Stephanie Link: Express Scripts Has a Prescription For Growth
NEW YORK ( TheStreet) -- Express Scripts
The company is positioned well to see better volumes, sales and earnings - and, importantly, operating leverage in 2014 from implementation of health care exchanges, increased mail order delivery, continued generic drug penetration, and further benefits from specialty drug exposure. It also stands to benefit as the synergies kick in from its 2012 acquisition of its largest rival, Medco Health .
Express Scripts held its analyst day meeting earlier this week and management laid out a good game plan for solid long term results, as well as a pretty compelling case for 2014 improvement. It expects to see 10% to 20% earnings growth over the next 10 years driven by the strong secular trends in health care as its key customers look to outsource various services to the PBM sector and the PBMs increase their level of product offerings. Cost containment services are the critical component for its customers, and this will only increase in importance as payers look to reduce drug plan benefit costs over time.
The company also believes that with Medco, it will be able to increase its current 27% script market share over time. While the long term is favorable, given these secular trends, the short term is also pretty interesting, with the company guiding EBITDA per script (a key metric in the industry that shows profitability) this year at 14% to 16% and EBITDA at 7% to 10%, driven by specialty pharmacy market share increases, a more narrow network offering and better utilization of its formulary management. The company has made it very clear it will drop certain clients that aren't profitable, which should also drive higher EBITDA per script over time. And finally, management remains committed to return at least 50% of its free cash flow - which means further buybacks and dividends.
One of the key issues surrounding the company has been the slower claims volume over the last few quarters (fourth quarter adjusted claims fell 2.8%) and the company's expectation for similar type of results in the first quarter. These declines have put pressure on organic growth and have capped the multiple on the stock that investors are willing to pay. Much of the slower volume is a reflection of the weak economy and lower utilization rates - people don't want to pay out a copay or coinsurance if they don't have to, especially in a challenging environment. This should start to change as the economy improves and exchanges (both public and private) see an increase in volumes from the Affordable Care Act. The company expects both public and private exchanges to be a positive - again the need for expense management, negotiating leverage and PBM expertise, which is critical for its customers.