Source: Express Scripts
Express Scripts' (ESRX) pharmacy benefit services include negotiating drug prices with drugmakers, improving patient adherence rates to medication, and boosting generic prescription fill rates. Those cost-saving missions can have a significant and lasting benefit to healthcare payers such as insurers that contract with Express Scripts to manage prescriptions for members.
But while payer demand for margin-boosting cost cuts has never been higher, Express Scripts is struggling to overcome challenges tied to the integration of its megamerger with competitor Medco Health. Struggles tied to merging the two company's processes and practices led to client losses that are weighing on the company's revenue. Since Express Scripts just reported its third-quarter sales, let's take a closer look at whether the company is overcoming its obstacles.
By the numbers
In addition to offsetting revenue lost during the merger, Express Scripts is also navigating the loss of UnitedHealth Group (UNH 1.61%), a former Medco client that decided to bring its pharmacy business in house at the end of 2013.
As a result of those headwinds, it's not surprising that Express Scripts' third-quarter sales sagged. The company's third-quarter revenue fell from $25.92 billion last year to $25.78 billion last quarter.
However, what may be encouraging is that the rate at which sales declined last quarter improved from previous quarters. During the third quarter, year-over-year sales dipped just 1%, but year to date, sales are 4.8% lower. That may suggest that the company is getting closer to turning the corner back to revenue growth.
Sources: Express Scripts and author's calculation.
Additionally encouraging is that Express Scripts continues to leverage more of its sales for bottom-line profit. In the first nine months of this year, Express Scripts' diluted EPS totaled $1.86, up from $1.62 in 2013.
In the third quarter, SG&A represented 4.22% of sales, down from 4.32% a year ago. The company is also enjoying profit support thanks to rising generic fill rates, which historically offer better margins. During the first nine months of this year, Express Scripts generics accounted for 82.9% of all the prescriptions the company filled, up from 80.7% in 2013.
As a result, operating income climbed from 3.38% last year to 3.82% last quarter, suggesting that Express Scripts may be realizing some of the planned cost synergies from the merger.
Although Express Scripts operates on razor-thin margins, the company throws off substantial cash flow. Express Scripts expects that its full-year operating cash flow will total between $4.55 billion and $5.15 billion in 2014, and that cash is fueling shareholder-friendly buybacks.
During the third quarter, Express Scripts spent $1.1 billion repurchasing 14.1 million shares, and since the company has 28.8 million shares remaining on its buyback authorization, it's likely that cash will continue to be deployed on repurchases in the coming year. If so, it should help Express Scripts boost its earnings growth.
Looking ahead
Express Scripts is guiding investors to expect fourth-quarter EPS of between $1.36 and $1.40 and full-year EPS of $4.86 to $4.90. If it can deliver on that forecast, it would represent year-over-year growth of 18% to 19% for 2014.
Regardless, the real key to Express Scripts' future stems from its ability to shore up its client base and deliver post-merger cost savings. Since Express Scripts' sales eclipse $100 billion annually, even small improvements in terms of sales and margin can have a big effect on net income.
