Express Scripts' Earnings Made Easy

Ugly.

That's the simplest and probably most accurate one-word summary of Express Scripts' (NASDAQ: ESRX  ) first-quarter financial results. There's really not much attractive about the big pharmacy benefits manager's numbers. Here's what you need to know from the company's Tuesday announcement. 

1. Down, down, down
First-quarter revenue fell nearly 9% year over year to $23.685 billion. Net income dropped 12% from the same quarter in 2013 to $328.3 million. That translated to earnings per share of $0.42 on a generally accepted accounting principles basis. Adjusted earnings per diluted share were $0.99, which met the average estimate of analysts polled by Thomson Reuters but fell below the midpoint of the company's earlier first-quarter guidance. 

Source: Express Scripts

Express Scripts also revised its full-year 2014 guidance, which now calls for adjusted EPS between $4.82 and $4.94. The range previously given was $4.88-$5.

The primary reason behind the declining numbers wasn't unexpected. UnitedHealth Group (NYSE: UNH  ) completed its shift of pharmacy benefits management, or PBM, services to its own business unit, OptumRx, at the end of 2013. OptumRx is one of a handful of major competitors to Express Scripts.  

Factoring out the UnitedHealth effect does make year-over-year comparisons look more favorable. GAAP earnings per share in this case actually rose 11% versus the first quarter of 2013, with adjusted net income inching up by 1%.

2. Obamacare and Old Man Winter tag team
Adjusted prescription claims volume, though, dropped even with UnitedHealth's departure discounted. Express Scripts blamed the drop on an unusual tag team: Obamacare and the weather.

The company said that "later than expected enrollment in public exchanges and lower net new health care reform lives" were key contributing factors to the sluggish first-quarter results. Even though enrollment in the Obamacare online marketplace exchanges wound up ahead of the target level, many Americans waited until late in the game to sign up and weren't submitting prescription claims during the first three months of 2014. 

Regarding the weather impact, Express Scripts said only that "severe winter weather" accounted for some of the prescription claims volume shortfall. Reading between the lines: If people can't get out of their houses because of snow and ice, they can't get prescriptions filled.

3. Subpoenas a-flying
Express Scripts also stated in its SEC quarterly filing that it had received three subpoenas recently. The first came on Feb. 27 from the U.S. Justice Department's Rhode Island District. This inquiry requested information about the PBM's arrangements with several drugmakers, including Pfizer, Bayer, EMD Serono, and Biogen Idec. These companies market multiple sclerosis drugs.

The attorney general of New Jersey issued the second subpoena on March 31, requesting information about Express Scripts' relationship with AstraZeneca for heartburn and gastroesophageal reflux disease drug Nexium. Finally, the U.S. Department of Labor sent a subpoena on April 8 asking about client relationships dating back to 2009. 

Biogen Idec also referenced a federal subpoena in its 10-Q filing last week. The biotech only stated that the government asked for information about its "relationship with certain pharmacy benefit managers." Express Scripts wasn't mentioned by name. 

Easy call?
Shares of Express Scripts fell over 5% in after-hours trading Tuesday night. Is there an easy answer for investors wondering what to do? First, look at the factors behind the ugliness.

UnitedHealth's block of business has gone. That's been a given for a long time and shouldn't change anyone's thinking about Express Scripts as an investment option. The severe winter has also passed. There shouldn't be too many individuals holed up inside to the extent that they can't get prescriptions filled.

Likewise, the portion of the claims shortfall stemming from later than expected Obamacare enrollment is a temporary phenomenon. Lower overall net new enrollment from health reform could be a concern, but not enough in my view to affect Express Scripts and other major PBMs too much.

That leaves the subpoenas. No one knows what will happen on that front. Often, these requests for information don't lead to anything serious. Of course, sometimes they do. Remember, though, that even negative news stemming from government investigations in the past has not kept companies with solid business models from prospering over the long run.

Here's the easy call: If you like Express Scripts' business and the capability of its management team, stick with the stock. You'll probably win over the long run if you're right. If you don't, find another stock that meets those criteria. Every stock has an ugly period now and then. I suspect, however, that 10 years from now investors holding on to Express Scripts shares will be sitting pretty. 

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