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Executives

David Myers - VP of IR

Jeffrey L. Hall - VP and CFO

George Paz - Chairman, President and CEO

Analysts

John Kreger - William Blair & Company

Kemp Dolliver - Cowen and Company

Charles Boorady - Citigroup

Robert Willoughby - Bank of America

Glen Santangelo - Credit Suisse

Lawrence Marsh - Barclays Capital

Ross Muken - Deutsche Bank

Tom Gallucci - Merrill Lynch

Matt Perry - Wachovia

Express Scripts Inc. (ESRX) Q3 FY08 Earnings Call October 31, 2008 9:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Third Quarter 2008 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct the question-and-answer session. Instruction will be given at that time. [Operator Instructions]. As a reminder this conference is being recorded.

I would now like to turn the conference over to your host, David Myers. Please go ahead.

David Myers - Vice President of Investor Relations

Thank you and welcome everyone to our third quarter 2008 conference call. With me this morning are George Paz, our Chairman and CEO and Jeff Hall, our CFO.

Before we begin, I need to read the following statement. Statements or comments made on this conference call may be forward-looking statements, it may include but are not necessarily limited to financial projections or other statements of the company's plans, objectives, expectations or intentions. These matters involved certain risks and uncertainties. The company's actual results may differ significantly from those projected or suggested and any forward-looking statements due to variety of factors which are discussed in detail in our SEC filings.

In addition the reconciliation of EBITDA to net income and to net cash provider by operating activities can be found on our earnings release which is also posted on our website.

At this point, I'll turn over the call to Jeff, who will discuss our third quarter financial results.

Jeffrey L. Hall - Vice President and Chief Financial Officer

Thank you, David. As most of you already know, Express Script had another strong quarter. We attribute this success to the continued focus on our model of alignment that is we make money when our clients save money.

We're taking this model of alignment to the next level through our consumer analogy initiative. The application of human behavior and behavior economic to the pharmacy benefit. By using technology to tailor our offerings and interaction to each individual, we can increase therapy adherence and lower cost of care, delivering lower cost and better health outcome.

In the mid economic environment, saving money is more important than ever to many of our clients.

As I told you last quarter, as the result of positive initial reaction to our consumer logy effort. We have accelerated our programs and spending in these areas. This trend continued in the third quarter and as a result we are excited about the prospects for client savings and profitability growth in 2009.

To that end, I'll spend a few minutes today reviewing the highlights of the quarter before providing a little more color on our outlook for 2009.

In the third quarter we enjoyed strong performance across all of our businesses. Our industry leading generic fill rate reached to record 66.2% up 4 percentage pointsfrom last year. This increase drove both savings to our clients as well as contributing to our growth profit of 18% from the prior year.

Home delivery claims were up both sequentially and versus prior year and home delivery penetration in our PVM segment grew to 25.2%. By leveraging our consumer platform and tailoring our offerings to individual members we believe we can create significant savings for our clients by driving home delivery penetrations to 40% in the future.

In addition, better performance in our specialty business contributed to stronger results for the quarter at fast operating income increased 6% to $15.2 million. Our integrated PVM and specialty platform enhances cost effective single source solution to our clients and is beginning to drive strongest specialty growth and profit.

EBITDA was up 15% from last year and EBITDA for adjusted claim of $2.87 up 16% over last year.

Early in the quarter we decided to hold our share repurchase program in order to build liquidity for what we felt at the time was a deteriorating credit market. As a results we ended the quarter was $274 million of cash and short-term investments while paying down our debt balance by $60 million and completing the purchase of MSC for $247 million in cash.

As a result of this quarters strong performance we are again increasing our guidance for 2008. EPS is now expected to be in a range of $3.07 to $3.10. EBITDA for adjusted claim is expected to be in range of $2.70 to $2.80 and we still expect adjusted script to be approximately flat with 2007.

While we delivered another good quarter I am sure you are interested in our 2009 guidance. So let me move on to that.

For 2009, we expect diluted earnings per share would be in the range of $3.63 to $3.73. Our outlook for 2009 continues our history of improving profitability by lowering cost to our clients as a result of higher generic utilization, lower drug procurement and network cost, increased home delivery penetration and improved specialty performance.

