2010-09-07 19:02:09 -

Fitch Ratings has affirmed Medco Health Solutions (NYSE: MHS) Issuer Default Rating (IDR) and debt ratings as follows.

--IDR at 'BBB';

--Senior unsecured credit facility at 'BBB';

--Senior unsecured debt at 'BBB'.

Fitch has also assigned a 'BBB' rating to the company's proposed $1 billion five- and 10-year notes offering. MHS intends to use the net proceeds for general corporate purposes, including repayment of revolving borrowings incurred in order to fund the acquisition of United BioSource Corporation.

The Rating Outlook is Stable.

The rating affirmation is supported by MHS' continued strong operational and financial performance. Reliable demand for the company's services and the expectation of relatively stable margins supports Fitch's belief that MHS will generate adequate free cash flow of $1.6 billion

to $1.7 billion during 2010, which should be sufficient to fund share repurchases and targeted acquisitions. As such, MHS is expected to operate with leverage of 1.5 times (x) to 1.7x. The company has ample liquidity and access to the credit markets.

The key rating drivers for this credit are leverage measured as total debt-to-EBITDA, EBITDA margins and free cash flow. The 'BBB' leverage range for this credit is approximately 1.5x-2.0x. Margin variability of less than 90 basis points and material free cash flow generation are expected for this rating.

Fitch expects MHS will continue to generate reliable growth in the intermediate term. Despite the currently challenging employment environment, prescription trends remain moderately positive. The company continues to maintain high client retention rates and garner new business wins. Its focus on improving the efficacy and safety of drug therapy while also helping to moderate the growth in drug spending appears to be resonating with patients and payers. In addition, MHS is expanding into Europe where a number of practices that pharmacy benefit managers (PBMs) use to drive optimal drug therapy are not employed.

One area of concern for MHS is the potential for margin pressure within the prescription drug channel, as payers seek to control drug costs. To the extent that PBMs can demonstrate their ability to moderate the growth in drug spending and positively influence patients' health, Fitch believes the industry can garner adequate pricing and sufficient fees from payers to support the industry's profitability.

Fitch expects MHS will use a portion of its free cash flow to repurchase shares and will remain acquisitive in the core PBM space. However, during the past few years the industry has consolidated, leaving fewer large targets for acquisitions. Nevertheless, MHS' increasingly comprehensive approach to drug therapy is providing growth opportunities through internal investment, geographic expansion and acquisitions/collaborative ventures. Fitch believes the company will be mindful of its 'BBB' rating when pursuing acquisitions, and if a significant leveraging transaction (leverage greater than 2.0x) were to occur, it would be followed by timely reduction in debt/leverage.

Fitch does not expect that the healthcare reform legislation enacted in March 2010 will meaningfully affect the credit ratings of MHS and other standalone PBMs. While an increase in healthcare coverage for the uninsured is likely to lead to moderate volume increases in 2014-2016, the law potentially creates pricing pressure on drug manufacturers and increases transparency requirements which could pressure PBM margins.

At June 30, 2010, MHS had approximately $4 billion in debt, with approximately $1 billion of a term loan maturing in 2012, $800 million in notes maturing in 2013 and $1.2 billion in notes maturing in 2018.

MHS also has $1 billion outstanding on its $2 billion revolving credit facility, which matures April 30, 2012 and no borrowings under its $600 million, 365-day accounts receivable facility. At June 30, 2010, the company had liquidity of approximately $1.2 billion in cash and short-term investments, $1 billion availability on its revolving credit facility, and $600 million availability on its receivables facility. MHS generated approximately $2 billion of free cash flow for the latest 12 months (LTM) ended June 30, 2010, and leverage (total debt/EBITDA) was 1.38x.

Additional information is available at ' www.fitchratings.com : '.

These rating actions reflect the application of Fitch's current criteria which are available at ' www.fitchratings.com : ' and specifically include the following reports.

--'Corporate Rating Methodology' (Aug. 16, 2010);

--'Liquidity Considerations for Corporate Issuers' (June 12, 2007).

Related Research.

Corporate Rating Methodology

www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id= .. :

Liquidity Considerations for Corporate Issuers

www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id= .. :

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Fitch RatingsPrimary AnalystBob KirbyDirector+1-312-368-3147Fitch,
Inc.70 W. Madison St.Chicago, IL 60602orSecondary

AnalystMegan NeuburgerDirector+1-212-908-0501orCommittee
ChairpersonMichael WeaverManaging Director+1-312-368-3156orMedia
RelationsBrian Bertsch+1-212-908-0549 brian.bertsch@fitchratings.com : mailto:brian.bertsch@fitchratings.com