The industry that makes money by saving its customers money seems to be chugging along. We'll have to wait until Medco Health Solutions (NYSE:MHS) and CVS Caremark (NYSE:CVS) report next week, but Express Scripts' (NASDAQ:ESRX) earnings report looks fairly solid.
The two most important numbers to look at for pharmacy-benefit managers are the mail-order numbers and the generic-drug fill rate, since they come at reduced costs. Mail orders rose as clients took advantage of the mail-order copays, which are typically lower than the ones for retail pharmacies. The generic fill rate was also headed in the right direction, increasing from 66.2% last year to 68.3% this year. The combined lower costs contributed to a 22% increase in adjusted earnings per share.
Quite a few blockbuster drugs will see generic competition in a couple of years and should help continue the increase in generic-drug use. In the meantime, Express Scripts is driving earnings by getting bigger. It should close on its acquisition of WellPoint's (NYSE:WLP) pharmaceutical business management division, NextRx, in the fourth quarter. As with any retailer, getting bigger is almost always a good thing. It'll give Express Scripts more buying power with drug distributors and allow it to share fixed costs over a larger revenue stream.
I like the business model of the pharmacy-benefit managers for a couple of reasons:
- Lowering costs is at the forefront of health-care reform.
- Any time a company can align the interests of its users with the company's, there's bound to be money to be made.
The only problem is that it seems everyone else has noticed, too. If Express Scripts can continue to grow, it shouldn't have any problems supporting its lofty valuation, but I don't see much of a safety net, either.