We had a good selling season in 2008 with more than 95% of our EBIT retained or renewed for 2009. However, we are expecting the tough economic times to continue and as a result we expect utilization at existing client to remain at current levels, which will below the historical average of 3% to 5%.

This low utilization in combination with the recent loss of a male only client, result in our forecast that claims will be down 2% to 3% in 2009.

That said, the tough economy is also creating a catalyst for our consumerology effort. As consumers and plan sponsors received lowered cost drug networks and channels, creating value for us as we save them money.

Finally, although we do not provide quarterly guidance, consistent with prior years first quarter EPS is expected to be slightly down from Q4 EPS. SG&A for 2009 is expected to be flat to slightly up as productivity gains are offset by increased investments. Net interest expense is also expected to be approximately flat as higher interest rates are offset by lower debt levels and for the year EBITDA for just script is expected to grow to $3.15 to $3.25.

We look forward to delivering in every year savings per client and earnings to grow per shareholders. And with that I'll turn over to George.

George Paz - Chairman, President and Chief Executive Officer

Thank you, Jeff and good morning everyone. The recent turbulence in the financial markets and the impact to the overall economic environment has been unprecedented. In the first couple of months, we've talked with many of our clients and prospects in each of our market segments and we've learned that our plan sponsors need our approach to pharmacy benefit management now more than ever.

They need our help to drive our ways to the greater use of generics and low cost preferred brand and they need our help to drive home delivery, not just because of the enhanced economics. But because that's where we can best manage drug mix, area adherence and dispensing accuracy.

They require outstanding service and our commitment to excellence in this area has not gone unnoticed. J.D. Power and Associates ranked home delivery from Express Scripts Pharmacy second in customer satisfaction, surpassing our two largest PBM competitors.

And more than ever, plan sponsors won satisfied members that are engaged and active about the decisions they're making in the pharmacy benefit.

These are the reasons why behavior centric consumer platform is gaining so much traction with our plan sponsors. Our clients agree that it's necessary to understand the behavioral science behind what works and what doesn't work and promoting better management of the pharmacy benefit.

In partnership with our independent Blue Ribbon panel of experts, we're developing and deploying scientifically proven tools to bring about positive behavior changes at the level of individuals.

Our initiatives are on track and I feel strongly that this strategy will be a key differentiator in the marketplace. We have great energy around this initiative from our clients as Jeff has mentioned. We've seen aggressive demand from involvement in several of our pilot programs. These pilot programs are designed to achieve better pharmacy benefit management in several key areas.

First to facilitate a better understanding a our member behavior we have on our members in five to six segments. And we've been testing the effectiveness of segment specific messaging across multiple channels.

Second, we had targeted improved therapy adherence from key disease classes including diabetes, asthma, cardiovascular and hyper tension. And finally we have developed innovative tools designed to drive a greater use of our cost effective home delivery services. We've hold our plans which we believe will drive mail to mandatory like levels of might maintaining members choice. Early results from this pilots are promising and we plan to rollout additional programs effective 1/1/09.

So as we look to the over all economic environment, we feel lot of opportunity. Although we expect see lower utilization next year than we have normally seen. The environment has made our services more important than ever and hoping to eliminate ways of preserving the pharmacy benefit.

For example while utilization has been lower 2008 that trend is driven by a decrease in high costs non-preferred brands. While generic utilization continues to climb. With the increased use of generics, average number cope phase have decreased by 2.3% this year to just under $13 per prescription.

As plan sponsors and their members look for cost savings in this economic environment, consumerology is providing the right tools at the right time. Even though we recently we a lost a large male-only client, our experience in the runoff of low margin claims, we partially offset that loss by the additional of fully integrated clients that will add significant value.

Our new consumer platform has been a contributing factor in these key wins. This year we have won 226 new accounts serving over 1.4 million lives. We're excited about the timely behavior; centric approaches of consumerology. Our position in the PBM industry and the opportunity to deliver value to our clients and stockholders in the future.

That concludes our prepared remarks and now we'll be happy to answer any questions. Operator?

Question And Answer

Operator

Okay. [Operator Instructions]. Your first question comes form the line of John Kreger from William Blair.

John Kreger - William Blair & Company

Hi, thanks very much. Jeff, question about your additional detour on your guidance for next year. What sort of share buyback were you assuming behind the guidance?

