Medco Integration Issues Mar an Otherwise Solid Q3 for Express Scripts

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The largest pharmacy-benefits management company in the world, Express Scripts (NASDAQ: ESRX  ) , released its third-quarter earnings results after the closing bell, and shareholders seem none too thrilled with what's been delivered.

For the quarter, Express Scripts produced $25.92 billion in revenue, a 3.2% decline from the year-ago period, as adjusted EPS improved modestly to $1.08, from $1.03 in the previous period, and adjusted claims from continuing operations fell 9%, to 358.1 million, due to UnitedHealth Group in-sourcing all of its PBM activities. Comparatively, revenue topped the consensus estimates by a tad more than $900 million, while EPS was right in-line with estimates.

There were a number of factors that aided Express Scripts in meeting Wall Street's quarterly EPS forecast of $1.08, including the company repurchasing 11.6 million shares of its common stock during the quarter. (If you recall, share repurchases reduce the number of shares outstanding, which inflates EPS.) The company was also helped by a reduction in its income-tax rate, which allowed it to boost its full-year EPS forecast by $0.04, to a new range of $4.30-$4.34, representing year-on-year growth of 15%-16%. The current EPS consensus for the full year is $4.31.

Perhaps nothing was more crucial to Express Scripts' bottom line than another improvement in generic-drug utilization. For the quarter, generic fills accounted for 80.8% of all scripts, a 200-basis-point improvement over the year-ago quarter. Generics offer beefier margins for PBM's like Express Scripts, which is a big reason revenue only declined 3.2% despite a 9% drop in claims.

Net cash flow improvement of 31%, to $1 billion, is also another highlight of its results. Cash flow generation is going to be a key to reducing Express Script's long-term debt, which stood at $13.48 billion at of the end of Q3. At this time last year, Express Scripts boasted $14.98 billion in long-term debt.

However, Express Scripts' ongoing integration issues with Medco Health Solutions continue to plague its results. The company notes that delays in non-client integration activities, which includes merging all of Medco's legacy payment cycles with those of Express Scripts, is causing it to adjust its full-year free cash flow projections down by $500 million at the midpoint, to a new range of $4 billion to $4.5 billion.

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9/28/2016 4:00 PM
ESRX $70.93 Up +0.14 +0.20%
Express Scripts CAPS Rating: *****