5 Things Express Scripts' Management Wants You to Know

These five quotes from Express Scripts' second-quarter earnings conference call offer insight into whether investors should expect the business to grow or shrink.

Aug 28, 2014 at 1:26PM

Express Scripts (NASDAQ:ESRX) appears to have bitten off a bit more than it could chew with its 2012 purchase of Medco Health Solutions. During its second-quarter earnings conference call, the pharmacy benefits management company reported that client retention is sagging due to integration struggles tied to the acquisition.

It's not surprising that Express Scripts had challenges combining these two big businesses. Investors would be wise to pay attention to comments from management, as they may offer clues  on just how long it may take for the company to get its business back on track.

With that in mind, let's consider five points made by Express Scripts executives during the company's quarterly earnings call and what they may mean to investors.

G

Source: Express Scripts

1. Tripping over hurdles

"The integration activity specifically resulted in some isolated challenges with some of our clients revamped our leadership, strongly aligned our metrics to key service indicators, and redefined our commitment to service across the organization," said Express Scripts President Tim Wentworth.

Based on comments made by Wentworth and other executives during the call, the company seemingly had some turnover among account managers that made it easier for competitors like CVS Caremark to win away Express Scripts customers. Express Scripts specifically suggested that it had fallen short in key customer service metrics following the merger.

2. Getting back on its feet

Customer losses prompted Express Scripts to guide investors to expect client retention rates in the low 90% range, which is below the company's preferred levels.

However, efforts to refocus teams on customer retention might be curbing customer defections, and since retention levels reflect past losses, opportunity may exist for the company to improve the customer retention rate in the coming year or two.

"We have stabilized our teams, again, we -- the turnover that came was unfortunate and regrettable, but we do believe that [retention] is more than largely stabilized," said Wentworth.

3. Specialty drugs are the future

"Specialty is a primary driver of growth and it will continue to be so in the future," said CEO George Paz.

Demand for specialty medicine is climbing quickly as drugmakers launch next-generation personalized medications that are increasingly more expensive.

The approval of these high-priced medicines has Express Scripts expecting that spending on specialty drugs will climb 63% over the next three years.

That spending increase is likely to support demand for Express Scripts' pharmacy benefit services, which include negotiating lower drug prices with manufacturers, programs designed to increase the percentage of patients taking generic drugs, and programs that help patients take their medicine as prescribed, which is important to minimizing high-cost hospitalizations.

4. Generic biotech is untapped

Express Scripts believes that healthcare payer demands for pharmacy benefit services will grow once the FDA establishes a pathway to approval for biosimilars.

Despite biosimilars winning support in language contained within the Affordable Care Act, regulators have been slow to adopt rules that offer drugmakers clarity into how to win FDA approval for generic biologics.

Although ambiguity acts as a stumbling block, it's likely that obstacles to biosimilars will disappear over the coming few years given that these drugs are already being approved in Europe and other foreign markets, and that pressure from U.S. healthcare payers is likely to grow once blockbuster specialty drugs like Roche's Rituxan and AbbVie's Humira lose patent protection.

As a result, Express Scripts is focused on working with the FDA to create "better and easier pathways to bring biologic generics into the marketplace," according to Paz. "When that occurs, that [biosmilars offer] significant upside for us and significant upside for our clients, and this is going to improve adherence for our patients, less cost, less strain, less concern," he added..

5. Buybacks will continue

"[Express Scripts] generated $735.5 million of cash flow during the quarter, and repurchased 29.9 million shares for $2.2 billion," said CFO Cathy Smith.

Pharmacy benefit managers operate on thin margins because they take a small piece of the savings they generate for their clients; however, their businesses generate significant cash flow that can be used for shareholder friendly acquisitions and buybacks.

To put that in perspective, consider that Express Scripts' revenue in the first two quarters of 2014 totaled $48.8 billion, resulting in $857 million in net income. Those are pretty heady numbers for a company that is admittedly not firing on all cylinders.

Assuming that Express Scripts overcomes the headwinds holding back its performance, investors should expect the amount of money returned to shareholders to grow over the coming years. In the short term, Express Scripts estimates it will buy back 28 million more shares just in the second half of this year.

Fool-worthy final thoughts

Previously, I outlined three challenges facing Express Scripts, but that doesn't mean there aren't opportunities for the company's business to improve over time. Based on comments during the earnings conference call, management appears aware of the challenges it faces; recognizing those headwinds should serve as the first step in overcoming them. If that's the case, Express Scripts' hiccups may prove to be short term, which is something shareholders would applaud.

Leaked: Express Scripts may struggle to keep up with this coming blockbuster
The best biotech investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not just how we treat a common chronic illness, but potentially the entire health industry. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns you will need The Motley Fool's new free report on the dream-team responsible for this game-changing blockbuster. CLICK HERE NOW.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool recommends Express Scripts. The Motley Fool owns shares of Express Scripts. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers