    %
    
    
    5.2
    %
    
    
    
    
    
    
    44.8
    %
    
    
    3.1
    %
    
    
    
    
    
    
    41.7
    %Overall generic dispensing rate
    
    
    59.7
    %
    
    
    4.5
    %
    
    
    
    
    
    
    55.2
    %
    
    
    3.7
    %
    
    
    
    
    
    
    51.5
    %
 
 (1)
    
    Includes PolyMedicas and Critical Cares operating results commencing October 31, 2007 and
November 14, 2007, the dates of acquisition, respectively.(2)
    
    Fiscal 2005 represents a 53-week fiscal year. All other fiscal years are comprised of 52 weeks.(3)
    
    Includes Accredos operating results commencing August 18, 2005, the date of acquisition, and for the
subsequent periods.(4)
    
    Includes retail co-payments of $7,553 million for 2007, $7,394 million for 2006 and $7,436 million for 2005.(5)
    
    Defined as net revenues minus cost of revenues.(6)
    
    Estimated 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.(7)
    
    The percentage of adjusted mail-order prescriptions to total adjusted prescriptions.
 Net Revenues
 Retail.
  Mail-order.
   43




---



##### Table of Contents



Gross Margin
     44




---



##### Table of Contents



December 29,
    
    Increase
    
    December 30,
    
    Increase
    
    December 31,For Fiscal Years Ended
    
    2007(1)
    
    (Decrease)
    
    2006(2)
    
    (Decrease)
    
    2005(3) (4)Gross margin
    
    $
    2,945.3
    
    
    $
    539.9
    
    
    
    22.4
    %
    
    $
    2,405.4
    
    
    $
    462.5
    
    
    
    23.8
    %
    
    $
    1,942.9Selling, general and
administrative expenses
    
    
    1,114.1
    
    
    
    4.9
    
    
    
    0.4
    %
    
    
    1,109.2
    
    
    
    351.6
    
    
    
    46.4
    %
    
    
    757.6Amortization of intangibles
    
    
    228.1
    
    
    
    9.6
    
    
    
    4.4
    %
    
    
    218.5
    
    
    
    26.0
    
    
    
    13.5
    %
    
    
    192.5Interest and other
(income) expense, net
    
    
    99.8
    
    
    
    33.9
    
    
    
    51.4
    %
    
    
    65.9
    
    
    
    26.0
    
    
    
    65.2
    %
    
    
    39.9Income before provision for
income taxes
    
    
    1,503.3
    
    
    
    491.5
    
    
    
    48.6
    %
    
    
    1,011.8
    
    
    
    58.9
    
    
    
    6.2
    %
    
    
    952.9Provision for income taxes
    
    
    591.3
    
    
    
    209.7
    
    
    
    55.0
    %
    
    
    381.6
    
    
    
    30.7
    
    
    
    8.7
    %
    
    
    350.9Net income
    
    $
    912.0
    
    
    $
    281.8
    
    
    
    44.7
    %
    
    $
    630.2
    
    
    $
    28.2
    
    
    
    4.7
    %
    
    $
    602.0
 
 (1)
    
    Includes PolyMedicas and Critical Cares operating results commencing October 31, 2007 and
November 14, 2007, the dates of acquisition, respectively.(2)
    
    Includes a first-quarter 2006 pre-tax legal settlements charge of $162.6 million recorded to
SG&A, with a $99.9 million after-tax effect.(3)
    
    Fiscal 2005 represents a 53-week fiscal year. All other fiscal years are comprised of 52 weeks.(4)
    
    Includes Accredos operating results commencing August 18, 2005, the date of acquisition, and
for the subsequent periods.
 Selling, General and Administrative Expenses
   Amortization of Intangibles
  45




---



##### Table of Contents



Interest and Other (Income) Expense, Net
    Provision for Income Taxes.
  Net Income and Earnings per Share .
   46




---



##### Table of Contents



Segment Results of Operations
 PBM Segment
  December 29,
    
    Increase
    
    December 30,
    
    Increase
    
    December 31,For Fiscal Years Ended
    
    2007(1)
    
    (Decrease)
    
    2006(2)
    
    (Decrease)
    
    2005(3) (4)Product net revenues
    
    $
    37,981.4
    
    
    $
    1,340.1
    
    
    
    3.7
    %
    
    $
    36,641.3
    
    
    $
    941.2
    
    
    
    2.6
    %
    
    $
    35,700.1Total service revenues
    
    
    482.1
    
    
    
    16.2
    
    
    
    3.5
    %
    
    
    465.9
    
    
    
    69.9
    
    
    
    17.7
    %
    
    
    396.0Total net revenues
    
    
    38,463.5
    
    
    
    1,356.3
    
    
    
    3.7
    %
    
    
    37,107.2
    
    
    
    1,011.1
    
    
    
    2.8
    %
    
    
    36,096.1Total cost of revenues
    
    
    35,997.7
    
    
    
    872.0
    
    
    
    2.5
    %
    
    
    35,125.7
    
    
    
    834.8
    
    
    
    2.4
    %
    
    
    34,290.9Total gross margin(5)
    
    $
    2,465.8
    
    
    $
    484.3
    
    
    
    24.4
    %
    
    $
    1,981.5
    
    
    $
    176.3
    
    
    
    9.8
    %
    
    $
    1,805.2Gross margin percentage
    
    
    6.4
    %
    
    
    1.1
    %
    
    
    
    
    
    
    5.3
    %
    
    
    0.3
    %
    
    
    
    
    
    
    5.0
    %Selling, general and administrative expenses
    
    
    884.3
    
    
    
    (28.7
    )
    
    
    (3.1
    )%
    
    
    913.0
    
    
    
    217.2
    
    
    
    31.2
    %
    
    
    695.8Amortization of intangibles
    
    
    188.6
    
    
    
    8.7
    
    
    
    4.8
    %
    
    
    179.9
    
    
    
    
    
    
    
    
    
    
    
    179.9Operating income
    
    $
    1,392.9
    
    
    $
    504.3
    
    
    
    56.8
    %
    
    $
    888.6
    
    
    $
    (40.9
    )
    
    
    (4.4
    )%
    
    $
    929.5
 
 (1)
    
    Includes PolyMedicas operating results commencing October 31, 2007, the date of acquisition.(2)
    
    Includes a first-quarter 2006 pre-tax legal settlements charge of $162.6 million recorded to SG&A.(3)
    
    Fiscal 2005 represents a 53-week fiscal year. All other fiscal years are comprised of 52 weeks.(4)
    
    Includes eight fiscal months of specialty pharmacy activity previously included in Medcos PBM business, as the Specialty Pharmacy segment commenced on August 18,
2005, the date of the Accredo acquisition.(5)
    
    Defined as net revenues minus cost of revenues.
      47




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Specialty Pharmacy Segment
  December 29,
    
    Increase
    
    December 30,
    
    Increase
    
    December 31,For Fiscal Years Ended
    
    2007(1)
    
    (Decrease)
    
    2006
    
    (Decrease)
    
    2005(2)Product net revenues
    
    $
    5,980.5
    
    
    $
    599.2
    
    
    
    11.1
    %
    
    $
    5,381.3
    
    
    
    N/M
    *
    
    $
    1,754.9Total service revenues
    
    
    62.2
    
    
    
    7.0
    
    
    
    12.7
    %
    
    
    55.2
    
    
    
    N/M
    *
    
    
    19.9Total net revenues
    
    
    6,042.7
    
    
    
    606.2
    
    
    
    11.2
    %
    
    
    5,436.5
    
    
    
    N/M
    *
    
    
    1,774.8Total cost of revenues
    
    
    5,563.2
    
    
    
    550.6
    
    
    
    11.0
    %
    
    
    5,012.6
    
    
    
    N/M
    *
    
    
    1,637.1Total gross margin(3)
    
    $
    479.5
    
    
    $
    55.6
    
    
    
    13.1
    %
    
    $
    423.9
    
    
    
    N/M
    *
    
    $
    137.7Gross margin percentage
    
    
    7.9
    %
    
    
    0.1
    %
    
    
    
    
    
    
    7.8
    %
    
    
    
    
    
    
    7.8
    %Selling, general and administrative expenses
    
    
    229.8
    
    
    
    33.6
    
    
    
    17.1
    %
    
    
    196.2
    
    
    
    N/M
    *
    
    
    61.8Amortization of intangibles
    
    
    39.5
    
    
    
    0.9
    
    
    
    2.3
    %
    
    
    38.6
    
    
    
    N/M
    *
    
    
    12.6Operating income
    
    $
    210.2
    
    
    $
    21.1
    
    
    
    11.2
    %
    
    $
    189.1
    
    
    
    N/M
    *
    
    $
    63.3
 
 *
    
    Not meaningful (see note 2 below).(1)
    
    Includes Critical Cares operating results commencing November 14, 2007, the date of acquisition.(2)
    
    The Specialty Pharmacy segment commenced on August 18, 2005, the date of the Accredo acquisition. 2005 segment results above exclude eight fiscal months of
specialty pharmacy activity previously included in Medcos PBM business. If the Company had owned Accredo for the full fiscal year ended December 31, 2005, it is
estimated that the Specialty Pharmacy segment net revenues would represent approximately 12% of total Medco net revenues.(3)
    
    Defined as net revenues minus cost of revenues.
    48




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##### Table of Contents



Liquidity and Capital Resources
 Cash Flows
  December 29,
    
    
    
    
    
    
    December 30,
    
    
    
    
    
    
    December 31,For Fiscal Years Ended
    
    2007(1)
    
    
    Variance
    
    
    2006
    
    
    Variance
    
    
    2005(2)(3)Net cash provided by operating activities
    
    $
    1,367.0
    
    
    $
    126.0
    
    
    $
    1,241.0
    
    
    $
    200.2
    
    
    $
    1,040.8Net cash used by investing activities
    
    
    (1,713.8
    )
    
    
    (1,558.3
    )
    
    
    (155.5
    )
    
    
    1,030.8
    
    
    
    (1,186.3
    )Net cash provided by (used by) financing activities
    
    
    302.4
    
    
    
    1,457.6
    
    
    
    (1,155.2
    )
    
    
    (1,043.4
    )
    
    
    (111.8
    )Net decrease in cash and cash equivalents
    
    
    (44.4
    )
    
    
    25.3
    
    
    
    (69.7
    )
    
    
    187.6
    
    
    
    (257.3
    )Cash and cash equivalents at beginning of year
    
    
    818.5
    
    
    
    (69.7
    )
    
    
    888.2
    
    
    
    (257.3
    )
    
    
    1,145.5Cash and cash equivalents at end of year
    
    $
    774.1
    
    
    $
    (44.4
    )
    
    $
    818.5
    
    
    $
    (69.7
    )
    
    $
    888.2
 
 (1)
    
    Includes PolyMedica and Critical Cares operating results commencing October 31, 2007 and
November 14, 2007, the dates of acquisition, respectively.(2)
    
