Express Scripts Reports in Line – Analyst Blog

Express Scripts Inc. (ESRX) announced first-quarter earnings of $1.10 per share, in line with the Zacks Consensus Estimate and 25% above the year-ago earnings of 88 cents.

 

First quarter revenues jumped to $11.1 billion. While the Emerging Markets (EM) segment contributed 3% to first quarter revenues, Pharmacy Benefit Management (PBM) segment revenues accounted for the balance. EM segment revenues grew 7.2% to $332.5 million due to volume increases in certain areas of the distribution line of business. Moreover, the company witnessed strong demand in its fertility business.

 

However, the company announced the loss of a contract in one of its smaller EM businesses. This loss should not affect the segment’s performance in 2010 as the contract runs through the end of the year.

 

Meanwhile, PBM revenues increased to $10.8 billion. We believe that the company benefited from new business gained through its acquisition of NextRx, the PBM segment of WellPoint Inc. (WLP). Results also included the impact of the company’s new Department of Defense (DoD) contract, which boosted revenues as well as cost of sales.

 

The company reported that approximately $5,515.4 million of the increase in total product revenues was due to volume increases resulting from the NextRx acquisition and the DoD contract.

 

Express Scripts continues to progress with the NextRx integration process and has shifted a major group of lives (about 15% of membership) to its IT system.

 

NextRx provides PBM services to approximately 25 million Americans and manages more than 265 million adjusted prescriptions annually. We view Express Scripts’ acquisition of NextRx as a smart strategic move. The aligned business model should provide significant opportunities for driving growth.

 

The deal also includes a 10-year agreement under which Express Scripts will provide PBM services including home delivery and specialty pharmacy services to members of the affiliated health plans of WellPoint. The dispensing of services to NextRx members should allow Express Scripts to increase generic and mail penetration, which should help drive earnings.

 

Express Scripts reported that the generic fill rate for the first quarter increased to 70.2%. Total adjusted claims increased 50% to 186.6 million.

 

 

Express Scripts tweaked its guidance slightly and increased the lower end of its previously issued earnings guidance by 5 cents. The company is looking towards earnings in the range of $4.85 to $5.00 per share. Earlier, the company was expecting earnings of $4.80 to $5.00.

 

Revenues are expected in the range of $46−$48 billion. Performance will be driven by continued growth in the base business and contributions from NextRx.

 

Express Scripts continues to expect the NextRx acquisition to generate more than $1 billion of incremental EBITDA once the integration is completed. Adjusted EBITDA per script is expected in the range of $3.15 to $3.25. Total adjusted claims are expected in the range of 740 to 760 million in 2010.

 

Express Scripts expects to generate cash flow from operations in excess of $2 billion. We believe the company will utilize the cash towards repayment of debt, share repurchases and small-sized acquisitions.

 

About 2.2 million shares were bought back for $218 million during the first quarter. Approximately 18.8 million shares remain available for repurchase under this program. Express Scripts also paid off long-term debt of $180 million during the quarter.

 

 

We currently have a Neutral recommendation on Express Scripts. We are positive on the company’s acquisition of the NextRx business and believe that the company is well positioned to benefit from increased generic utilization, a shift toward mail orders, a strong specialty growth and an aging population. Moreover, health care reform initiatives such as broader insurance coverage, the approval of a pathway for bio-similars and incentives supporting the utilization of information technology systems should also help drive growth.

 

However, competition is tough in the PBM industry. Additionally, integration risks related to the NextRx merger remain.