Pharmacy benefits manager Express Scripts
Revenue was up just 2.9% for the quarter, but it's the various profit lines that investors should really care about. Generic drugs are cheaper, so they don't add as much to revenue as branded drugs, but generics often sport higher gross margins. By increasing the number of prescriptions filled with generics to 65.9%, up 480 basis points, Express Scripts was able to increase its gross profit by 15%. This helped boost operating profit by 20%.
Finally, at the bottom of the income statement, thanks in part to lower interest expenses, net income improved 24.6%. And with a 5.6% decrease in shares outstanding from recent stock repurchases, diluted earnings per share jumped more than 31% to $0.75.
That's far from generic growth -- especially in this market.
Looking at those stock repurchases, Express Scripts bought back $373 million worth -- about 5.3 million shares -- in the most recent quarter. Even though the company is pumping out the cash flow, not every penny can be reinvested back into the company to try to stay ahead of rival Medco Health Solutions
Given all that, I like the long-term growth prospects for pharmacy benefits managers in general. Quite a few blockbuster drugs have already gone off patent this year. Merck's
Combine the higher margins these companies earn on those generics with the fact that higher gas prices should be an incentive for customers to take advantage of the home-delivery option, and pharmacy benefits managers like Express Scripts look to have a winning combination for steady growth.
Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. Pfizer and Johnson & Johnson are Income Investor selections. Pfizer is also an Inside Value pick. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.