    Fiscal 2005 represents a 53-week fiscal year. All other fiscal years are comprised of 52 weeks.(3)
    
    Includes Accredos operating results commencing August 18, 2005, the date of acquisition, and
for the subsequent periods.
 Operating Activities
  49




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Investing Activities
   Financing Activities
  50




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##### Table of Contents



Financing Facilities
 Five-Year Credit Facilities and Refinancing
    Accounts Receivable Financing Facility
  New 364-day Credit Facility
  51




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Interest Rates
  Swap Agreements
   Covenants
  Debt Ratings
  EBITDA
  52




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December 29,
    
    December 30,
    
    December 31,For Fiscal Years Ended
    
    2007(1)
    
    2006
    
    2005(2) (3)Net income
    
    $
    912.0
    
    
    $
    630.2
    
    
    $
    602.0Add:Interest and other (income) expense, net
    
    
    99.8
    
    
    
    65.9
    
    
    
    39.9Provision for income taxes
    
    
    591.3
    
    
    
    381.6
    (4)
    
    
    350.9
    (4)Depreciation expense
    
    
    168.9
    
    
    
    173.6
    
    
    
    165.0Amortization expense
    
    
    228.1
    
    
    
    218.5
    
    
    
    192.5EBITDA
    
    $
    2,000.1
    
    
    $
    1,469.8
    
    
    $
    1,350.3Adjustment for the 2006 legal settlements
charge
    
    
    
    
    
    
    162.6
    (5)
    
    
    EBITDA, excluding the 2006 legal
settlements charge
    
    $
    2,000.1
    
    
    $
    1,632.4
    
    
    $
    1,350.3Adjusted prescriptions(6)
    
    
    748.3
    
    
    
    729.9
    
    
    
    714.1EBITDA per adjusted prescription
    
    $
    2.67
    
    
    $
    2.01
    
    
    $
    1.89EBITDA per adjusted prescription,
excluding the 2006 legal settlements
charge
    
    $
    2.67
    
    
    $
    2.24
    
    
    $
    1.89
 
 (1)
    
    Includes PolyMedicas and Critical Cares operating results commencing October 31, 2007 and
November 14, 2007, the dates of acquisition, respectively.(2)
    
    Fiscal 2005 represents a 53-week fiscal year. All other fiscal years are comprised of 52 weeks.(3)
    
    Includes Accredos operating results commencing August 18, 2005, the date of acquisition, and
for the subsequent periods.(4)
    
    2006 and 2005 include non-recurring tax benefits of $20.0 million and $25.7 million,
respectively. See Note 10, Taxes on Income, to our consolidated financial statements
included in Part II, Item 8 of this Annual Report on Form 10-K.(5)
    
    Represents a pre-tax legal settlements charge of $162.6 million recorded in the first quarter
of 2006. This charge reflects an agreement with the U.S. Attorneys Office for the Eastern
District of Pennsylvania to settle three previously disclosed federal legal matters.(6)
    
    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.
  53




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Commitments
 Contractual Obligations
  Payments Due By Period
 Total
    
    
    2008
    
    
    2009-2010
    
    
    2011-2012
    
    
    ThereafterLong-term debt obligations(1)
    
    $
    2,900.0
    
    
    $
    
    
    
    $
    
    
    
    $
    2,400.0
    
    
    $
    500.0Interest expense on long-term debt obligations(2)
    
    
    765.9
    
    
    
    165.9
    
    
    
    331.9
    
    
    
    245.4
    
    
    
    22.7Operating lease obligations(3)
    
    
    123.8
    
    
    
    39.0
    
    
    
    58.3
    
    
    
    15.7
    
    
    
    10.8Purchase commitments and other(4)
    
    
    19.5
    
    
    
    9.5
    
    
    
    10.0
    
    
    
    
    
    
    
    Total
    
    $
    3,809.2
    
    
    $
    214.4
    
    
    $
    400.2
    
    
    $
    2,661.1
    
    
    $
    533.5
 
 (1)
    
    Long-term debt obligations exclude the $2.6 million in
unamortized discount on the senior notes and a fair value
adjustment of $3.0 million associated with the interest
rate swap agreements on $200 million of the senior notes.(2)
    
    The variable component of interest expense for the senior
unsecured credit facility is based on the fourth-quarter
2007 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)
    
    As part of the PolyMedica acquisition, we assumed a $10
million note payable associated with a previous
acquisition, which is included in other noncurrent
liabilities in the consolidated balance sheet. PolyMedica
also has committed to purchase approximately $9.5 million
in advertising spots and other media in fiscal 2008.
PolyMedica entered into these purchase commitments to
obtain favorable advertising rates.
      Off-Balance Sheet Arrangements
  54




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Interest Rate and Foreign Exchange Risk
   Share Repurchase Program
  Looking Forward
    Use of Estimates and Critical Accounting Policies and Estimates
 Use of Estimates
  55




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Critical Accounting Policies and Estimates
  Revenue Recognition
   56




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Rebates Receivable and Payable
 57




---



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Allowance for Doubtful Accounts.
  Income Taxes, Including the Recently Adopted Financial Accounting Standard, FIN 48
  58




---



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Balance at December 31, 2006
    
    $
    89.8Gross increases, prior period tax positions
    
    
    11.5Gross increases, current period tax positions
    
    
    16.5Gross increases, acquisition effects
    
    
    3.0Gross decreases, prior period tax positions
    
    
    (5.6
    )Settlements
    
    
    (3.2
    )Lapse of statutes of limitations
    
    
    (7.5
    )Balance at December 29, 2007
    
    $
    104.5
     Goodwill and Intangible Assets
 59




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Pension and Other Postretirement Benefit Plans
    60




---



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Contingencies
 Stock-Based Compensation.
    61




---



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Recent Accounting Pronouncements.
    62




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63




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CONDENSED INTERIM FINANCIAL DATA (UNAUDITED)  (In millions, except per share amounts)
 2007
    
    4th Quarter
    
    3rd Quarter
    
    2nd Quarter
    
    1st QuarterProduct net revenues(1)
    
    $
    11,240.2
    
    
    $
    10,783.1
    
    
    $
    10,912.3
    
    
    $
    11,026.3Service revenues
    
    
    138.2
    
    
    
    135.5
    
    
    
    137.3
    
    
    
    133.3Total net revenues(1)
    
    
    11,378.4
    
    
    
    10,918.6
    
    
    
    11,049.6
    
    
    
    11,159.6Cost of operations:Cost of product net revenues(1)
    
    
    10,557.5
    
    
    
    10,183.3
    
    
    
    10,311.9
    
    
    
    10,349.9Cost of service revenues
    
    
    54.7
    
    
    
    34.5
    
    
    
    33.1
    
    
    
    36.0Total cost of revenues(1)
    
    
    10,612.2
    
    
    
    10,217.8
    
    
    
    10,345.0
    
    
    
    10,385.9Selling, general and administrative expenses
    
    
    328.6
    
    
    
    263.2
    
    
    
    274.0
    
    
    
    248.4Amortization of intangibles
    
    
    64.2
    
    
    
    54.6
    
    
    
    54.6
    
    
    
    54.6Interest and other (income) expense, net
    
    
    37.4
    
    
    
    25.5
    
    
    
    21.9
    
    
    
    14.9Total cost of operations
    
    
    11,042.4
    
    
    
    10,561.1
    
    
    
    10,695.5
    
    
    
    10,703.8Income before provision for income taxes
    
    
    336.0
    
    
    
    357.5
    
    
    
    354.1
    
    
    
    455.8Provision for income taxes
    
    
    128.4
    
    
    
    142.8
    
    
    
    139.2
    
    
    
    181.0Net income
    
    $
    207.6
    
    
    $
    214.7
    
    
    $
    214.9
    
    
    $
    274.8Basic earnings per share(2):Weighted average shares outstanding
    
    
    535.2
    
    
    
    537.9
    
    
    
    554.4
    
    
    
    573.5Earnings per share
    
    $
    0.39
    
    
    $
    0.40
    
    
    $
    0.39
    
    
    $
    0.48Diluted earnings per share(2):Weighted average shares outstanding
    
    
    546.3
    
    
    
    547.9
    
    
    
    564.2
    
    
    
    582.3Earnings per share
    
    $
    0.38
    
    
    $
    0.39
    
    
    $
    0.38
    
    
    $
    0.47
 2006
    
    4th Quarter
    
    3rd Quarter
    
    2nd Quarter
    
    1st QuarterProduct net revenues(3)
    
    $
    10,785.5
    
    
    $
    10,334.8
    
    
    $
    10,458.9
    
    
    $
    10,443.3Service revenues
    
    
    144.7
    
    
    
    126.3
    
    
    
    129.9
    
    
    
    120.2Total net revenues(3)
    
    
    10,930.2
    
    
    
    10,461.1
    
    
    
    10,588.8
    
    
    
    10,563.5Cost of operations:Cost of product net revenues(3)
    
    
    10,203.2
    
    
    
    9,840.8
    
    
    
    9,977.6
    
    
    
    9,990.9Cost of service revenues
    
    
    36.8
    
    
    
    26.8
    
    
    
    27.7
    
    
    
    34.4Total cost of revenues(3)
    
    
    10,240.0
    
    
    
    9,867.6
    
    
    
    10,005.3
    
    
    
    10,025.3Selling, general and administrative expenses
    
    
    251.3
    
    
    
    222.9
    
    
    
    239.1
    
    
    
    395.9Amortization of intangibles
    
    
    54.6
    
    
    
    54.6
    
    
    
    54.6
    
    
    
    54.6Interest and other (income) expense, net
    
    
    16.2
    
    
    
    20.9
    
    
    
    15.3
    
    
    
    13.5Total cost of operations
    
    
    10,562.1
    
    
    
    10,166.0
    
    
    
    10,314.3
    
    
    
    10,489.3Income before provision for income taxes
    
    
    368.1
    
    
    
    295.1
    
    
    
    274.5
    
    
    
    74.2Provision for income taxes
    
    
    139.3
    
    
    
    109.3
    
    
    
    103.6
    
    
    
    29.4Net income
    
    $
    228.8
    
    
    $
    185.8
    
    
    $
    170.9
    
    
    $
    44.8Basic earnings per share(2):Weighted average shares outstanding
    
    
    583.4
    
    
    
    588.3
    
    
    
    598.0
    
    
    
    608.4Earnings per share
    
    $
    0.39
    
    
    $
    0.32
    
    
    $
    0.29
    
    
    $
    0.07Diluted earnings per share(2):Weighted average shares outstanding
    
    
    591.1
    
    
    
    597.3
    
    
    
    605.8
    
    
    
    617.1Earnings per share
    
    $
    0.39
    
    
    $
    0.31
    
    
    $
    0.28
    
    
    $
    0.07
 
 (1)
    
    Includes retail co-payments of $1,849 million for the fourth quarter, $1,831 million
for the third quarter, $1,887 million for the second quarter and $1,986 million for the first
quarter of 2007.(2)
    
    Common share and per share amounts have been retrospectively adjusted for the
two-for-one stock split. See Note 1, Background and Basis of Presentation, to our
consolidated financial statements included in Part II, Item 8 of this Annual Report on Form
10-K.(3)
    
    Includes retail co-payments of $1,855 million for the fourth quarter, $1,779
million for the third quarter, $1,807 million for the second quarter and $1,953 million for
the first quarter of 2006.   64




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Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
  
 Item 8. Financial Statements and Supplementary Data.
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS*
 Report of Independent Registered Public Accounting Firm
    
    
    66Consolidated Balance Sheets as of December 29, 2007 and December 30, 2006
    
    
    67Consolidated Statements of Income for the Years Ended December 29, 2007,
December 30, 2006 and December 31, 2005
    
    
    68Consolidated Statements of Stockholders Equity for the Years Ended
December 31, 2005, December 30, 2006 and December 29, 2007
    
    
    69Consolidated Statements of Cash Flows for the Years Ended December 29,
2007, December 30, 2006 and December 31, 2005
    
    
    70Notes to Consolidated Financial Statements
    
    
    71
 
 *
    
    Selected quarterly financial data for the fiscal years ended December 29, 2007 and December
30, 2006 is included herein under Part II, Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations  Condensed Interim Financial Data (Unaudited).   65




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Report of Independent Registered Public Accounting Firm
  Internal Control  Integrated Framework
    
 
 66




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##### Table of Contents



MEDCO HEALTH SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for share data)
 December 29,
    
    
    December 30,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    774.1
    
    
    $
    818.5Short-term investments
    
    
    70.3
    
    
    
    68.4Manufacturer accounts receivable, net
    
    
    1,516.2
    
    
    
    1,531.6Client accounts receivable, net
    
    
    1,340.3
    
    
    
    1,294.9Income taxes receivable
    
    
    216.0
    
    
    
    Inventories, net
    
    
    1,946.0
    
    
    
    1,676.8Prepaid expenses and other current assets
    
    
    285.4
    
    
    
    273.4Deferred tax assets
    
    
    154.4
    
    
    
    191.4Total current assets
    
    
    6,302.7
    
    
    
    5,855.0Noncurrent income taxes receivable
    
    
    
    
    
    
    212.9Property and equipment, net
    
    
    725.5
    
    
    
    649.7Goodwill
    
    
    6,230.2
    
    
    
    5,108.7Intangible assets, net
    
    
    2,905.0
    
    
    
    2,523.1Other noncurrent assets
    
    
    54.5
    
    
    
    38.7Total assets
    
    $
    16,217.9
    
    
    $
    14,388.1LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Claims and other accounts payable
    
    $
    2,812.9
    
    
    $
    2,884.2Client rebates and guarantees payable
    
    
    1,092.2
    
    
    
    886.1Accrued expenses and other current liabilities
    
    
    624.1
    
    
    
    656.2Short-term debt
    
    
    600.0
    
    
    
    325.0Current portion of long-term debt
    
    
    
    
    
    
    75.3Total current liabilities
    
    
    5,129.2
    
    
    
    4,826.8Long-term debt, net
    
    
    2,894.4
    
    
    
    866.4Deferred tax liabilities
    
    
    1,167.0
    
    
    
    1,161.3Other noncurrent liabilities
    
    
    152.0
    
    
    
    30.1Total liabilities
    
    
    9,342.6
    
    
    
    6,884.6Commitments and contingencies (See Note 14)Stockholders equity:Preferred stock, par value $0.01authorized: 10,000,000 shares;
issued and outstanding: 0
    
    
    
    
    
    
    Common stock, par value $0.01authorized: 1,000,000,000 shares;
issued: 647,384,634 shares at December 29, 2007 and
635,018,698 shares at December 30, 2006(1)
    
    
    6.4
    
    
    
    6.3Accumulated other comprehensive income
    
    
    6.4
    
    
    
    15.3Additional paid-in capital(1)
    
    
    7,553.0
    
    
    
    7,153.1Retained earnings
    
    
    2,826.4
    
    
    
    1,885.110,392.2
    
    
    
    9,059.8Treasury stock, at cost: 111,445,348 shares at December 29, 2007 and
58,121,790 shares at December 30, 2006(1)
    
    
    (3,516.9
    )
    
    
    (1,556.3
    )Total stockholders equity
    
    
    6,875.3
    
    
    
    7,503.5Total liabilities and stockholders equity
    
    $
    16,217.9
    
    
    $
    14,388.1
 
 (1)
    
    Balances and share amounts have been retrospectively adjusted to reflect the January
24, 2008 two-for-one stock split. See Note 1, Background and Basis of Presentation, for more
information. The accompanying notes are an integral part of these consolidated financial statements.
 67




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##### Table of Contents



MEDCO HEALTH SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except for per share data)
 December 29,
    
    
    December 30,
    
    
    December 31,For Fiscal Years Ended
    
    2007
    
    
    2006
    
    
    2005(1)Product net revenues (Includes retail
co-payments of $7,553 for 2007, $7,394 for
2006, and $7,436 for 2005)
    
    $
    43,961.9
    
    
    $
    42,022.6
    
    
    $
    37,455.0Service revenues
    
    
    544.3
    
    
    
    521.1
    
    
    
    415.9Total net revenues
    
    
    44,506.2
    
    
    
    42,543.7
    
    
    
    37,870.9Cost of operations:Cost of product net revenues (Includes
retail co-payments of $7,553 for 2007,
$7,394 for 2006, and $7,436 for 2005)
    
    
    41,402.6
    
    
    
    40,012.5
    
    
    
    35,827.8Cost of service revenues
    
    
    158.3
    
    
    
    125.8
    
    
    
    100.2Total cost of revenues
    
    
    41,560.9
    
    
    
    40,138.3
    
    
    
    35,928.0Selling, general and administrative expenses
    
    
    1,114.1
    
    
    
    1,109.2
    
    
    
    757.6Amortization of intangibles
    
    
    228.1
    
    
    
    218.5
    
    
    
    192.5Interest and other (income) expense, net
    
    
    99.8
    
    
    
    65.9
    
    
    
    39.9Total cost of operations
    
    
    43,002.9
    
    
    
    41,531.9
    
    
    
    36,918.0Income before provision for income taxes
    
    
    1,503.3
    
    
    
    1,011.8
    
    
    
    952.9Provision for income taxes
    
    
    591.3
    
    
    
    381.6
    
    
    
    350.9Net income
    
    $
    912.0
    
    
    $
    630.2
    
    
    $
    602.0Basic earnings per share(2):Weighted average shares outstanding
    
    
    550.2
    
    
    
    594.5
    
    
    
    576.1Earnings per share
    
    $
    1.66
    
    
    $
    1.06
    
    
    $
    1.04Diluted earnings per share(2):Weighted average shares outstanding
    
    
    560.9
    
    
    
    603.3
    
    
    
    587.1Earnings per share
    
    $
    1.63
    
    
    $
    1.04
    
    
    $
    1.03
 
 (1)
    
    Fiscal 2005 represents a 53-week fiscal year. All other fiscal years are
comprised of 52 weeks.(2)
    
    Common share and per share amounts have been retrospectively adjusted to
reflect the two-for-one stock split.
See Note 1, Background and Basis of Presentation for additional information. The accompanying notes are an integral part of these consolidated financial statements.
 68




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##### Table of Contents



MEDCO HEALTH SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Shares in thousands; $ in millions, except for per share data)
 Shares of
    
    
    
    
    
    
    
    
    
    
    AccumulatedCommon
    
    
    Shares of
    
    
    $0.01 Par Value
    
    
    Other
    
    
    AdditionalStock
    
    
    Treasury
    
    
    Common
    
    
    Comprehensive
    
    
    Paid-in
    
    
    Unearned
    
    
    Retained
    
    
    TreasuryIssued(1)
    
    
    Stock(1)
    
    
    Stock(1)
    
    
    Income
    
    
    Capital(1)
    
    
    Compensation
    
    
    Earnings
    
    
    Stock
    
    
    TotalBalances at
December 25, 2004
    
    
    548,873
    
    
    
    
    
    
    $
    5.4
    
    
    $
    
    
    
    $
    5,064.3
    
    
    $
    (3.2
    )
    
    $
    652.9
    
    
    $
    
    
    
    $
    5,719.4Net income(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    602.0
    
    
    
    
    
    
    
    602.0Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    602.0
    
    
    
    
    
    
    
    602.0Shares issued in
connection with the
Accredo acquisition
    
    
    48,868
    
    
    
    
    
    
    
    0.5
    
    
    
    
    
    
    
    1,212.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,212.9Medco stock options
issued in connection with
the Accredo acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100.6Issuance of common stock
for options exercised,
including tax benefit
    
    
    25,830
    
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    471.6
    
    
    
    (0.2
    )
    
    
    
    
    
    
    
    
    
    
    471.7Issuance of common stock
under the Employee Stock
Purchase Plan
    
    
    330
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.8Restricted stock and
restricted stock unit
activity, including tax
benefit
    
    
    101
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54.5
    
    
    
    (36.4
    )
    
    
    
    
    
    
    
    
    
    
    18.1Treasury stock acquired
    
    
    
    
    
    
    15,486
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (407.3
    )
    
    
    (407.3
    )Balances at
December 31, 2005
    
    
    624,002
    
    
    
    15,486
    
    
    
    6.2
    
    
    
    
    
    
    
    6,910.2
    
    
    
    (39.8
    )
    
    
    1,254.9
    
    
    
    (407.3
    )
    
    
    7,724.2Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    630.2
    
    
    
    
    
    
    
    630.2Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    630.2
    
    
    
    
    
    
    
    630.2Adjustment to initially
apply FASB Statement No.
158(3), net of
tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.3Issuance of common stock
for options exercised,
including tax benefit
    
    
    10,475
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    181.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    181.5Issuance of common stock
under employee stock
purchase plans
    
    
    358
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10.0Restricted stock and
restricted stock unit
activity, including tax
benefit
    
    
    184
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29.5Reversal of unearned
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39.8
    )
    
    
    39.8
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
related to options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61.8Treasury stock acquired
    
    
    
    
    
    
    42,636
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,149.0
    )
    
    
    (1,149.0
    )Balances at
December 30, 2006
    
    
    635,019
    
    
    
    58,122
    
    
    
    6.3
    
    
    
    15.3
    
    
    
    7,153.1
    
    
    
    
    
    
    
    1,885.1
    
    
    
    (1,556.3
    )
    
    
    7,503.5Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    912.0
    
    
    
    
    
    
    
    912.0Other comprehensive
income, net of
tax(4)Defined benefit plans:Net prior service cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4.5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4.5
    )Net gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4Unrealized loss on cash
flow hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4.8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4.8
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8.9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8.9
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8.9
    )
    
    
    
    
    
    
    
    
    
    
    912.0
    
    
    
    
    
    
    
