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Express Scripts (ESRX) Q2 Earnings Beat, Network Claims Fall

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Express Scripts Holding Company (ESRX - Free Report) posted second-quarter 2018 adjusted earnings of $2.22 per share, which beat the Zacks Consensus Estimate of $2.20. Further, adjusted earnings improved 28.3% year over year.

Revenues of $25.64 billion surpassed the Zacks Consensus Estimate of $5.36 billion and inched up 1.2% year over year. The upside was driven by operational cost improvement backed by focus on technology, digital tools, home delivery and specialty services.

The stock has a Zacks Rank #3 (Hold). Express Scripts has outperformed the industry in a year’s time. The stock has gained 18.9% compared with the industry's rise of 12.6%.

Express Scripts Holding Company Price, Consensus and EPS Surprise

 

Q2 Patient Claim Volume Details

Express Scripts’ second-quarter 2018 witnessed year-over-year declines in patient claims.

Adjusted network claims were 261.8 million, down 0.9% year over year.

Adjusted home delivery and specialty claims were 76.1 million in the reported quarter, down 11.4% year over year.

As a result, net adjusted claims in the second quarter were 337.9 million, down 3.5% on a year-over-year basis. The decline was primarily caused by the loss of certain public-sector clients.

Core Business Update

During the second quarter, Express Scripts generated $1.3 billion of core business adjusted EBITDA, up 10% year over year.

Margin Details

Adjusted gross profit in the second quarter was $2.29 billion, up 3.2% year over year. As a percentage of revenues, adjusted gross margin was 8.9% of net revenues. This reflected an increase of 20 basis points (bps) year over year.

Adjusted selling, general and administrative (SG&A) expenses were $499.4 million, up 5.4% from the prior-year quarter’s figure. As a percentage of revenues, adjusted SG&A margin was 1.9% of net revenues. This remained flat year over year.

Adjusted EBITDA in the second quarter of 2018 was up 3% year over year due to supply chain initiatives, continued strong performance from the Company's SafeGuardRx suite of solutions, growth in Accredo specialty pharmacy and the inclusion of eviCore.

Guidance

Express Scripts reiterated guidance for 2018.

Adjusted earnings are estimated in the band of $9-$9.14. Notably, the Zacks Consensus Estimate for earnings is currently pegged at $9.07, which lies significantly above the guidance. Revenues are expected in the band of $99-$102 billion. The Zack Consensus Estimate for revenues is currently pegged at $100.62 billion, which lies within the guidance. Adjusted EBITDA is expected between $7.6 billion and $7.8 billion.

However, Express Scripts raised core business 2018 adjusted EBITDA guidance from $5.25-5.40 billion to $5.27-5.43 billion. This represents growth of 8% year over year at the midpoint of the range. 

Management also announced that the company expects to make approximately $140 million of investments toward enterprise value initiatives for 2018, which are expected to contribute $65-$75 million of savings in 2018.  This is expected to deliver cumulative savings of nearly $1.2 billion by 2021.

For the third quarter of 2018, adjusted earnings per share are estimated in the range of $2.40-$2.45, reflecting growth of 26-29% from third-quarter 2017 level. Notably, the Zacks Consensus Estimate for earnings is currently pegged at $2.43, which is within the projected range. The company expects total adjusted claims for the third quarter in the range of 330-340 million, of which 275-285 million are attributable to the core business.

Summing Up

Express Scripts ended the third quarter of 2018 on a favorable note, beating the Zacks Consensus Estimate for earnings and revenues. Strong performance by core PBM unit has provided the company a competitive edge in the Medical Services market. Further, the company’s recently-acquired eviCore's complementary medical-benefit solutions is likely to build a comprehensive PBM solution worldwide. Recent collaborations also deserve mention. Notably, management expects cumulative savings of nearly $1.2 billion by 2021.

Express Scripts currently faces persistent drug pricing issue, which is anticipated to have a negative impact on the stock. A lackluster guidance for 2018 also raises concern. Moreover, the company faces stiff competition in niche space. Express Scripts announced that its biggest customer and leading health insurer Anthem is not likely to extend the PBM agreement with the company anymore. Furthermore, the company has currently suspended share repurchase program because of the merger agreement with Cigna, which is scheduled to be concluded by 2018.

Q2 Earnings of MedTech Majors at a Glance

A few better-ranked stocks in the broader medical space, which reported solid earnings this season are Stryker Corporation (SYK - Free Report) , Intuitive Surgical, Inc (ISRG - Free Report) and Illumina, Inc (ILMN - Free Report) .

While Intuitive Surgical and Illumina sport a Zacks Rank #1 (Strong Buy), Stryker carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Intuitive Surgical reported adjusted earnings of $2.76 per share in the second quarter of 2018, which beat the Zacks Consensus Estimate of $2.48. Adjusted earnings improved 38% year over year.

Stryker reported second-quarter 2018 adjusted earnings per share of $1.76, beating the Zacks Consensus Estimate by 1.7%. Earnings improved 15% year over year and also exceeded the high end of the company’s guidance.

Illumina reported adjusted earnings of $1.43 per share, beating the Zacks Consensus Estimate of $1.11.

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