Jeffrey L. Hall - Vice President and Chief Financial Officer

We don't like to typically guide for share guide... for share buyback. But it's certainly within the guidance is the average buyback that we've been seeing in a year.

John Kreger - William Blair & Company

Okay, great. And then George, can you give us an update on as you discuss with your clients about plans for next year. Is the uptake, changing at all for the idea of a restricted pharmacy networks? And any additional comments on how the integrated retail PBM model is being accepted in the market?

George Paz - Chairman, President and Chief Executive Officer

I would tell you that clients now are faced with significant demands. We've seen over the last year, even going up to more recent downturn of the market to the first and second quarter that clients were concerned about the economic environment in which they operating, whether it be a U.S. company trying to compete globally, or just trying to deal with the rising cost of healthcare in their financials.

And clients need answers. Obviously, the better answers we can provide that cause the less... least levels of disruption, are the best answers for our client. We work hard on several fronts. Our sales and account management team work hard to provide alternatives and answers for our clients in order to drive down cost, and our product development people work hard. So that when those choices are made, that they can do it in a way that minimizes disruption.

With respect to narrowing networks, I would tell you as we go into 2009, everything's on the table, whether it's trying to drive male order to generate the higher savings that we've seen mail or male order provides. That's certainly something that clients are looking towards.

Generics, never go out of vogue, and those are very important measures as well. Specialty pharmacy, taking care of those high costs patients are extremely important and clearly from a period network perspective, a certain retailers aren't going to be competitive, or they're not going to try to provide the incentives. Why should a plan be willing to cover a network when the goods that they sell are being covered by every other pharmacy out there. And so I think that plans will be looking to figure out ways to drive down costs and optimize our savings.

John Kreger - William Blair & Company

Alright, thanks.

Operator: Your next question comes from the line of Kemp Dolliver from Cowen and Company. Please go ahead.

Kemp Dolliver - Cowen and Company

Hi Thanks. This year it looks like generic mix is going to be up around 300 basis points. What kind of increase you have embedded in the 2009 guidance?

George Paz - Chairman, President and Chief Executive Officer

We don't to get into those levels of specifics. But if you just do the pure math, you're in the right range of what happens on conversions. As generic go, lose their... I mean as brands lose there patent. But I'll tell you thoughts that that's all we get. All we do is get the conversion from peer patent expiration that we don't feel like we've done our job.

Our job is to maximize and therapeutic interchange where appropriate. Never putting the patient at risk and never compromising how that comes. And so that is our focus, our account managements with our clinical pharmacists are in the field visiting with their clients and giving them again that whole list of opportunities.

We sit down with our clients, our larger clients on a quarterly basis on a less frequent basis. But we usually take them to where our current trends are. What are the key leverage they can pull in order to drive down their cost. And many often those are buy putting in step their few programs for our authorization program and other opportunities to try to enforce those therapeutic interchanges to take advantage of the generics.

So I would tell you that as you look at our guidance ranges to the extend that we're better. And we can drive those generic rates higher, then that give us an opportunity to go to higher ends of the ranges.

Kemp Dolliver - Cowen and Company

That's great. And my follow up relates to the specialty business and that did a glitch prone for a while last year and at the beginning and for last six months it seems to be on a steady reporting. What do you anticipate for that business next year particularly say uptake, both in the client base and then with the external clients?

George Paz - Chairman, President and Chief Executive Officer

As I said on the past calls, one of the revelations or interesting learning's over for me over the last three to fours years, as we've been getting bigger in this spaces. You modern time product... it takes time for product to come to market. So there's always that issue. If some of these product get tied up for quite awhile as they work their way through. We expect to see continued improvement in that segment as we continue to see specialty again with this tough economic times, helping control the cost of these patients, those high cost patients is extremely important. And it's different models as you know from the pure PBM.

Here it's really helping people navigate in the period higher authorization insurance programs that they have to work their way through just to get access to the drugs and helping those members to stay on therapy. It's a very time consuming high touch model. And we don't' want to get into segment specific guidance. But I would tell we expect that segment to continue grow and us to continue to make sure we get our share of all the new products that are coming to market and we are excited about this pace.

Kemp Dolliver - Cowen and Company

Thank you.

Operator

Your next questions come from the line of Charles Boorady from Citi. please go ahead.

Charles Boorady - Citigroup

Thanks, good morning. Can you tell us the mix of business between employers and health plan customers? And is one more likely than the others to adopt some of your consumerology initiatives?