    903.1Adoption of FASB
Interpretation No.
48(5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29.3
    
    
    
    
    
    
    
    29.3Issuance of common stock
for options exercised,
including tax benefit
    
    
    11,876
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    286.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    286.7Issuance of common stock
under employee stock
purchase plans
    
    
    365
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13.0Restricted stock and
restricted stock unit
activity, including tax
benefit
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52.2Stock-based compensation
related to options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48.1Treasury stock acquired
    
    
    
    
    
    
    53,323
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,960.6
    )
    
    
    (1,960.6
    )Balances at
December 29, 2007
    
    
    647,385
    
    
    
    111,445
    
    
    $
    6.4
    
    
    $
    6.4
    
    
    $
    7,553.0
    
    
    $
    
    
    
    $
    2,826.4
    
    
    $
    (3,516.9
    )
    
    $
    6,875.3
 
 (1)
    
    Share data, common stock and additional paid-in-capital have been retrospectively
adjusted to reflect the January 24, 2008 two-for-one stock split. See Note 1, Background and
Basis of Presentation, for more information.(2)
    
    Fiscal 2005 represents a 53-week fiscal year. All other fiscal years are comprised
of 52 weeks.(3)
    
    See Note 2, Summary of Significant Accounting PoliciesPension and Other
Postretirement Benefit Plans, for more information.(4)
    
    See Note 2, Summary of Significant Accounting PoliciesOther Comprehensive Income
and Accumulated Other Comprehensive Income, for more information.(5)
    
    See Note 2, Summary of Significant Accounting PoliciesIncome Taxes, Including the
Recently Adopted Financial Accounting Standard (FIN 48), for more information. The accompanying notes are an integral part of these consolidated financial statements.
 69




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MEDCO HEALTH SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
 December 29,
    
    
    December 30,
    
    
    December 31,For Fiscal Years Ended
    
    2007
    
    
    2006
    
    
    2005(1)Cash flows from operating activities:Net income
    
    $
    912.0
    
    
    $
    630.2
    
    
    $
    602.0Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    168.9
    
    
    
    173.6
    
    
    
    165.0Amortization of intangibles
    
    
    228.1
    
    
    
    218.5
    
    
    
    192.5Deferred income taxes
    
    
    (134.1
    )
    
    
    (99.8
    )
    
    
    (233.0
    )Stock-based compensation on employee stock plans
    
    
    102.5
    
    
    
    95.6
    
    
    
    17.2Tax benefit on employee stock plans
    
    
    102.2
    
    
    
    60.6
    
    
    
    116.1Excess tax benefits from stock-based compensation arrangements
    
    
    (69.9
    )
    
    
    (33.1
    )
    
    
    Other
    
    
    65.0
    
    
    
    51.0
    
    
    
    20.9Net changes in assets and liabilities (net of acquisition effects, 2007 and 2005 only):Manufacturer accounts receivable, net
    
    
    25.9
    
    
    
    25.5
    
    
    
    (110.3
    )Client accounts receivable, net
    
    
    65.0
    
    
    
    (146.9
    )
    
    
    (113.5
    )Inventories, net
    
    
    (218.1
    )
    
    
    (149.7
    )
    
    
    (40.8
    )Prepaid expenses and other current assets
    
    
    (4.9
    )
    
    
    (18.5
    )
    
    
    (187.4
    )Deferred income taxes
    
    
    
    
    
    
    162.9
    
    
    
    Income taxes receivable
    
    
    (3.1
    )
    
    
    (212.9
    )
    
    
    Other noncurrent assets
    
    
    2.1
    
    
    
    25.9
    
    
    
    37.8Claims and other accounts payable
    
    
    (119.2
    )
    
    
    248.3
    
    
    
    627.4Client rebates and guarantees payable
    
    
    206.1
    
    
    
    98.7
    
    
    
    (145.9
    )Accrued expenses and other current and noncurrent liabilities
    
    
    38.5
    
    
    
    111.1
    
    
    
    92.8Net cash provided by operating activities
    
    
    1,367.0
    
    
    
    1,241.0
    
    
    
    1,040.8Cash flows from investing activities:Acquisitions of businesses, net of cash acquired
    
    
    (1,530.6
    )
    
    
    
    
    
    
    (989.4
    )Cash paid for selected assets of Pediatric Services of America, Inc.
    
    
    
    
    
    
    
    
    
    
    (72.5
    )Capital expenditures
    
    
    (177.7
    )
    
    
    (151.0
    )
    
    
    (132.1
    )Purchases of securities and other investments
    
    
    (181.7
    )
    
    
    (121.9
    )
    
    
    (75.5
    )Proceeds from sale of securities and other investments
    
    
    176.2
    
    
    
    117.4
    
    
    
    83.2Net cash used by investing activities
    
    
    (1,713.8
    )
    
    
    (155.5
    )
    
    
    (1,186.3
    )Cash flows from financing activities:Proceeds from long-term debt
    
    
    2,400.0
    
    
    
    
    
    
    
    750.0Repayments on long-term debt
    
    
    (688.4
    )
    
    
    (75.5
    )
    
    
    (1,265.2
    )Proceeds under accounts receivable financing facility
    
    
    275.0
    
    
    
    150.0
    
    
    
    450.0Repayments under accounts receivable financing facility
    
    
    
    
    
    
    (275.0
    )
    
    
    Debt issuance costs
    
    
    (1.8
    )
    
    
    (0.5
    )
    
    
    (2.5
    )Purchase of treasury stock
    
    
    (1,960.6
    )
    
    
    (1,149.0
    )
    
    
    (407.3
    )Excess tax benefits from stock-based compensation arrangements
    
    
    69.9
    
    
    
    33.1
    
    
    
    Proceeds from employee stock plans
    
    
    208.3
    
    
    
    161.7
    
    
    
    363.2Net cash provided by (used by) financing activities
    
    
    302.4
    
    
    
    (1,155.2
    )
    
    
    (111.8
    )Net decrease in cash and cash equivalents
    
    
    (44.4
    )
    
    
    (69.7
    )
    
    
    (257.3
    )Cash and cash equivalents at beginning of year
    
    
    818.5
    
    
    
    888.2
    
    
    
    1,145.5Cash and cash equivalents at end of year
    
    $
    774.1
    
    
    $
    818.5
    
    
    $
    888.2Supplemental disclosures of cash flow information:Cash paid during the year for interest
    
    $
    123.4
    
    
    $
    89.9
    
    
    $
    72.2Cash paid during the year for income taxes
    
    $
    668.5
    
    
    $
    401.4
    
    
    $
    369.6Non-cash investing and financing activities related to the Accredo acquisition:Fair value of assets acquired (including approximately $1.8 billion of goodwill and
$770.1 million of intangibles)
    
    $
    
    
    
    $
    
    
    
    $
    3,343.4Cash paid in the acquisition
    
    $
    
    
    
    $
    
    
    
    $
    (1,108.4
    )Issuance of approximately 48 million shares of common stock
    
    $
    
    
    
    $
    
    
    
    $
    (1,213.0
    )Issuance of converted stock options for the purchase of approximately 9 million shares
of common stock, net of approximately $0.2 million allocated to unearned compensation
    
    $
    
    
    
    $
    
    
    
    $
    (100.6
    )Liabilities assumed
    
    $
    
    
    
    $
    
    
    
    $
    921.4
 
 (1)
    
    Fiscal 2005 represents a 53-week fiscal year. All other fiscal years are
comprised of 52 weeks. The accompanying notes are an integral part of these consolidated financial statements.
 70




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MEDCO HEALTH SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. BACKGROUND AND BASIS OF PRESENTATION
    2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Fiscal Years .
 Principles of Consolidation .
 Cash and Cash Equivalents .
 Short-Term and Long-Term Investments .
 71




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Financial Instruments .
 Accounts Receivable .
    72




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Concentrations of Risks.
  Inventories, Net .
 Property and Equipment, Net .
 Net Revenues .
  73




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74




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Cost of Revenues .
   Goodwill .
 Intangible Assets, Net .
 75




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Income Taxes, Including the Recently Adopted Financial Accounting Standard (FIN 48). Settlement
  76




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Balance at December 31, 2006
    
    $
    89.8Gross increases, prior period tax positions
    
    
    11.5Gross increases, current period tax positions
    
    
    16.5Gross increases, acquisition effects
    
    
    3.0Gross decreases, prior period tax positions
    
    
    (5.6
    )Settlements
    
    
    (3.2
    )Lapse of statutes of limitations
    
    
    (7.5
    )Balance at December 29, 2007
    
    $
    104.5
     Use of Estimates .
 Operating Segments.
 77




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##### Table of Contents



Earnings per Share (EPS).
   Fiscal Years
    
    2007
    
    2006
    
    2005Weighted average shares outstanding
    
    
    550.2
    
    
    
    594.5
    
    
    
    576.1Dilutive common stock equivalents:Outstanding stock options,
restricted stock units and restricted stock
    
    
    10.7
    
    
    
    8.8
    
    
    
    11.0Weighted average shares outstanding
assuming dilution
    
    
    560.9
    
    
    
    603.3
    
    
    
    587.1
    Pension and Other Postretirement Benefit Plans .
  78




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##### Table of Contents



Other Comprehensive Income and Accumulated Other Comprehensive Income .
   Pension Benefits
    
    
    Other Postretirement Benefits
    
    
    Cash Flow HedgesBefore Taxes
    
    
    After Taxes
    
    
    Before Taxes
    
    
    After Taxes
    
    
    Before Taxes
    
    
    After TaxesNet actuarial loss
    
    $
    11.0
    
    
    $
    6.7
    
    
    $
    13.2
    
    
    $
    8.0
    
    
    $
    
    
    
    $
    Prior service cost (credit)
    
    
    
    
    
    
    
    
    
    
    (49.2
    )
    
    
    (30.0
    )
    
    
    
    
    
    
    Decrease (increase) in
AOCI at December 30, 2006
    
    $
    11.0
    
    
    $
    6.7
    
    
    $
    (36.0
    )
    
    $
    (22.0
    )
    
    $
    
    
    
    $
    Loss (gain) arising during
period
    
    $
    1.4
    
    
    $
    0.8
    
    
    $
    (1.3
    )
    
    $
    (0.8
    )
    
    $
    
    
    
    $
    Amortization of actuarial
loss included in net
periodic benefit cost
    
    
    
    
    
    
    
    
    
    
    (0.6
    )
    
    
    (0.4
    )
    
    
    
    
    
    
    Prior service cost (credit)
    
    
    3.0
    
    
    
    1.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of prior
service credit
    
    
    
    
    
    
    
    
    
    
    4.3
    
    
    
    2.7
    
    
    
    
    
    
    
    Unrealized losses on cash
flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.9
    
    
    
    4.8Other comprehensive income
during 2007
    
    $
    4.4
    
    
    $
    2.6
    
    
    $
    2.4
    
    
    $
    1.5
    
    
    $
    7.9
    
    
    $
    4.8Balance at December 29,
2007
    
    $
    15.4
    
    
    $
    9.3
    
    
    $
    (33.6
    )
    
