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Express Scripts (ESRX +0.00%) saw its top and bottom lines diverge in the second quarter of 2016. Revenue declined by less than 1%, but net income jumped 20%. The pharmacy benefits manager (PBM) announces its third-quarter performance before the market opens on Oct. 26. Will the revenue and earnings trends continue? Here are three key things to watch in Express Scripts' third-quarter results.
1. Selling season
CEO Tim Wentworth expressed optimism about Express Scripts' selling season three months ago. He specifically mentioned the company's SafeGuardRx programs as a big draw for potential customers. These programs help clients control spending on high-cost drug classes, including hepatitis C, cholesterol, and cancer drugs. Partly because of SafeGuardRx, Wentworth said that Express Scripts' retention rate for 2017 to be 96% to 98%, a 1% increase at the midpoint compared to last year.
Express Scripts needs a strong selling season to offset losses resulting from the departure of Coventry, a major customer for the PBM. Aetna (AET +0.00%) bought Coventry in 2012. Coventry's Medicare contract with Express Scripts expired in 2015, impacting this year's revenue for the PBM. Express Scripts won't have Coventry's commercial business in 2017.
In his second-quarter remarks, Wentworth said the company's goal is still to grow revenue overall, despite the loss of Coventry. However, he didn't provide specific numbers about how strong the selling season actually is. Look for more details in the third-quarter results to find out if Wentworth's optimism is warranted.
2. Cost control
Selling, general, and administrative (SG&A) costs dropped by 9% year over year in the second quarter. That decrease was key in Express Scripts' bottom-line improvement. However, a big chunk of the reduction in SG&A costs stemmed from one-time costs in 2015 that made the year-over-year comparison look better. On an adjusted basis, SG&A costs still declined -- but only by 1%.
To meet its earnings guidance for 2016, Express Scripts needs to keep SG&A costs under control. While the trend is headed in the right direction, keeping that trend going might be difficult. In both 2014 and 2015, the PBM's SG&A increased in the second half of the year compared to the first half of the year.
Express Scripts said in the second quarter that it expects to be on track with its adjusted SG&A guidance for full-year 2016. The company thinks that its efforts to streamline processes and use automation should pay off. Third-quarter SG&A results could make the difference as to whether or not Express Scripts meets investors' expectations.
3. Dispute update
The ongoing dispute with Anthem (ANTM +1.69%) won't make a big difference in Express Scripts' third-quarter financial results. Probably the only area that would be impacted is increased legal costs. But what happens with Anthem is definitely important for Express Scripts' future.
Don't expect Express Scripts to share a lot of details on the litigation. Tim Wentworth and former CEO George Paz have refused to say a whole lot about the Anthem issue in the past. The PBM's corporate message continues to be that they're working hard to serve Anthem and that their teams work well with each other.
One thing potentially working in Express Scripts' favor is that the federal government wants to block Anthem from acquiring Cigna. Cigna has its own in-house PBM. Should the deal fall through, that could possibly make Anthem more willing to compromise with Express Scripts. Listen for any hint in third-quarter comments that Express Scripts and Anthem might come to terms. If the two companies make nice, Express Scripts' stock should soar.
