Express Scripts (ESRX +0.00%), the nation's largest pharmacy benefits manager, or PBM, announced its second-quarter financial results after the market closed on Monday. Here are three things you need to know from the company's update.
1. The beat goes on.
For the fifth quarter in a row, Express Scripts beat analysts' earnings estimates. The company reported adjusted earnings of $1.12 per diluted share. That surpassed the average estimate of $1.10 per share and reflected a 28.7% increase over the same quarter in 2012. On a GAAP basis, Express Scripts recorded earnings of $558.3 million, or $0.67 per diluted share.
The PBM also beat Wall Street's top line expectations. Total revenue came in at $26.4 billion compared to the average analysts' estimate of $25.5 billion. More than $108 million in revenue was recognized during the second quarter due to the way that a large client contract was structured.
Revenue for the quarter, however, was down nearly 4% year-over-year. The loss of UnitedHealth Group's (UNH +1.80%) business as the big insurer transitions pharmacy claims to its OptumRx PBM accounts for much of this drop.
Express Scripts now says that it expects adjusted earnings per diluted share in the range of $4.26 to $4.34 -- a jump of 13% to 16% over full-year 2012. The company's prior range for 2013 was $4.23 to $4.33 per diluted share.
2. Business is changing.
As mentioned above, UnitedHealth is in-sourcing all of its PBM services. This resulted in a 7% drop-off in claims volume for Express Scripts during the second quarter. However, it really doesn't reflect poorly on Express Scripts. UnitedHealth's contract was with Medco. The insurer's decision to move its PBM business in-house was made prior to Medco's merger with Express Scripts.
Even with the revenue loss from UnitedHealth's move, Express Scripts continues to generate more profit. That trend stems in large part from sustained improvement in generic utilization. During the second quarter. the PBM's overall generic utilization rate was 80.9%, up dramatically from the 77.8% reported in the same quarter last year.
Express Scripts isn't alone in experiencing improved generic utilization. CVS Caremark (CVS +0.08%) saw its overall rate increase from 76.5% in its first quarter of 2012 to 80.5% in the same quarter this year. UnitedHealth didn't report detailed numbers for OptumRx last quarter, but noted that it was seeing improvements in its generic mix that helped drive earnings higher. Catamaran (CTRX +0.00%) also experienced a solid 3% year-over-year jump during the first quarter to 83%.
George Paz, Express Scripts' chairman and CEO, hit the nail on the head with his comments that customers face "unprecedented challenges" ahead in managing pharmacy benefits. Paz listed several factors, including forthcoming health insurance exchanges, new and costly regulations, higher brand drug prices, and increased usage of specialty drugs.
3. CFO is leaving.
Jeff Hall, currently executive vice president and CFO for Express Scripts, is on the way out. Hall will remain employed by the company through Sept. 30 as part of a transition plan. He had served as CFO since 2008.
Matthew Harper will assume the role of interim CFO while a full search is conducted. Harper joined Express Scripts in 2000 and has served as vice president of financial planning and analysis since April of this year.
Regardless of which company is involved, the departure of a CFO usually raises eyebrows. No reason was given for Hall's departure. The fact that he is staying on for several more months is encouraging, though, and seems to minimize the likelihood of worst-case scenarios that might come to mind.
Buy, sell, or hold?
The initial reaction to Express Scripts' earnings announcement was to sell. Shares fell 1% in after-hours trading following the release of the quarterly financial results. I don't think selling is in order, though.
I agree with George Paz that the dynamics are changing. My view, which I'm sure Paz holds as well, is that these changes will drive higher demand for the services that PBMs provide. I like the PBM industry as a whole over the long run.
Express Scripts still appears to be the best pick among its peers. Its forward price-to-earnings ratio of 13.5 compares favorably against CVS Caremark's 13.85 multiple and Catamaran's 21.4. UnitedHealth and Express Scripts are roughly equal in terms of forward P/E. When growth is factored in, Express Scripts comes out as the best value of the bunch.
The stock is up more than 20% year-to-date. I'm not sure how the rest of 2013 will look. However, over the long term I think that Express Scripts should be a solid addition to most investors' portfolios.