    $
    (20.5
    )
    
    $
    7.9
    
    
    $
    4.8
  Contingencies .
 Stock-Based Compensation.
 79




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80




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##### Table of Contents



Fiscal Years
    
    2007
    
    
    2006Cost of product net revenues
    
    $
    6.1
    
    
    $
    10.1Selling, general and administrative expenses
    
    
    44.2
    
    
    
    53.4Total stock-based compensation expense, before taxes
    
    
    50.3
    
    
    
    63.5Related income tax benefits
    
    
    (19.7
    )
    
    
    (24.9
    )Stock-based compensation expense, net of taxes
    
    $
    30.6
    (1)
    
    $
    38.6
    (2)Earnings per share effect:Basic
    
    $
    0.06
    
    
    $
    0.07Diluted
    
    $
    0.05
    
    
    $
    0.06
 
 (1)
    
    Stock-based compensation expense includes stock option expense of $29.3 million
($48.1 million pre-tax), and employee stock purchase plan expense of $1.3 million ($2.2
million pre-tax).(2)
    
    Stock-based compensation expense includes stock option expense of $37.5 million
($61.8 million pre-tax), and employee stock purchase plan expense of $1.1 million ($1.7
million pre-tax).  Fiscal Year
    
    2005(1)Net income, as reported
    
    $
    602.0Stock-based compensation expense related to options
and the employee stock purchase plan, net of
tax(2)
    
    
    (60.2
    )Pro forma net income, including stock-based
compensation expense
    
    $
    541.8Basic earnings per share:As reported
    
    $
    1.04Effect of stock-based compensation expense
related to options and the employee stock
purchase plan
    
    
    (0.10
    )Pro forma
    
    $
    0.94Diluted earnings per share:As reported
    
    $
    1.03Effect of stock-based compensation expense
related to options and the employee stock
purchase plan
    
    
    (0.11
    )Pro forma
    
    $
    0.92
 
 (1)
    
    Fiscal 2005 represents a 53-week fiscal year.(2)
    
    Pro forma stock-based compensation expense for the year
ended December 31, 2005 includes stock option expense of
$59.5 million ($98.7 million pre-tax), and employee stock
purchase plan expense of $0.7 million ($1.2 million
pre-tax).   81




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##### Table of Contents



Recent Accounting Pronouncements.
    3. ACQUISITIONS OF BUSINESSES
 PolyMedica Corporation.
  82




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##### Table of Contents



As ofOctober 31, 2007Current assets
    
    $
    211.2Property and equipment, net
    
    
    59.6Goodwill
    
    
    1,008.0Identifiable intangible assets
    
    
    541.5Other noncurrent assets
    
    
    16.9Total assets acquired
    
    
    1,837.2Current liabilities
    
    
    90.1Long-term debt
    
    
    231.3Deferred income taxes
    
    
    181.2Other noncurrent liabilities
    
    
    13.8Total liabilities assumed
    
    
    516.4Net assets acquired
    
    $
    1,320.8
  2007
    
    2006Fiscal Years
    
    (Unaudited)
    
    (Unaudited)Pro forma total net revenues
    
    $
    44,982.5
    
    
    $
    43,161.3Pro forma net income
    
    $
    887.4
    
    
    $
    594.3Pro forma basic earnings per common share
    
    $
    1.61
    
    
    $
    1.00Pro forma diluted earnings per common share
    
    $
    1.58
    
    
    $
    0.99
  Critical Care.
 83




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##### Table of Contents



Accredo.
   2005Fiscal Year
    
    (Unaudited)Pro forma total net revenues
    
    $
    38,912.0Pro forma net income
    
    $
    596.4Pro forma basic weighted average shares outstanding
    
    
    624.8Pro forma basic earnings per common share
    
    $
    0.95Pro forma diluted weighted average shares outstanding
    
    
    637.1Pro forma diluted earnings per common share
    
    $
    0.94
  Pediatric Services.
 84




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4. LEGAL SETTLEMENTS CHARGE
  qui tam
 qui tam
     5. PROPERTY AND EQUIPMENT
  December 29,
    
    
    December 30,2007
    
    
    2006Land and buildings
    
    $
    235.4
    
    
    $
    188.0Machinery, equipment and office furnishings
    
    
    642.6
    
    
    
    584.0Computer software
    
    
    938.1
    
    
    
    825.6Leasehold improvements
    
    
    114.1
    
    
    
    103.9Construction in progress (primarily capitalized software development)
    
    
    21.8
    
    
    
    14.41,952.0
    
    
    
    1,715.9Less accumulated depreciation
    
    
    (1,226.5
    )
    
    
    (1,066.2
    )Property and equipment, net
    
    $
    725.5
    
    
    $
    649.7
 85




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##### Table of Contents



6. LEASES
  Fiscal Years Ending December2008
    
    $
    39.02009
    
    
    35.02010
    
    
    23.32011
    
    
    11.42012
    
    
    4.3Thereafter
    
    
    10.8Total
    
    $
    123.8
  7. GOODWILL AND INTANGIBLE ASSETS
  December 29, 2007
    
    
    December 30, 2006Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    
    
    
    
    Carrying
    
    
    AccumulatedValue
    
    
    Amortization
    
    
    Net
    
    
    Value
    
    
    Amortization
    
    
    NetGoodwill:PBM(1)
    
    $
    5,131.6
    
    
    $
    813.4
    
    
    $
    4,318.2
    
    
    $
    4,123.6
    
    
    $
    813.4
    
    
    $
    3,310.2Specialty Pharmacy(2)
    
    
    1,912.0
    
    
    
    
    
    
    
    1,912.0
    
    
    
    1,798.5
    
    
    
    
    
    
    
    1,798.5Total
    
    $
    7,043.6
    
    
    $
    813.4
    
    
    $
    6,230.2
    
    
    $
    5,922.1
    
    
    $
    813.4
    
    
    $
    5,108.7Intangible assets:PBM(1)
    
    $
    3,714.2
    
    
    $
    1,580.0
    
    
    $
    2,134.2
    
    
    $
    3,172.2
    
    
    $
    1,391.4
    
    
    $
    1,780.8Specialty Pharmacy(2)
    
    
    861.5
    
    
    
    90.7
    
    
    
    770.8
    
    
    
    793.5
    
    
    
    51.2
    
    
    
    742.3Total
    
    $
    4,575.7
    
    
    $
    1,670.7
    
    
    $
    2,905.0
    
    
    $
    3,965.7
    
    
    $
    1,442.6
    
    
    $
    2,523.1
 
 (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
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 PolyMedica in 2007,
and ProVantage in 2000. See Note 3, Acquisitions of Businesses.(2)
    
    Represents the Specialty Pharmacy segment, primarily reflecting the portion of
the excess of the purchase price paid by the Company to acquire 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 in 2007, and
Pediatric Services in 2005. See Note 3, Acquisitions of Businesses. 86




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##### Table of Contents



SpecialtyPBM
    
    
    Pharmacy
    
    
    TotalBalance as of December 30, 2006
    
    $
    4,123.6
    
    
    $
    1,798.5
    
    
    $
    5,922.1Goodwill acquired during the year
    
    
    1,008.0
    (1)
    
    
    116.2
    (2)
    
    
    1,124.2Converted option activity
associated with the acquisition
of Accredo
    
    
    
    
    
    
    (2.7
    )
    
    
    (2.7
    )Balance as of December 29, 2007
    
    $
    5,131.6
    
    
    $
    1,912.0
    
    
    $
    7,043.6
 
 (1)
    
    Represents the portion of the excess of the purchase price paid by the Company
to acquire PolyMedica.
See Note 3, Acquisitions of Businesses.(2)
    
    Represents the portion of the excess of the purchase price paid by the Company
to acquire Critical Care.
See Note 3, Acquisitions of Businesses.  Fiscal Years Ending December2008
    
    $
    278.42009
    
    
    263.02010
    
    
    243.92011
    
    
    232.92012
    
    
    228.5Total
    
    $
    1,246.7
  8. DEBT AND REFINANCING
  December 29,
    
    
    December 30,2007
    
    
    2006Short-term debt:Current portion of long-term debt
    
    $
    
    
    
    $
    75.3Accounts receivable financing facility
    
    
    600.0
    
    
    
    325.0Total short-term debt
    
    
    600.0
    
    
    
    400.3Long-term debt:Senior unsecured revolving credit facility
    
    
    1,400.0
    
    
    
    Senior unsecured term loan
    
    
    1,000.0
    
    
    
    381.37.25% senior notes due 2013, net of unamortized discount
    
    
    497.4
    
    
    
    497.0Fair value adjustment for interest rate swap agreements
    
    
    (3.0
    )
    
    
    (11.9
    )Total long-term debt
    
    
    2,894.4
    
    
    
    866.4Total debt
    
    $
    3,494.4
    
    
    $
    1,266.7
 Five-Year Credit Facilities and Refinancing.
 87




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Senior Notes .
 Swap Agreements .
  Accounts Receivable Financing Facility .
 88




---



##### Table of Contents



New 364-day Credit Facility.
 Covenants .
 Aggregate Maturities and Interest Expense .
 Fiscal Years Ending December2008
    
    $
    2009
    
    
    2010
    
    
    2011
    
    
    Thereafter
    
    
    2,900.0Total
    
    $
    2,900.0
  9. PENSION AND OTHER POSTRETIREMENT BENEFITS
 Net Pension and Postretirement Benefit Cost.
 Fiscal Years
    
    2007
    
    
    2006
    
    
    2005Service cost
    
    $
    18.0
    
    
    $
    17.2
    
    
    $
    16.4Interest cost
    
    
    7.9
    
    
    
    6.6
    
    
    
    6.0Expected return on plan assets
    
    
    (11.0
    )
    
    
    (9.3
    )
    
    
    (8.1
    )Net amortization of actuarial losses
    
    
    
    
    
    
    0.4
    
    
    
    0.3Net pension cost
    
    $
    14.9
    
    
    $
    14.9
    
    
    $
    14.6
 89




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##### Table of Contents



Fiscal Years
    
    2007
    
    
    2006
    
    
    2005Service cost
    
    $
    0.9
    
    
    $
    0.8
    
    
    $
    1.8Interest cost
    
    
    0.7
    
    
    
    0.7
    
    
    
    1.8Amortization of prior service credit
    
    
    (4.3
    )
    
    
    (4.3
    )
    
    
    (4.3
    )Net amortization of actuarial losses
    
    
    0.6
    
    
    
    0.7
    
    
    
    1.7Net postretirement benefit (credit) cost
    
    $
    (2.1
    )
    
    $
    (2.1
    )
    
