Express Scripts (NASDAQ:ESRX) announced solid third-quarter results on Tuesday after the market closed. In its conference call on Wednesday morning, the pharmacy benefits manager (PBM) provided more insight into what the future might hold. Here are five key things that Express Scripts' management team said in that call that you need to know. (All quotes courtesy of S&P Global Market Intelligence.)
1. The PBM role has never been more important
Tim Wentworth, Express Scripts' CEO, started off the conference call on Wednesday by underscoring that the job his company does has never been more important. Wentworth listed five market forces that are driving demand for PBMs:
- Fewer patents expiring for brand drugs
- Increase in specialty pharmacy spending
- Higher use of prescription drug coupons
- Continued price inflation for brand drugs
- "Hyper-inflation" of pricing from some drugmakers
All of these factors combine to push drug prices higher. Wentworth quoted an Associated Press statement to emphasize why Express Scripts' job is so important: "If you did not have PBMs you'd invent a PBM."
2. Express Scripts is delivering results for customers
Wentworth was quick to point out that his company has delivered results for its customers. He noted that Express Scripts' formulary management strategy kept hepatitis C drug costs below the average costs in five major European countries -- France, Italy, Germany, Spain and the United Kingdom.
The numbers speak for themselves. Prescription drug spending per member per year in 2015 increased 5.2% in the U.S. overall. Express Scripts' customers fared much better than that in 2016. The PBM's year-to-date drug trend is 3.9%.
According to Express Scripts, the company's SafeGuardRx program played a key role in keeping drug costs down. SafeGuardRx has four current solutions, including three focused on controlling costs for hepatitis C, cancer, and cholesterol drugs plus an inflation-protection program. Express Scripts is introducing three new solutions: two that focus on controlling costs for inflammatory disease and diabetes treatments, and the third providing market events protection.
3. Financial performance is strong despite headwinds
Express Scripts faces headwinds from loss of customer contracts. Aetna (NYSE:AET) bought one of the PBM's biggest customers, Coventry, back in 2012. While the acquisition by Aetna didn't have an immediate impact, Express Scripts began to feel the financial effects this year with Coventry's Medicare block of business rolling off. Another contract for Coventry's commercial business expires at the end of this year and will impact the PBM in 2017.
Despite the Coventry loss, Express Scripts' financial performance remained strong in the third quarter. Adjusted earnings jumped 19% from the prior-year period. GAAP earnings climbed 9%. The company expects adjusted earnings growth for full-year 2016 of 15% to 16%.
4. Selling season is going well
Express Scripts said that the selling season for 2017 is going very well. According to Tim Wentworth, net new sales are "meaningfully" exceeding losses from the roll-off of expired contracts like Coventry. And most existing customers aren't going anywhere.
Express Scripts had previously projected its customer retention rate would be in the range of 96% to 98%. Now, however, the company says that its retention rate (excluding the Coventry business) will be between 97% and 98%.
Management was asked during the conference call if the competitive landscape was challenging. The response was that it is a competitive pricing environment, but nothing unusual compared to past years. Express Scripts expects to provide more details on the selling season in December.
5. Ongoing litigation isn't a distraction
The big elephant in the room at every conference call held by Express Scripts this year was still there: fallout from the ongoing litigation with Anthem (NYSE:ANTM). This dispute has weighed down Express Scripts' stock throughout 2016.
Tim Wentworth mentioned that he thought that Anthem was "quite busy working on another matter," a reference to the insurer's attempt to buy Cigna that has encountered stiff resistance from the federal government. However, he said that Express Scripts intended to continue providing great service so that Anthem doesn't have to "spend any more time than they need to on pharmacy."
Wentworth also said that he expects Anthem to issue a request for proposal (RFP) sometime next year. The health insurer's contract with Express Scripts expires in 2019, so the RFP would be for 2020 and beyond. Wentworth said he wouldn't be surprised if his company isn't included on the RFP distribution, at first. However, he intends to position Express Scripts as "the obvious choice" when Anthem begins looking at its PBM for the future.
Four out of the five points mentioned above bode well for Express Scripts' future. I think they're all interrelated. High demand for PBM services combined with Express Scripts' proven track record in delivering results leads to strong financial performance, increasing new sales, and high customer retention.
What about the uncertainty surrounding Anthem? My view remains the same as it has been for a while: A departure by Anthem is already baked into Express Scripts' stock price.
Any good news related to Anthem will definitely help Express Scripts. Bad news might hurt, but most of the damage has been done already. Regardless of what happens, I still think that Express Scripts is a good pick for investors with a long-term perspective.