Express Scripts Reports In-Line

Express Scripts Inc. (ESRX - Analyst Report) announced third-quarter earnings of 81 cents per share, in-line with the Zacks Consensus Estimate as well as last year's profit. Revenues, however, increased 3% to $5.6 billion with product revenues increasing 3.1% to $5.5 billion.
 
The company reports revenues from two segments: Pharmacy Business Management (PBM) and Emerging Markets (EM). PBM product revenue consists of revenues from the sale of prescription drugs by retail pharmacies in the company’s retail pharmacy networks and revenues from the dispensing of prescription drugs from the company’s home delivery and specialty pharmacies. EM product revenues consist of distribution of certain fertility drugs and revenues from drug distribution services.
 
PBM revenues increased 3.5% to $5.3 billion with network pharmacy revenues increasing by 3.4% mainly due to higher claims volume that were partially offset by price decreases. New clients contributed to the increase in claims volume. Meanwhile, generic fill rate increased to 69.6% of total network claims in the third quarter as compared to 67.3% in the year-ago period.
 
Home delivery and specialty revenues increased 3.3% due to price increases of specialty products. This was partially offset by lower home delivery claims volume from the loss of low margin clients and the impact of a higher generic fill rate. Generic fill rate increased to 58.3% of home delivery claims in the third quarter as compared to 57.2% in the year-ago period. Overall generic drugs usage increased to 68.3% from 66.2% in the year-ago period.
 
EM revenues declined 3% to $348 million. Decreased revenues in the company’s Specialty Distribution line of business due to a reduction in sales volume of a few specific drugs led to the decline in EM revenues. The company’s Canadian PBM delivered $11.6 million in revenues.
 
Total adjusted claims increased 2% to 126.3 million. While gross profit increased 18% from 2008, operating income increased 8.4%. The company recorded a 36% increase in SG&A expenses due to several reasons including costs related to the settlement of a legal matter, investments to improve the technological infrastructure, and increases in employee compensations. EBITDA per adjusted claim increased 18% to $3.38.
 
The company narrowed its earnings guidance for 2009 based on strong underlying fundamentals in the core business. Express Scripts raised the lower end of its previously issued earnings guidance by 4 cents and now expects earnings in the range of $3.76 - $3.82. This represents growth of 21% to 23% from 2008.
 
Express Scripts expects to close its acquisition of WellPoint’s (WLP - Analyst Report) NextRx PBM business in the next four to six weeks. We believe this acquisition will provide the company with the opportunity to drive growth. The acquisition should be moderately accretive in 2010. Express Scripts’ main competitors include MedcoHealth Solutions Inc. (MHS) and CVS Caremark Corp. (CVS - Analyst Report).

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