    $
    1.0
  Pension Plan Assets .
 Percentage of Plan Assets atTargetAllocation
    
    December 29,
    
    December 30,Asset Category
    
    2008
    
    2007
    
    2006U.S. equity securities
    
    
    50-60
    %
    
    
    54
    %
    
    
    56
    %International equity securities
    
    
    12-18
    %
    
    
    15
    %
    
    
    15
    %Fixed income*
    
    
    27-33
    %
    
    
    31
    %
    
    
    29
    %Total
    
    
    
    
    
    
    100
    %
    
    
    100
    %
 
 *
    
    Includes cash.   Changes in Plan Assets, Benefit Obligation and Funded Status .
 90




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##### Table of Contents



Pension Benefits
    
    
    Other Postretirement BenefitsFiscal Years
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Fair value of plan assets at beginning of year
    
    $
    132.3
    
    
    $
    113.9
    
    
    $
    
    
    
    $
    Actual return on plan assets
    
    
    10.6
    
    
    
    13.6
    
    
    
    
    
    
    
    Company contributions
    
    
    16.8
    
    
    
    11.8
    
    
    
    0.7
    
    
    
    1.6Employee contributions
    
    
    
    
    
    
    
    
    
    
    1.0
    
    
    
    1.1Benefits paid
    
    
    (7.7
    )
    
    
    (7.0
    )
    
    
    (1.7
    )
    
    
    (2.7
    )Fair value of plan assets at end of year
    
    $
    152.0
    
    
    $
    132.3
    
    
    $
    
    
    
    $
    Benefit obligation at beginning of year(1)
    
    $
    138.8
    
    
    $
    123.5
    
    
    $
    13.2
    
    
    $
    33.2Service cost
    
    
    18.0
    
    
    
    17.2
    
    
    
    0.8
    
    
    
    0.8Interest cost
    
    
    7.9
    
    
    
    6.6
    
    
    
    0.7
    
    
    
    0.7Employee contributions
    
    
    
    
    
    
    
    
    
    
    1.0
    
    
    
    1.2Amendments(2)
    
    
    3.0
    
    
    
    
    
    
    
    
    
    
    
    Actuarial (gains) losses
    
    
    1.0
    
    
    
    (1.5
    )
    
    
    (1.3
    )(3)
    
    
    (20.0
    )(3)Benefits paid
    
    
    (7.7
    )
    
    
    (7.0
    )
    
    
    (1.7
    )
    
    
    (2.7
    )Benefit obligation at end of year(1)
    
    $
    161.0
    
    
    $
    138.8
    
    
    $
    12.7
    (3)
    
    $
    13.2
    (3)Funded status at end of year
    
    $
    (9.0
    )
    
    $
    (6.5
    )
    
    $
    (12.7
    )
    
    $
    (13.2
    )
 
 (1)
    
    Represents the projected benefit obligation for pension benefits and
the accumulated postretirement benefit obligation for other postretirement benefits.(2)
    
    The Company amended the cash balance retirement plan to reflect a change from
graduated seven-year vesting to three-year cliff vesting, as mandated by the Pension
Protection Act of 2006.(3)
    
    The Company amended the postretirement healthcare benefit plan in 2003, which
reduced and capped benefit obligations, the effect of which is reflected in the actuarial
(gains) losses. In addition, the decrease in the benefit obligation includes the
aforementioned change in assumption regarding retiree participation.  Pension Benefits
    
    
    Other Postretirement Benefits2007
    
    
    2006
    
    
    2007
    
    
    2006Accrued expenses and other current liabilities
    
    $
    
    
    
    $
    
    
    
    $
    (1.1
    )
    
    $
    (1.4
    )Other noncurrent liabilities
    
    
    (9.0
    )
    
    
    (6.5
    )
    
    
    (11.6
    )
    
    
    (11.8
    )Net liability
    
    $
    (9.0
    )
    
    $
    (6.5
    )
    
    $
    (12.7
    )
    
    $
    (13.2
    )
    91




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Actuarial Assumptions and Funding Requirement .
 Pension Benefits
    
    Other Postretirement Benefits2007
    
    2006
    
    2005
    
    2007
    
    2006
    
    2005Weighted average assumptions used to determine
benefit obligations at fiscal year-end:Discount rate
    
    
    6.00
    %
    
    
    5.75
    %
    
    
    5.50
    %
    
    
    6.00
    %
    
    
    5.75
    %
    
    
    5.50
    %Salary growth rate
    
    
    4.50
    %
    
    
    4.50
    %
    
    
    4.50
    %
    
    
    
    
    
    
    
    
    
    
    Weighted average assumptions used to determine net
cost for the fiscal year ended:Discount rate
    
    
    5.75
    %
    
    
    5.50
    %
    
    
    5.75
    %
    
    
    5.75
    %
    
    
    5.50
    %
    
    
    5.75
    %Expected long-term rate of return on plan assets
    
    
    8.00
    %
    
    
    8.00
    %
    
    
    8.00
    %
    
    
    
    
    
    
    
    
    
    
    Salary growth rate
    
    
    4.50
    %
    
    
    4.50
    %
    
    
    4.50
    %
    
    
    
    
    
    
    
    
    
    
    
  Cash Flows
 Employer Contributions
 Estimated Future Benefit Payments.
 OtherPension
    
    PostretirementFiscal Years
    
    Benefits(1)
    
    Benefits2008
    
    $
    12.0
    
    
    $
    1.12009
    
    $
    12.9
    
    
    $
    1.02010
    
    $
    13.7
    
    
    $
    0.92011
    
    $
    14.6
    
    
    $
    0.82012
    
    $
    15.9
    
    
    $
    0.72013-2017
    
    $
    100.1
    
    
    $
    4.4
 
 (1)
    
    The estimated future benefit payments increased from that of prior year primarily
due to the plan amendment from graduated seven-year vesting to three-year cliff vesting,
which is effective January 1, 2008. Other Plans .
  92




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10. TAXES ON INCOME
 Provision for Income Taxes .
 Fiscal Years
    
    2007
    
    
    2006
    
    
    2005Current provision:Federal
    
    $
    594.7
    
    
    $
    278.9
    
    
    $
    486.3State
    
    
    122.6
    
    
    
    38.1
    
    
    
    97.7Total
    
    
    717.3
    
    
    
    317.0
    
    
    
    584.0Deferred provision (benefit):Federal
    
    
    (114.0
    )
    
    
    46.0
    
    
    
    (172.2
    )State
    
    
    (12.0
    )
    
    
    18.6
    
    
    
    (60.9
    )Total
    
    
    (126.0
    )
    
    
    64.6
    
    
    
    (233.1
    )Total provision for income taxes
    
    $
    591.3
    
    
    $
    381.6
    
    
    $
    350.9
  Fiscal Years
    
    2007
    
    
    2006
    
    
    2005U.S. statutory rate applied to pretax income
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Differential arising from:State taxes
    
    
    4.8
    
    
    
    3.6
    
    
    
    2.5Other
    
    
    (0.5
    )
    
    
    (0.9
    )
    
    
    (0.7
    )Effective tax rate
    
    
    39.3
    %
    
    
    37.7
    %
    
    
    36.8
    %
    93




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##### Table of Contents



Deferred Income Taxes .
 December 29, 2007
    
    
    December 30, 2006Assets
    
    
    Liabilities
    
    
    Assets
    
    
    LiabilitiesIntangibles
    
    $
    
    
    
    $
    1,078.1
    
    
    $
    
    
    
    $
    973.2Accelerated depreciation
    
    
    
    
    
    
    153.8
    
    
    
    
    
    
    
    159.2Accrued expenses
    
    
    52.2
    
    
    
    
    
    
    
    33.7
    
    
    
    Accrued rebates
    
    
    43.6
    
    
    
    
    
    
    
    30.6
    
    
    
    Stock-based compensation
    
    
    71.1
    
    
    
    
    
    
    
    41.0
    
    
    
    Other
    
    
    113.7
    
    
    
    61.3
    
    
    
    86.1
    
    
    
    28.9Total deferred taxes
    
    $
    280.6
    
    
    $
    1,293.2
    
    
    $
    191.4
    
    
    $
    1,161.3Net deferred income taxes
    
    
    
    
    
    $
    1,012.6
    
    
    
    
    
    
    $
    969.9Recognized as:Current deferred tax asset
    
    $
    154.4
    
    
    
    
    
    
    $
    191.4Non current deferred tax liability
    
    
    
    
    
    $
    1,167.0
    
    
    
    
    
    
    $
    1,161.3
 Other .
  11. STOCK-BASED COMPENSATION
 Overview.
  94




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##### Table of Contents



Fiscal Years
    
    2007
    
    2006
    
    2005Medco stock options Black-Scholes assumptions
(weighted average):Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    Risk-free interest rate
    
    
    4.7
    %
    
    
    4.6
    %
    
    
    4.0
    %Expected volatility
    
    
    29.0
    %
    
    
    32.0
    %
    
    
    35.0
    %Expected life (years)
    
    
    5.0
    
    
    
    4.8
    
    
    
    5.3
 Stock Option Plans.
 Weighted Average
    
    
    Aggregate IntrinsicNumber of Shares
    
    
    Weighted Average
    
    
    Remaining Contractual
    
    
    Value(in thousands)
    
    
    Exercise Price
    
    
    Term
    
    
    (in millions)Outstanding at December 30, 2006
    
    
    31,713.6
    
    
    $
    19.40Granted
    
    
    7,135.1
    
    
    
    34.75Exercised
    
    
    (11,888.4
    )
    
    
    16.60Forfeited
    
    
    (646.1
    )
    
    
    27.06Outstanding at December 29, 2007
    
    
    26,314.2
    
    
    $
    24.64
    
    
    
    7.08
    
    
    $
    677.1Exercisable at December 29, 2007
    
    
    12,771.3
    
    
    $
    18.25
    
    
    
    6.03
    
    
    $
    410.3
   WeightedNumber of
    
    
    AverageShares
    
    
    Grant-Date(in thousands)
    
    
    Fair ValueNonvested at December 30, 2006
    
    
    14,750.8
    
    
    $
    9.33Granted
    
    
    7,135.1
    
    
    
    11.86Vested
    
    
    (7,780.8
    )
    
    
    8.89Forfeited
    
    
    (562.2
    )
    
    
    10.02Nonvested at December 29, 2007
    
    
    13,542.9
    
    
    $
    10.89
 Restricted Stock Units and Restricted Stock Plans.
 95




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##### Table of Contents



Aggregate IntrinsicNumber of Shares
    
    
    ValueRestricted Stock Units
    
    (in thousands)
    
    
    (in millions)Outstanding at December 30, 2006
    
    
    4,103.6Granted
    
    
    2,458.9Converted to common stock
    
    
    (85.6
    )Forfeited
    
    
    (142.8
    )Outstanding at December 29, 2007
    
    
    6,334.1
    
    
    $
    319.0Vested and deferred at December 29, 2007
    
    
    288.6
    
    
    $
    14.5
 Aggregate IntrinsicNumber of Shares
    
    
    ValueRestricted Stock
    
    (in thousands)
    
