Tags: Express | Scripts | Medco | ESRX

Express Scripts Takes Larger Slice of Drug Market

By    |   Monday, 23 April 2012 05:32 PM

Express Scripts (ESRX) is poised to take a larger slice of the prescription drug delivery market, increasing its cash flow thanks to a recently completed deal to buy rival Medco Health Solutions. Analysts are bullish on the potential for increased efficiencies following the deal.

Express Scripts is a pharmacy benefit management (PBM) company. It combines retail pharmacy claims processing, formulary management and home delivery pharmacy services to create an integrated product offering to manage the prescription drug benefit for providers.

Express Scripts is one of the largest PBMs in North America, offering a full range of services to its clients, which include HMOs, health insurers, third-party administrators, employers, union-sponsored benefit plans, workers’ compensation plans and government health programs.

Revenues are generated primarily from the delivery of prescription drugs through a contracted network of retail pharmacies, home delivery and specialty pharmacy services and what Express Scripts calls “emerging market” services.

Revenues from the delivery of prescription drugs to members represented 99.4 percent of revenues in 2011. Revenues from services, such as the fees associated with the administration of retail pharmacy networks contracted by certain clients, medication counseling services, and certain specialty distribution services, comprised the remainder of revenues.

Prescription drugs are dispensed to members of health plans through networks of retail pharmacies under non-exclusive contracts and through home delivery fulfillment pharmacies, specialty drug pharmacies and fertility pharmacies operated by Express Scripts.

More than 60,000 retail pharmacies representing more than 95 percent of all United States retail pharmacies participated at the end of 2011.

However, as of Jan. 1, Walgreens was no longer part of the retail pharmacy network, reducing the number of pharmacies participating to approximately 55,000, representing approximately 85 percent of all United States retail pharmacies.

Medco deal

In early April, Express Scripts completed its $29.1 billion deal to acquire Medco Health Solutions, a leading PBM serving more than 65 million members. Analysts report that Medco earned close to $1.5 billion on revenues of over $70 billion in 2011.

“We believe Medco offers significant opportunities to enhance ESRX's market position, yield more than $1 billion in operating synergies, and enable ESRX to generate over $4 billion in cash flow,” Standard & Poor’s analysts said in a recent appraisal.

“We estimate that the combined firm now accounts for close to 40 percent of the total PBM market, and about 29 percent of the retail segment.”

Express Scripts has a one-year projected price-to-earnings-growth (PEG) ratio of 0.82, compared to 3.33 for the healthcare sector and 1.42 for the overall market. Its five-year annualized projected growth rate is 26.4 percent, compared to 7.9 percent in the sector and 11 percent for the market.

The annual earnings per share consensus for fiscal 2012 is $3.65, compared to $2.97 a year ago, and rising to $4.51 in fiscal 2013 and $5.41 the year after that, reports First Call.

Wall Street is bullish on Express Scripts. Buy or outperform calls come from Jeffries, Standard & Poor’s, JP Morgan, BB&T, UBS, Deutsche Bank, Oppenheimer, RBC Capital Markets and Raymond James.

Express Scripts next reports on May 10.

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Monday, 23 April 2012 05:32 PM
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