George Paz - Chairman, President and Chief Executive Officer

That's a great question. The manage care side of our business is held around 40% over the years. And slightly... probably slightly down form that just because of the large losses we had on male only client. But it should be in those ranges. The... it really is a bit of a mix bag because, if it's a medicate type plans then clearly those are going to heavily favored towards retail. Often the membership is transient nature. So male order isn't going to be as big as pull through. There's often mandatory generics in those programs.

So yes, those mix of the type of client has an impact because for many health plans that are trying to compete in just the commercial marketplace. We feel that when we do of service our clients best we allow our manage care providers to grow, and we grow with their growth. And that's why we've always taken the position we don't want to compete directly with those clients that's why we weren't in the Medicare part D space as a direct provider.

And, so we want to work through those... our clients in order to help them grow. So, if they are in the commercial marketplace competing in the commercial space, then yes. They are going to be more likely to buy in or very likely to buy in with the generic programs or step therapy programs. And we've seen a much more aggressive approach towards male in many of those plans as they see the savings that can be gained as well.

Charles Boorady - Citigroup

Thanks. And as you went through this selling season which is the first selling season post having a full year of the combined CVS Caremark and they had their chance to make their pitch to customers. Did you notice a change in what your customers were asking for and RFPs for example to male order to our retail locations that are to the home or anything else that was really different?

George Paz - Chairman, President and Chief Executive Officer

Yes. I mean clearly, the CVS Caremark approach that Tom Ryan's better to talk about this than I am, but I would tell you that they have got a distinct message in the marketplace. If you like that message then you'll become their client. I think the whole idea of what they do may have merit for certain clients. I think the real differentiator in space.

We don't sell the consumer, we sell the businesses. And businesses care about results. And the real differentiation ultimately comes under the bottom line. So messaging, yes that could see in the doors as well a sizzle to it, sounds great. But the whole idea is what are you doing to the bottom line. And for us, we talk a lot about consumerology.

Consumerology only matters if we drive generics, we drive low cost frames and we drive higher amount of penetration and we also drive therapy adherence So, please do those things by communicating with those members each and every time then our numbers speak for themselves.

So, whether it's Medco's program or whether its Caremark's program, everybody's got their own little stick. But at the end of the day, what really matter is results and we are very proud of the results we put in front of our clients each and everyday and as we try to drive cost down, I think we are just leading generic flow rate is evidence of our commitments driving customer costs down.

Charles Boorady - Citigroup

Thanks. So, to be clear, you sounds like you really differentiating us versus them. Are there things that the customers like that they do that you can offer to do for your customers? Or you're sticking to our way or their way in the RFP approach?

Jeffrey L. Hall - Vice President and Chief Financial Officer

No, I think if it's our way, no way, then I think we're giving as a business. I think there is certain things we won't compromise. We'll never push brands ahead generics. We won't do certain things that we don't feel fix in our model. But as far as using retail outlook to deliver mail subscripts... yes we can do that. We've got clients I'm sorry...retailers that are willing to work with us. We've got options that allow us to address the market place in other ways.

I don't think it's ever our way or the high ware, we'll find the high way so we've got to be able to meet the market demand.

I will tell you quite honestly though, I don't know that plan sponsors. We're talking about the people that are making the buying decisions. What you have seen over the last three to four years is more of those buying decisions are could be into heavily influenced if not totally influenced by the purchasing department of big corporations. And that takes a lot of sizzle away that's why they come back to it as to be about results. You got to be other show you can drive generics you can drive mail you can drive PNPM cost down. If you could do that then you can win.

And so I don't know that most purchasing managers are, don't believe that most purchasing managers are wed to any particular pharmacy. We've got over 60,000 pharmacy in the United States. So if you're trying to promote one pharmacy to another the way you have to promote them is they have to be low cost and they have to have quality, and they have to have accuracy, and they have to comply with the different programs in the contract. And if they do those things and they are good contract, they are good pharmacy for us to have it and if they don't then it doesn't work.

Charles Boorady - Citigroup

Thank you.

Operator

Your next question comes from the line of Robert Willoughby form Bank of America Securities. Please go ahead.