    
    (in millions)Outstanding at December 30, 2006
    
    
    149.5Granted
    
    
    Converted to common stock
    
    
    (64.9
    )Forfeited
    
    
    (4.8
    )Outstanding at December 29, 2007
    
    
    79.8
    
    
    $
    4.0
  Weighted AverageNumber of Shares
    
    
    Grant-Date FairNonvested Restricted Stock Units
    
    (in thousands)
    
    
    ValueNonvested at December 30, 2006
    
    
    3,774.8
    
    
    $
    24.98Granted
    
    
    2,458.9
    
    
    
    36.01Vested
    
    
    (45.4
    )
    
    
    27.03Forfeited
    
    
    (142.8
    )
    
    
    28.82Nonvested at December 29, 2007
    
    
    6,045.5
    
    
    $
    29.36
 Weighted AverageNumber of Shares
    
    
    Grant-Date FairNonvested Restricted Stock
    
    (in thousands)
    
    
    ValueNonvested at December 30, 2006
    
    
    149.5
    
    
    $
    24.85Granted
    
    
    
    
    
    
    Vested
    
    
    (64.9
    )
    
    
    24.81Forfeited
    
    
    (4.8
    )
    
    
    24.81Nonvested at December 29, 2007
    
    
    79.8
    
    
    $
    24.89
  96




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##### Table of Contents



Employee Stock Purchase Plan .
  12. SHARE REPURCHASE PROGRAM
   13. SEGMENT REPORTING
 Reportable Segments.
  97




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##### Table of Contents



Factors Used to Identify Reportable Segments.
  Selected Segment Income and Asset Information.
 For Fiscal Years Ended:
    
    December 29, 2007
    
    
    December 30, 2006
    
    
    December 31, 2005(4)Specialty
    
    
    
    
    
    
    
    
    
    
    Specialty
    
    
    
    
    
    
    
    
    
    
    SpecialtyPBM(1)
    
    
    Pharmacy(2)
    
    
    Total
    
    
    PBM(3)
    
    
    Pharmacy
    
    
    Total(3)
    
    
    PBM(5)
    
    
    Pharmacy(6)
    
    
    TotalProduct net revenues
    
    $
    37,981.4
    
    
    $
    5,980.5
    
    
    $
    43,961.9
    
    
    $
    36,641.3
    
    
    $
    5,381.3
    
    
    $
    42,022.6
    
    
    $
    35,700.1
    
    
    $
    1,754.9
    
    
    $
    37,455.0Total service revenues
    
    
    482.1
    
    
    
    62.2
    
    
    
    544.3
    
    
    
    465.9
    
    
    
    55.2
    
    
    
    521.1
    
    
    
    396.0
    
    
    
    19.9
    
    
    
    415.9Total net revenues
    
    
    38,463.5
    
    
    
    6,042.7
    
    
    
    44,506.2
    
    
    
    37,107.2
    
    
    
    5,436.5
    
    
    
    42,543.7
    
    
    
    36,096.1
    
    
    
    1,774.8
    
    
    
    37,870.9Total cost of revenues
    
    
    35,997.7
    
    
    
    5,563.2
    
    
    
    41,560.9
    
    
    
    35,125.7
    
    
    
    5,012.6
    
    
    
    40,138.3
    
    
    
    34,290.9
    
    
    
    1,637.1
    
    
    
    35,928.0Selling, general and
administrative
expenses
    
    
    884.3
    
    
    
    229.8
    
    
    
    1,114.1
    
    
    
    913.0
    
    
    
    196.2
    
    
    
    1,109.2
    
    
    
    695.8
    
    
    
    61.8
    
    
    
    757.6Amortization of
intangibles
    
    
    188.6
    
    
    
    39.5
    
    
    
    228.1
    
    
    
    179.9
    
    
    
    38.6
    
    
    
    218.5
    
    
    
    179.9
    
    
    
    12.6
    
    
    
    192.5Operating income
    
    $
    1,392.9
    
    
    $
    210.2
    
    
    $
    1,603.1
    
    
    $
    888.6
    
    
    $
    189.1
    
    
    $
    1,077.7
    
    
    $
    929.5
    
    
    $
    63.3
    
    
    $
    992.8Reconciling item to
income before provision
for income taxes:Interest and other
(income) expense, net
    
    
    
    
    
    
    
    
    
    
    99.8
    
    
    
    
    
    
    
    
    
    
    
    65.9
    
    
    
    
    
    
    
    
    
    
    
    39.9Income before
provision for
income taxes
    
    
    
    
    
    
    
    
    
    $
    1,503.3
    
    
    
    
    
    
    
    
    
    
    $
    1,011.8
    
    
    
    
    
    
    
    
    
    
    $
    952.9Capital expenditures
    
    $
    142.4
    
    
    $
    35.3
    
    
    $
    177.7
    
    
    $
    122.7
    
    
    $
    28.3
    
    
    $
    151.0
    
    
    $
    123.3
    
    
    $
    8.8
    
    
    $
    132.1
 
 (1)
    
    Includes PolyMedicas operating results commencing October 31, 2007, the date of acquisition.(2)
    
    Includes Critical Cares operating results commencing November 14, 2007, the date of acquisition.(3)
    
    Includes a first-quarter 2006 pre-tax legal settlements charge of $162.6 million recorded to SG&A expenses.(4)
    
    Fiscal 2005 represents a 53-week fiscal year. All other fiscal years are comprised of 52 weeks.(5)
    
    Includes eight fiscal months of specialty pharmacy activity previously included in Medcos PBM business.(6)
    
    The Specialty Pharmacy segment commenced on August 18, 2005, the date of the Accredo acquisition. If the Company had owned Accredo for the full fiscal year ended December 31, 2005, it is estimated that the Specialty
Pharmacy segment net revenues would represent approximately 12% of total Medco net revenues. 98




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##### Table of Contents



As of December 29, 2007
    
    As of December 30, 2006Specialty
    
    
    
    
    
    
    
    
    
    SpecialtyIdentifiable Assets:
    
    PBM
    
    Pharmacy
    
    Total
    
    PBM
    
    Pharmacy
    
    TotalTotal identifiable assets
    
    $
    12,597.7
    
    
    $
    3,620.2
    
    
    $
    16,217.9
    
    
    $
    11,146.3
    
    
    $
    3,241.8
    
    
    $
    14,388.1
  14. COMMITMENTS AND CONTINGENCIES
 Legal Proceedings.
    Government Proceedings and Requests for Information. qui tam qui tam qui tam
 99




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##### Table of Contents



ERISA and Similar Litigation . Gruer v. Merck-Medco
Managed Care, L.L.C. 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.
 100




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##### 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.,
 101




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##### Table of Contents



Contract Litigation . Group Hospitalization and Medical
Services v. Merck-Medco Managed Care, L.L.C., et al.
  Accredo .
 PolyMedica Shareholder Litigation. Groen v. PolyMedica Corp. et al.,
  Other Matters
  Purchase Obligations
  102




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##### Table of Contents



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9A. Controls and Procedures.
 Managements Responsibility for Financial Statements
   Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
  Managements Report on Internal Control over Financial Reporting
   Internal Control  Integrated Framework
   103




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##### Table of Contents



Changes in Internal Control
  
 Item 9B. Other Information.
  
 PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance.
  http://www.medco.com http://www.medco.com
 
 Item 11. Executive Compensation.
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters.
  Rule 10b5-1 Sales Plans.
 104




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##### 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)John DriscollPresident, New Markets
    
    
    27,934
    
    
    Option exercise in tranches
of 18,934 and 1,000 shares
shall be triggered if stock
reaches specific prices; sale
of 8,000 previously acquired
shares shall trigger if stock
reaches specified price.
    
    
    0
    
    
    
    41,874Kenneth O. Klepper
President and Chief Operating Officer
    
    
    53,334
    
    
    Sale of 11,000 previously
acquired shares if stock
reaches a specified price and
sales related to option
exercises shall trigger if
stock reaches specified
price.
    
    
    11,000
    
    
    
    214,044Laizer Kornwasser
President, Liberty Medical and Senior Vice
President, Channel and
Generic Strategy
    
    
    10,039
    
    
    Option exercise of 2,900
shall be triggered if stock
reaches specific price; sale
of 7,139 previously acquired
shares shall trigger if stock
reaches specified price.
    
    
    0
    
    
    
    54,051Thomas M. Moriarty
Senior Vice President,
Pharmaceutical Contracting
    
    
    29,078
    
    
    Option exercise in tranches
of 6,628; 7,200 and 7,130
shares shall be triggered if
stock reaches specific
prices; sale of 8,120
previously acquired shares
shall trigger if stock
reaches specified price.
    
    
    0
    
    
    
    5,680David B. Snow, Jr. 
Chairman and Chief Executive Officer
    
    
    200,000
    
    
    Sale of 200,000 previously
acquired shares if stock
reaches a specified price and
sales related to option
exercises shall trigger if
stock reaches specified
price.
    
    
    0
    
    
    
    978,812Timothy C. Wentworth 
President and Chief Executive Officer of
Accredo Health Group, Inc.
    
    
    62,964
    
    
    Option exercise in tranches
of 18,324; 22,320 and 22,320
shares shall be triggered if
stock reaches specific
prices.
    
    
    0
    
    
    
    43,968
 
 (1)
    
    This table does not include any trading plans entered into by any executive
officer that have expired by their terms as of November 1, 2007 or have been fully executed
through February 14, 2008. No plans entered into by executive officers have been
voluntarily terminated. Shares have been retrospectively adjusted to reflect the January
24, 2008 two-for-one stock split. See Note 1, Background and Basis of Presentation, to
our consolidated financial statements included in Part II, Item 8 of this Annual Report on
Form 10-K for more information.(2)
    
    This column reflects the number of shares remaining to be sold as of February
14, 2008.(3)
    
    This column reflects the number of shares sold under the plan through February
14, 2008.(4)
    
    This column reflects an estimate of the number of 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 February 14, 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 105




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##### Table of Contents



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
February 14, 2008 outside of the plan. 
 Item 13. Certain Relationships and Related Transactions, and Director Independence.
  
 Item 14. Principal Accounting Fees and Services.
  
