The 800-Pound Gorilla of PBMs Reports Solid Q1 Results

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One year after the Medco acquisition, Express Scripts (NASDAQ: ESRX  ) looks to be adjusting well to life as the big gorilla in the pharmacy benefits management world. The company announced its first-quarter results after the market close on Monday, and shares were up more than 1% in after-hours trading. Here's what you need to know about Express Scripts' first quarter.

By the numbers
Adjusted earnings per diluted share for the quarter came in at $0.99. That figure beat the average analysts' estimate of $0.97. On a GAAP basis, Express Scripts reported first-quarter net income of $374 million, or $0.45 per diluted share.

The company's revenue for first quarter totaled nearly $26.1 billion. Analysts were expecting around $25.6 billion.

While year-over-year comparisons aren't generally meaningful in wake of the Medco acquisition, Express Scripts enjoyed larger numbers on virtually every front. The company's revenue more than doubled compared with the first quarter of 2012, while earnings increased 39%.

Express Scripts reported cash and cash equivalents of $1.99 billion as of the end of first quarter, a drop from nearly $2.8 billion held at the end of 2012. The company's long-term debt situation improved thanks to use of this cash, though, falling from $14.98 billion at the end of December to $13.81 billion at the end of the first quarter.

Behind the numbers
The assimilation of Medco puts Express Scripts in an enviable position as the largest PBM in the U.S. and helped drive the solid numbers from first quarter. While no. 2 PBM CVS Caremark (NYSE: CVS  ) recorded nearly 226 million claims processed in its last reported quarter ending Dec. 31, Express Scripts processed 390 million adjusted claims.Those kinds of numbers power strong revenue.

Earnings improvement requires that the company control its costs well. Express Scripts scored on that front also, with overall generic fill rates rising from 76.5% in the first quarter of 2012 to 80.5% last quarter. That result edges out CVS Caremark's fourth quarter 2012 generic fill rate of 80%, although we have yet to find out CVS's first-quarter results from this year.

A portion of the higher earnings per share attained by Express Scripts stemmed from share buybacks. The company repurchased 5.1 million shares during the first quarter for $300 million. Another 69.9 million shares could potentially be bought back under the current share repurchase program authorization.

Looking ahead
Express Scripts revised its full-year adjusted earnings guidance from a range of $4.20 to $4.30 per diluted share to a range of $4.23 to $4.33 per diluted share. The average analysts' estimate is $4.26. The revised range reflects growth of 13% to 16% over 2012.

The company faces the loss of some volume as UnitedHealth Group (NYSE: UNH  ) transitions services to its own OptumRx unit. Before its acquisition by Express Scripts, Medco announced the termination of the contract with its largest customer. This move, along with some other contracts, will contribute to some fluctuation in quarterly earnings compared with historical trends. Express Scripts expects adjusted earnings for the second quarter of 2013 to be between $1.08 and $1.12 per share as a result, higher than analysts expected.

I look for Express Scripts to continue to do well. The demand for services PBMs provide should remain strong. I expect Express Scripts will leverage its scale to keep winning new business and hold down costs. It might still be a jungle out there, but it's always nice to be the big gorilla.

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