Giant pharmacy benefits manager (PBM) Express Scripts Holding Company (ESRX +0.00%) met consensus analysts' earnings estimates to the penny in the previous three quarters. The company reported its third-quarter results after the market closed on Tuesday. Did Express Scripts make it four in a row? Here's what you need to know from the PBM's results.
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By the numbers
Express Scripts reported third-quarter revenue of $25.4 billion, up slightly from the $25.2 billion posted in the same quarter of 2015. So far this year, the company's revenue trails the amount generated in the first nine months of last year.
The bottom line was more impressive. Express Scripts announced earnings of $722.9 million, a 9% year-over-year increase. That translated to diluted earnings per share of $1.15, up 19% from the prior-year period. This higher increase on a per-share basis compared to net income stemmed from Express Scripts buying back stock, including repurchasing 14.1 million shares in the third quarter.
On an adjusted basis, the company's diluted earnings per share were $1.74, a 20% jump from the third quarter of 2015. And that was yet again exactly what Wall Street expected.
Express Scripts continued to have strong cash flow. The company posted net cash flow provided by operating activities of $1,480.4 million, up 87% from the prior-year period. Express Scripts also reported $2.3 billion in cash and cash equivalents as of the end of September.
Behind the numbers
Revenue came in a little lower than many expected. One primary contributing factor was a faster-than-anticipated roll-off of the Coventry business. Coventry has been one of Express Scripts' largest customers in the past. However, Aetna (AET +0.00%) bought Coventry in 2012. The Aetna deal began to affect Express Scripts this year, with Coventry's Medicare contract expiring at the end of 2015.
Earnings grew at a solid pace despite the slow revenue growth for several reasons. One key cause was that cost of revenue increased only negligibly. More important, though, was that Express Scripts did a great job of controlling operational costs. Selling, general, and administrative (SG&A) costs dropped nearly 15% from the prior-year period.
Another factor held back revenue while increasing profits. The PBM's overall generic fill rate increased from 84.5% in the third quarter of 2015 to 85.4% in the most recent quarter. Generic drugs are cheaper, which means total revenue isn't as high as it would be if more prescriptions were filled with brand drugs. However, Express Scripts typically makes more profit off generic drugs, which helps boost the bottom line.
Looking ahead
Express Scripts kept the midpoint for full-year 2016 GAAP earnings per diluted share unchanged from its previous guidance. However, the company narrowed the range for its earnings outlook from $4.45 to $4.55 per diluted share to a range of $4.47 to $4.53. The range for full-year adjusted earnings per diluted share was also narrowed from $6.33 to $6.43 to between $6.36 and $6.42.
Aetna's acquisition of Coventry will have more impact going into 2017. Express Scripts' contract for Coventry's commercial business expires at the end of this year. The good news, though, is that the selling season for 2017 business has been strong. Express Scripts announced that its retention rate (excluding the Coventry business) will be between 97% and 98%. The PBM had previously projected the retention rate would be in the range of 96% to 98%.
The market reacted positively to Express Scripts' third-quarter results, with shares slightly higher in after-hours trading. That's a short-term response, but what about the PBM's long-term prospects? Questions remain about what will happen with the ongoing litigation with Anthem, Express Scripts' second largest customer. However, with an increased national focus on controlling prescription drug costs, particularly for high-priced specialty drugs, I think Express Scripts' stock is a buy for long-term investors.
