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.


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.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

Two years ago, University of Chicago professor Harold Pollack wrote his entire financial plan on an index card.

It blew up. People loved the idea. Financial advice is often intentionally complicated. Obscurity lets advisors charge higher fees. But the most important parts are painfully simple. Here's how Pollack put it:

The card came out of chat I had regarding what I view as the financial industry's basic dilemma: The best investment advice fits on an index card. A commenter asked for the actual index card. Although I was originally speaking in metaphor, I grabbed a pen and one of my daughter's note cards, scribbled this out in maybe three minutes, snapped a picture with my iPhone, and the rest was history.

More advisors and investors caught onto the idea and started writing their own financial plans on a single index card.

I love the exercise, because it makes you think about what's important and forces you to be succinct.

So, here's my index-card financial plan:


Everything else is details. 

Something big just happened

I don't know about you, but I always pay attention when one of the best growth investors in the world gives me a stock tip. Motley Fool co-founder David Gardner (whose growth-stock newsletter was rated #1 in the world by The Wall Street Journal)* and his brother, Motley Fool CEO Tom Gardner, just revealed two brand new stock recommendations moments ago. Together, they've tripled the stock market's return over 12+ years. And while timing isn't everything, the history of Tom and David's stock picks shows that it pays to get in early on their ideas.

Click here to be among the first people to hear about David and Tom's newest stock recommendations.

*"Look Who's on Top Now" appeared in The Wall Street Journal which references Hulbert's rankings of the best performing stock picking newsletters over a 5-year period from 2008-2013.

Compare Brokers