Express Scripts Earnings Set the Stage for Growth

Express Scripts reported better-than-expected fourth-quarter results.

Todd Campbell
Todd Campbell
Feb 24, 2015 at 11:19AM
Health Care

Source: Express Scripts.

As healthcare payers hunt for ways to rein in ever-higher drug costs, the pharmacy benefit manager Goliath Express Scripts Holding Company (NASDAQ:ESRX) reported better-than-expected fourth-quarter results, and full year 2014 results that indicate revenue headwinds are easing.

By the numbers
Express Scripts' fourth-quarter sales totaled $26.31 billion, and those results outpaced the average consensus Wall Street analyst forecast by $630 million.

Express Scripts also announced that its earnings per share reached $1.39, which were both a penny above analysts' estimates, and 24% above the EPS reported in the fourth quarter of 2013.

For the full year, Express Scripts' sales totaled $100.9 billion, which was down slightly from the $104 billion the company notched in 2013. Express Scripts' EPS grew to $4.88 during 2014, up from $4.33 in 2013.

Behind the numbers
In 2013, Express Scripts lost a top customer when UnitedHealth Group decided to take its PBM business in-house. That client loss weighed down Express Scripts' full-year revenue results in 2014; however, that headwind should disappear in 2015 given that it's been more than a year since the last revenue from UnitedHealth was recorded.

Assuming Express Scripts doesn't suffer any significant additional client losses this year, investors should start seeing the top line begin growing again. If it does, then moves made by the company to reduce spending last year should allow more money to flow from revenue to the bottom line.

That appears to already be happening. In the fourth quarter, Express Scripts' revenue improved by $531 million, or 2%, versus a year ago, while in the third quarter, revenue had slipped by 1% versus the third quarter of 2013.

Thanks to that fourth-quarter performance, the company's year-over-year sales decline improved from -4.8% through the first nine months of last year to just -3.1% for the full year.

The company's cost-savings moves, which include integration savings tied to its 2012 megamerger with competitor Medco Health, are also already showing signs of improving the company's profitability.

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In the fourth quarter, spending on SG&A improved to 4.38% of revenue from 4.78% of revenue the year before. For the full year, Express Scripts' spending on SG&A fell to $4.3 billion last year, down from $4.6 billion in 2013.

As a result, despite full-year sales slipping in 2014, the company still delivered $8.5 billion in adjusted gross profit, up from $8.49 billion in 2013.

Looking ahead
The pressure on healthcare payers to tamp down spending on prescription drugs provides significant tailwinds for PBMs like Express Scripts.

Express Scripts' ability to use its market might to negotiate stiff price cuts from drugmakers, such as in its recent exclusivity deal with AbbVie for the hepatitis C drug Viekira Pak, should allow the company to continue attracting big, high-quality clients.

As a result, Express Scripts is guiding for investors to expect that it will deliver EPS of between $5.35 and $5.49 in 2015. If it does, that would represent growth of between 10% and 13% from 2014 and would likely give Express Scripts plenty of financial flexibility to continue rewarding investors with shareholder-friendly buybacks. Last year, Express Scripts repurchased 62.1 million of its shares, and it still has 83.7 million shares remaining on its buyback authorization.