Robert Willoughby - Bank of America

Hey George or Jeff, can you give us the sense of MSC's contribution in the quarter if any? And just any anecdotal date on the selling season or future prospects, kind of where is that going to show up in the income statement?

George Paz - Chairman, President and Chief Executive Officer

Sure, MSC is going to roll up in the into the required PBM segment for us it's in line with the rest of our workers comp business. We don't break it out separately. But I'm happy to say we've now bend to rule a big junk in the immigration and no surprises, immigration is on track and it's meeting our expectations what we said was we expected it to be flat slightly accretive in the first full year and were certainly on track with that

Robert Willoughby - Bank of America

And anything is there a selling season for that business or suggest opportunistic?

George Paz - Chairman, President and Chief Executive Officer

No there's a year around selling season for that business and it's certainly going well were happy with our progress in that state

Jeffrey L. Hall - Vice President and Chief Financial Officer

But Robert there is a interesting side here is that what were toughest its a growing concern for many, many employers. And what you've seen is the opportunity to cross sell into some of our larger plans. We can also help them with their worker comps issues, the HR department often rightfully so is worried about employee drug costs and what's taking place. So the workers comp is becoming a larger and larger share of overall cost. And so we have a solution for that. A very strong solution. And so that's also getting some up-tick.

Robert Willoughby - Bank of America

And can I ask, just with the cash you're going to generate over the next five years, you can probably do three or four MSE's a year. But... and still not get it all deployed, I don't expect that. But, I guess is the magnitude of it. I mean isn't the risk here George that you just can't earn a return as good as what you're currently seeing and any of the new cash that you do put to work?

George Paz - Chairman, President and Chief Executive Officer

I'll take a stab [ph] that this isn't always Jeff speak to it. But I think my shareholders pay me and my management team to make sure we deploy that capital in lies way, and maintain our returns. I don't fear for diminishing returns because of excess capital. I think we can deploy them in a lot of different ways. I think our job, especially when you look at the return we've achieved over the last several years, is not to go off and just do something dumb to show growth.

We have to deploy the capital of returns better than we would otherwise see by reinvesting the money or buying back our shares, so that remains our key focus, and we will continue down that path. We tried as you know, or Robert as we've done many acquisitions over the years, to be very opportunistic in the marketplace and try to take care of inefficiencies that exist either with specific companies, or in the market at large, and that will remain our focus.

So we will continue to keep our focus on trying to grow our ROIC as you know it, you've followed us for a lot of years. We are totally driven our ROIC. I think the most important thing, or one of the most important things the management team can do is show that they are good stewards of the cash that they create, and once to get there, you have to create cash. And I think you got to be disciplined around earnings, you have to be disciplined around service, and you had to be disciplined around continuing [ph] to focus on your core business.

Robert Willoughby - Bank of America

I agree with all that George. I guess if I look at a year such as this, where the Wallaby personal accounts is taking quite a hit. So I'm wondering how you get away from offering a dividend that... which maybe the only return you might see in stocks this year.

George Paz - Chairman, President and Chief Executive Officer

Well, I believe that the way we've deployed our capital, and therefore the returns better... been realized by our shareholders exceeds a dividend that we could put on top of the stocks. So, we're not against anything at some point down the... in the future if that's the best of the best answer.

But I don't feel any pressure. I think, obviously, this last several months has been somewhat... well has been terrible, just to say it quite frankly. But that... I like to believe that we continue to deliver 25% growth rates to the future. That's a pretty good point to deploy capital, and I think we are focused on that. We won't take anything off the table.

Robert Willoughby - Bank of America

Okay. Thank George.

Operator

Your next question comes from the line of Glen Santangelo Joel from Credit Suisse. Please go ahead.

Glen Santangelo - Credit Suisse

Yes, George, just a quick question on the pricing environment. I mean we talked a lot about some of the contracts that had been moving around. I'm not sure if you specifically mentioned who that male order client you lost was, but that would be helpful. And I'm really more just kind of curious listening to just guidance in some 2009, your forecasting another 16% increase in EBITDA per adjusted script. Maybe if you just give us a sense of kind of what's going on in terms of pricing in the marketplace, that'd be helpful?

George Paz - Chairman, President and Chief Executive Officer

Okay. First let me just discuss the client situation and then I'll turn it over to Jeff. Our goal... first of all, we would take on any business that we believe adds to our business model. The hardest part is when it's male only, sometimes you've got to make sure we're in line with that client, that's going to have a similar formulary, and the same type of approaches to the market we have so that we actually get leverage out of the situation.

