Express Scripts (ESRX) Earnings Top in Q1, FY17 View Up

St. Louis, MO-based pharmacy benefit manager Express Scripts Holding Company ESRX posted first-quarter 2017 adjusted earnings per share of $1.33, beating the Zacks Consensus Estimate by a penny. Furthermore, adjusted earnings jumped 9% from the year-ago quarter.

Revenues of $24.65 billion missed the Zacks Consensus Estimate of $25.04 billion and were down roughly 0.6% on a year-over-year basis.

Notably, Express Scripts currently has a Zacks Rank #3 (Hold).

Express Scripts Holding Company - Earnings Surprise | FindTheBest

Q1 Highlights

Adjusted gross profit in the first quarter was up 1.4% year over year to $1.87 billion, highlighting a 10 basis points (bps) surge in gross margin from the year-ago quarter.

Adjusted selling, general and administrative expenses were $818.1 million, down 9.7% from the prior-year quarter.

Total adjusted claims amounted to 351.7 million in the first quarter, down 1% year over year.

Coming to EBITDA (earnings before interest, tax, depreciation and amortization) for the first quarter, Express Scripts witnessed a 3% rise to $1,496.2 million. The upside was driven by operational cost improvement backed by focus on technology, digital tools, home delivery and specialty services.

Express Scripts Holding Company Price, Consensus and EPS Surprise

Express Scripts Holding Company Price, Consensus and EPS Surprise | Express Scripts Holding Company Quote

Guidance Raised

The company raised its guidance for 2017 adjusted earnings and adjusted claims.

For full-year 2017, adjusted earnings per share are projected in the band of $6.90 to $7.04, up from the previously provided range of $6.82 to $7.02. This represents growth of 9% at the mid-point of the range.

Coming to the guidance for the second quarter of 2017, Express Scripts expects total adjusted claims in the range of $343 million to $353 million. Adjusted earnings per diluted share for the second quarter are estimated in the band of $1.70 to $1.74, representing growth of 8% to 11% on a year-over-year basis.  

Furthermore, the company anticipates compounded annual EBITDA growth rate in the band of 2% to 4% from 2017 through 2020 for the core PBM business. Notably, this excludes any contribution from Anthem and other transitioning clients.

Express Scripts Likely to Lose Anthem

Express Scripts recently announced that its biggest customer – the leading health insurer Anthem Inc. ANTM – is not likely to extend its pharmacy-benefits management agreement, which is slated for expiration by 2019-end.

In Mar 2016, Anthem had sued Express Scripts for overcharging its drugs and operational failures. Per management, Anthem has refused to participate in further discussions on pricing concessions and probable adjustments for the agreement. In fact, Anthem is likely to terminate its long-term PBM contract with Express Scripts by next year.

Meanwhile, in the first quarter, Anthem accounted for about 18.3% of net revenues for Express Scripts.

Our Take

We are highly upbeat about the company’s core pharmacy-benefits management long-term outlook. This takes the ongoing volatile healthcare market trends, inflation, patent expiration, lower industry utilization growth and other headwinds into consideration.

Furthermore, we expect Express Scripts to continue benefiting from increased generic utilization, shift toward mail orders, strong specialty growth and an aging population. Branded drugs are becoming increasingly expensive due to double-digit brand inflation, continued rise in the price of specialty drugs and an overwhelming regulatory burden that is actually paving the way for manifold prospects for generics.

Key Picks

Better-ranked stocks in the broader medical sector include Inogen Inc. INGN and Sunshine Heart Inc SSH. Notably, both the stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Inogen has a long-term expected earnings growth rate of 17.50%. The stock represents an impressive one-year return of 62.83%.

Sunshine Heart posted a positive earnings surprise of 58.24% in the last reported quarter. The stock recorded a stellar EPS growth rate (last 3–5 years of actual earnings) of roughly 22%.

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