By Lewis Krauskopf

Net income rose to $274.4 million, or 54 cents per share, from $207.6 million, or 38 cents per share, a year earlier.

Excluding items, Medco had a profit of 59 cents, topping analysts' average forecasts by a penny, according to Reuters Estimates.

"Medco reported solid fourth-quarter results," JP Morgan analyst Lisa Gill wrote in a note to clients. "Prescription volume was above our expectation, which was reassuring given the concern over the impact of the economic environment."

There has been fear that patients hit hard by the recession would stop filling prescriptions or attempt to stretch medication by splitting pills or taking them less often than prescribed.

The company's total adjusted volume of prescriptions handled rose 4.3 percent to 198.1 million. Mail-order volume jumped 9.4 percent to a record 26.7 million.

Medco's rate of dispensing generic drugs rose 3.5 percentage points to 64.9 percent.

Pharmacy benefit managers, or PBMs, administer prescription drug benefits for employers and health plans and operate large mail-order pharmacies.

Medco says it derives more than half its profit from delivering generic drugs by mail. Like other PBMs, it can take advantage of low prices from generic manufacturers and capture more profit by dispensing the drugs itself.

The Franklin Lakes, New Jersey-based company said it continued to expect 2009 earnings per share, excluding items, of $2.67 to $2.77, representing growth of 15 percent to 19 percent. Analysts are looking for $2.73.

"Guidance for the year was maintained. In this environment that's a victory," said John Kreger, an analyst for William Blair & Co.

Fourth-quarter revenue rose about 14 percent to $13 billion, exceeding Wall Street estimates of $12.72 billion.

Medco said it closed the year with more than $938 million in cash on its balance sheet, up 21 percent from 2007.

"Given the tight credit markets and uncertain economic times, we are creating our own liquidity, which will continue to fuel long-term shareholder returns," Chief Financial Officer Richard Rubino said in a statement.

Through Monday, Medco shares had risen 6.5 percent this year, compared with a nearly 18 percent drop for the Standard & Poor's 500 index <.SPX>.

(Reporting by Lewis Krauskopf; additional reporting by Bill Berkrot; Editing by Lisa Von Ahn, Dave Zimmerman)