Express Scripts Inc.’s (ESRX) second quarter 2011 earnings of 71 cents per share (excluding special items) were in line with the Zacks Consensus Estimate but were well above the year-ago adjusted earnings of 60 cents per share. The jump in earnings is attributable to reduced selling, general and administrative expenses and a lower share count as compared with the year-ago quarter.
Quarterly Details
Second quarter revenues of $11.36 billion surpassed the Zacks Consensus Estimate of $11.32 billion and the year ago revenues of $11.29 billion.
Adjusted gross profit for the quarter improved 4.5% to $812.6 million, and adjusted selling, general and administrative expenses decreased 8.5% to $194.6 million.
Total claims at Express Scripts for the reported quarter came in at 161.4 million against 164.5 million in the second quarter of 2010. Claims comprise network claims, home delivery claims, specialty and other claims. The latter includes drugs distributed through patient assistance schemes and limited distribution contracts with pharmaceutical manufacturers in addition to the Emerging Market claims. Total adjusted claims (thrice the home delivery claims since such claims are typically 90-day claims) of 185.7 million were less than the year-ago adjusted claims of 189.1.
Decreased utilization, member attrition and lower-than-expected in-group growth led to a decline in claims volume.
Share Repurchase
In May 2011, Express Scripts announced the Accelerated Share Repurchase (ASR) agreement, where in it plans to repurchase shares worth $1,750.0 million. The company repurchased 29.4 million shares under the ASR program.
Additionally, during the second quarter, Express Scripts repurchased 13.0 million shares for $765.7 million under the existing stock repurchase program (first announced in 1996). Currently, there are 22.7 million shares available for repurchase under the existing share repurchase plan.
Medco Health Acquisition
Separately, Express Scripts announced that it has agreed to acquire healthcare company Medco Health Solutions, Inc. (MHS) for $29.1 billion ($71.36 per share) in cash and stock. The $71.36 per share bid price represents a 28% premium over the closing price of July 20.
According to the terms of the acquisition, Medco shareholders will receive $28.80 in cash and 0.81 shares of Express Scripts for each Medco share owned.
Following the closure of the acquisition, which is expected in the first half of 2012, Express Scripts shareholders will own approximately 59% of the merged entity with Medco shareholders holding the balance.
2011 Guidance Reiterated
Express Scripts reaffirmed its earnings projection for 2011. Adjusted earnings are expected between $3.15 and $3.25 per share, reflecting a year-over-year increase of 26% to 30%. The Zacks Consensus Estimate of $3.19 lies within the company’s guidance range.
Express Scripts’ earnings expectation excludes the impact of the Medco acquisition.
Cash flow from operations is expected to range from $2.2 billion to $2.4 billion.
Our Take
Currently, we have a Neutral recommendation on Express Scripts. The stock carries a Zacks #3 Rank (Hold rating) in the short-run. We note that the company’s move to acquire Medco Health Solutions is the third major acquisition that it is making in the past few years.
In July 2008, Express Scripts acquired the Pharmacy Services Division of Medical Services Company. Medical Services Company is a leader in providing pharmacy benefit management (PBM) services to clients, providing workers compensation benefits. Further, in December 2009, Express Scripts acquired NextRx, WellPoint Inc.’s (WLP) PBM segment. The deal is expected to significantly expand Express Scripts PBM business. Finally, the acquisition of Medco Health is expected to help lower the cost of prescription drugs and improve the quality of healthcare, thereby attracting more patients.
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