 PART IV
 
 Item 15. Exhibits, Financial Statement Schedules.
 (a)
    
    The following documents are filed as part of this report:
 (1)
    
    Financial Statements. The following financial statements are filed as part of this
report under Item 8, Financial Statements and Supplementary Data:
       (2)
    
    Financial Statement Schedule:
   106




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##### Table of Contents



(3)
    
    Exhibits:
 ExhibitNumber
    
    Exhibit Description3.1
    
    
    Second Amended and Restated Certificate of Incorporation of Medco Health Solutions, Inc.3.2
    
    
    Third Amended and Restated Bylaws of Medco Health Solutions, Inc. as of January 30, 2008.
Incorporated by reference to Exhibit 3.1 to the Registrants Current Report on Form 8-K filed
February 5, 2008.4.1
    
    
    Form of Medco Health Solutions, Inc. common stock certificate. Incorporated by reference to
Exhibit 4.1 to the Registrants Amendment No. 3 to Form 10, File No. 1-31312, filed July 25, 2003.4.2
    
    
    Indenture between the Registrant and U.S. Bank Trust National Association, as Trustee, relating to
the Registrants senior notes due 2013. Incorporated by reference to Exhibit 4.2 to the
Registrants Annual Report on Form 10-K for the fiscal year ended December 27, 2003.10.1
    
    
    Medco Health Solutions, Inc. 2002 Stock Incentive Plan, as amended. Incorporated by reference to
Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q filed July 29, 2005.10.2
    
    
    Medco Health Solutions, Inc. 2006 Executive Severance Plan. Incorporated by reference to Exhibit
10.1 to the Registrants Current Report on Form 8-K filed February 7, 2006.10.3
    
    
    Medco Health Solutions, Inc. 2006 Change in Control Executive Severance Plan. Incorporated by
reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed February 7, 2006.10.4
    
    
    Indemnification and Insurance Matters Agreement between Merck & Co., Inc. and the Registrant.
Incorporated by reference to Exhibit 10.4 to the Registrants Annual Report on Form 10-K for the
fiscal year ended December 27, 2003.10.5
    
    
    Tax Responsibility Allocation Agreement, dated as of August 12, 2003, between Merck & Co., Inc.
and the Registrant. Incorporated by reference to Exhibit 10.5 to the Registrants Annual Report on
Form 10-K for the fiscal year ended December 27, 2003.10.6
    
    
    Employee Matters Agreement between Merck & Co., Inc. and the Registrant. Incorporated by reference
to Exhibit 10.6 to the Registrants Amendment No. 2 to Form 10, File no. 1-31312, filed July 8,
2003.10.7
    
    
    Employment Agreement with David B. Snow, Jr., dated as of March 17, 2003. Incorporated by
reference to Exhibit 10.14 to the Registrants Form 10, File No. 1-31312, filed May 28, 2003.10.8
    
    
    Amendment, dated as of January 24, 2007, to Employment Agreement with David B. Snow, Jr.
Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed
January 30, 2007.10.9
    
    
    Letter Agreement, dated as of February 22, 2005, among Medco Health Solutions, Inc., Accredo
Health, Incorporated and David D. Stevens. Incorporated by reference to Exhibit 10.2 of the
Registrants Current Report on Form 8-K filed August 24, 2005.10.10
    
    
    Credit Agreement, dated as of April 30, 2007, among the Registrant, the lenders party thereto and
Bank of America, N.A., as administrative agent and Citicorp North America, Inc. and JPMorgan Chase
Bank, N.A., as Co-Syndication Agents. Incorporated by reference to Exhibit 10.1 to the
Registrants Quarterly Report on Form 10-Q filed May 2, 2007.10.11
    
    
    364-Day Revolving Credit Agreement, dated as of November 30, 2007, among the Registrant, the
lenders party thereto, Citibank, N.A., as administrative agent and JPMorgan Chase Bank, N.A., as
Syndication
 107




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##### Table of Contents



ExhibitNumber
    
    Exhibit DescriptionAgent. Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on
Form 8-K filed December 3, 2007.10.12
    
    
    Amended and Restated Receivables Purchase Agreement, among Medco Health Receivables, LLC, the
financial institutions and commercial paper conduits party thereto and Citicorp North America,
Inc., as administrative agent. Incorporated by reference to Exhibit 10.12 to the Registrants
Annual Report on Form 10-K for the fiscal year ended December 27, 2003.10.13
    
    
    Amendment No. 4, dated as of July 31, 2006, to the Amended and Restated Receivables Purchase
Agreement, among Medco Health Receivables, LLC, the financial institutions and commercial paper
conduits party thereto and Citicorp North America, Inc., as administrative agent. Incorporated by
reference to Exhibit 10.13 to the Registrants Annual Report on Form 10-K for the fiscal year
ended December 30, 2006.10.14
    
    
    Medco Health Solutions, Inc. Executive Annual Incentive Plan. Incorporated by reference to Exhibit
10.1 to the Registrants Current Report on Form 8-K, filed February 8, 2005.10.15
    
    
    Performance Goals for 2007 under the Registrants Executive Annual Incentive Plan. Incorporated
by reference to the Registrants Current Report on Form 8-K filed January 30, 2007.10.16
    
    
    Form of terms and conditions for director stock option and restricted stock unit awards.
Incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K, filed
February 8, 2005.10.17
    
    
    Description of Compensation for Non-Management Directors. Incorporated by reference to the
Registrants Current Report on Form 8-K, filed July 24, 2006.10.18
    
    
    Accredo Health, Incorporated 2002 Long-Term Incentive Plan. Incorporated by reference to Exhibit
10.3 of the Registrants Current Report on Form 8-K filed August 24, 2005.10.19
    
    
    Terms for Accredo Health, Incorporated Restricted Stock Grants (3-year vesting). Incorporated by
reference to Exhibit 10.6 of the Registrants Current Report on Form 8-K filed August 24, 2005.10.20
    
    
    Form of terms and conditions of Restricted Stock Unit Grants under the Medco Health Solutions,
Inc. 2002 Stock Incentive Plan. Incorporated by reference to Exhibit 10.20 to the Registrants
Annual Report on Form 10-K filed March 3, 2006.10.21
    
    
    Form of terms and conditions of Non-Qualified Stock Option Grants under the Medco Health
Solutions, Inc. 2002 Stock Incentive Plan. Incorporated by reference to Exhibit 10.21 to the
Registrants Annual Report on Form 10-K filed March 3, 2006.10.22
    
    
    Form of terms and conditions of the 2008 Restricted Stock Unit Grants under the Medco Health
Solutions, Inc. 2002 Stock Incentive Plan.10.23
    
    
    Form of terms and conditions of 2008 Non-Qualified Stock Option Grants under the Medco Health
Solutions, Inc. 2002 Stock Incentive Plan.10.24
    
    
    Medco Health Solutions, Inc. Deferred Compensation Plan for Directors.10.25
    
    
    Settlement Agreement and Mutual Releases, dated as of October 23, 2006, entered into by and among
the United States of America, acting through the United States Department of Justice, on behalf of
the Office of the Inspector General of the Department of Health and Human Services, the Office of
Personnel Management, and the Department of Defense TRICARE Management Activity; Medco Health
Solutions, Inc.; Diane M. Collins; and relators George Bradford Hunt, Walter William Gauger and
Joseph Piacentile. Incorporated by reference to Exhibit 10.1 to the Registrants Current Report
on Form 8-K filed October 27, 2006.
 108




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description10.26
    
    
    Settlement Agreement and Mutual Releases, dated as of October 23, 2006, entered into by and among
the United States of America, acting through the United States Department of Justice, on behalf of
the Office of the Inspector General of the Department of Health and Human Services and the Office
of Personnel Management; Medco Health Solutions, Inc.; and relator Karl S. Schumann. Incorporated
by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed October 27,
2006.10.27
    
    
    Settlement Agreement and Mutual Releases, dated as of October 23, 2006, entered into by and among
the United States of America, acting through the United States Department of Justice, on behalf of
the Office of the Inspector General of the Department of Health and Human Services and Medco
Health Solutions, Inc. Incorporated by reference to Exhibit 10.3 to the Registrants Current
Report on Form 8-K filed October 27, 2006.10.28
    
    
    Corporate Integrity Agreement, dated as of October 23, 2006, between the Office of the Inspector
General of the Department of Health and Human Services and the Office of the Inspector General of
the Office of Personnel Management and Medco Health Solutions, Inc. Incorporated by reference to
Exhibit 10.4 to the Registrants Current Report on Form 8-K filed October 27, 2006.12.1
    
    
    Statement of Consolidated Ratios of Earnings to Fixed Charges.21.1
    
    
    List of Subsidiaries.23.1
    
    
    Consent of PricewaterhouseCoopers LLP, dated February 19, 2008.31.1
    
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of Chief Financial Officer 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.
 109




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##### Table of Contents



MEDCO HEALTH SOLUTIONS, INC.
 SCHEDULE II
 VALUATION AND QUALIFYING ACCOUNTS
($ in millions)
 Allowance for Doubtful Accounts Receivable:
 Balance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at End ofBeginning of Period
    
    Other
    
    Provision
    
    Write-offs(1)
    
    PeriodFiscal Year Ended December 29, 2007
    
    $
    81.8
    
    
    $
    41.2
    (2)
    
    $
    61.9
    
    
    $
    (54.9
    )
    
    $
    130.0Fiscal Year Ended December 30, 2006
    
    $
    67.3
    
    
    
    
    
    
    $
    46.5
    
    
    $
    (32.0
    )
    
    $
    81.8Fiscal Year Ended December 31, 2005
    
    $
    5.5
    
    
    $
    57.4
    (3)
    
    $
    11.8
    
    
    $
    (7.4
    )
    
    $
    67.3
 
 (1)
    
    Uncollectible accounts, net of recoveries.(2)
    
    Primarily represents balances acquired as a result of the PolyMedica and Critical Care acquisitions.(3)
    
    Primarily represents balances acquired as a result of the Accredo acquisition. 110




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##### Table of Contents



Signatures
  Medco Health Solutions, Inc.Dated:  February 19, 2008
    /s/ David B. Snow, Jr.Name:
    David B. Snow, Jr.Title:
    Chairman and Chief Executive OfficerDated:  February 19, 2008
    /s/ JoAnn A. ReedName:
    JoAnn A. ReedTitle:
    Senior Vice President, Finance and Chief
Financial OfficerDated:  February 19, 2008
    /s/ Richard J. Rubino, C.P.A.Name:
    Richard J. Rubino, C.P.A.Title:
    Senior Vice President and Controller,
Chief Accounting OfficerDated:  February 19, 2008
    /s/ Howard W. Barker, Jr., C.P.A.Name:
    Howard W. Barker, Jr., C.P.A.Title:
    DirectorDated:  February 19, 2008
    /s/ John L. CassisName:
    John L. CassisTitle:
    DirectorDated:  February 19, 2008
    /s/ Michael Goldstein, C.P.A.Name:
    Michael Goldstein, C.P.A.Title:
    DirectorDated:  February 19, 2008
    /s/ Charles M. Lillis, Ph.D.Name:
    Charles M. Lillis, Ph.D.Title:
    DirectorDated:  February 19, 2008
    /s/ Myrtle S. PotterName:
    Myrtle S. PotterTitle:
    Director 111




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##### Table of Contents



Dated:  February 19, 2008
    /s/ William L. Roper, M.D., M.P.H.Name:
    William L. Roper, M.D., M.P.H.Title:
    DirectorDated:  February 19, 2008
    /s/ David D. StevensName:
    David D. StevensTitle:
    DirectorDated:  February 19, 2008
    /s/ Blenda J. Wilson, Ph.D.Name:
    Blenda J. Wilson, Ph.D.Title:
    Director 112