Express Scripts Tops & Guides Up - Analyst Blog

Express Scripts Inc. (ESRX) announced better-than-expected results with fourth-quarter earnings of 97 cents per share, 7 cents above the Zacks Consensus Estimate. Earnings increased 14.1% from the year-ago period. Full year earnings were $3.58 per share, 12 cents above the Zacks Consensus Estimate and well above the year ago earnings of $3.18.

Fourth quarter revenues increased a whopping 49% to $8.2 billion. Full year revenues increased 12.6% to $24.7 billion. We believe that the company benefited from new business gained through its acquisition of NextRx, the pharmacy business management (PBM) segment of WellPoint Inc. (WLP).

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 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 utilization rate for the fourth quarter increased 1.8% to 69.1%. Total adjusted claims increased 23% to 154.6 million. For the full year, the generic utilization rate increased 2.2% to 68.3%. Meanwhile, total adjusted claims increased 5% to 530.6 million.

Express Scripts provided stronger than expected guidance for 2010. The company is looking towards earnings in the range of $4.80 to $5.00 per share. This is well above the current Zacks Consensus Estimate of $4.68. Performance will be driven by continued growth in the base business and contributions from NextRx.

Express Scripts expects 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. Express Scripts shares were up 9.5% in pre-market trading.

We currently have a Neutral recommendation on Express Scripts. We believe Express Scripts is well-positioned to benefit from increased generic utilization, a shift toward mail orders, strong specialty growth and an aging population.

The implementation of future healthcare reform initiatives like broader insurance coverage, 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, with players like MedcoHealth Solutions Inc. (MHS) and CVS Caremark Corp. (CVS).