When it's just put in pills in bottles and bottles and bag, we're not really inspired about that if all we're going to do is get a small fee, unless it really does to help us promote our model and gain some better economics for both us and that client. The situation in hand was one that we didn't feel is doing that for us. and I'm not going to mention the names. We've been at this for since 1992, and we try not to talk about these client specific situations; that's not fair to the client. That's made their own decisions, and that it's just not a place I'm willing to go.

But anyway, I think we're on the right track on what we do. Jeff.

Jeffrey L. Hall - Vice President and Chief Financial Officer

Overall in pricing, this has been a competitive environment for many years. And so we haven't really seen a significant change to the historical pricing environment. What I'd say overall to this is as long as we keep delivering value to our client, they're going to keep paying us to deliver that value. And I think the bottom line is we've a got a year where again we're going to grow into doctor's script at 16% and growth margin grows profit is growing inside of that. So we're happy with how we're getting paid for the value we're delivering at this point.

George Paz - Chairman, President and Chief Executive Officer

I think if you look at it, let say EBITDA prescripts $3, pick a number. By the time you applied D&A and taxes to that, you're down to less than a buck and a half. And with interest capital charges, everything else. So that's where we're charging to do all the things we do. Drive generic fill rates to the highest levels, take people and understand the right mix between male and generics.

Even when the number is going up and that might seem like its going up at a pretty price clip the reality is, its a pretty small price to pay for all the value that we had to the equation, go to the other side, what do the retailers make proof of prescription and what value do they actually deliver, at the end of the day when it's more of a commoditize business.

I think there when you're putting pills on the bottles any body can put a pill in the bottle. And so I believe that the value that we add into the equation really does pay for itself and it just sells. As long as we continue that trend, as long as we continue to drive savings the clients are willing to pay us.

Glen Santangelo - Credit Suisse

Okay. Thanks for the comments.

Operator

Your next question comes from the line Larry Marsh from Barclays Capital. Please go ahead.

Lawrence Marsh - Barclays Capital

Thanks, and do I just a quick clarification of the guidance and a question for you George, just tip on scripts, you're saying down 2% to 3% which seems large because we have broken that down between mail and retail at this point?

George Paz - Chairman, President and Chief Executive Officer

Yes. We are not breaking a down between mail and retail. But what I tell you is the key focus area throughout and with everything we're seeing a consumer logy the uptake the way economy is going we expect to be able to grow a more bit. But we are not breaking it down inside of that.

Lawrence Marsh - Barclays Capital

Okay. And, just a cash flow from ops for '09 if I'm using a $2 billion and that was like ballpark or you more specific at this point?

George Paz - Chairman, President and Chief Executive Officer

I'm not more specific at this point but giving our guidance I don't think its going to be down year-over-year

Lawrence Marsh - Barclays Capital

Right. And then I would assume D&A would be... for us to slightly up so I guess I'm curious it seems to be the interest guidance to being flat lets say 70 is a little conservative to given what seems to be free cash for generation over $1billion is that just being conservative around each?

George Paz - Chairman, President and Chief Executive Officer

Yeah as we look out on what we did per rate is we assumed the for reliable curve because we are on 100% floating at this point.

Lawrence Marsh - Barclays Capital

Okay, all right. Gorge against just follow up on your business model I know you talked about some other longer period of time the model is kind of 3 to 6% script growth tend to 12% EBITDA for script growth per year and than sort of 46% capital structure. Obviously '09 you don't have scripts so as you talked about your EBITDA just a script goes up do you think this is, is that sort of business models over then say that next five years as you think about it.

And just follow up with that you guys you have been excellent your capital efficiency so any reason to think if this business model is going to be anymore capital in terms of few or next five years?

George Paz - Chairman, President and Chief Executive Officer

Yes those are some really good questions. I'll tell you we do our goal as of corporation is to grow script counts. And that will remain a focus of ours, Eddy and his team are very focused first to perform more on retaining our current clients and helping them meet the needs that they are faced with and secondly being a presence in the market place and winning our share of the business.

As you know with several years we've had some pretty large account that won't providing much value to the bottom line and that's it seems to be a little bit of an old story quite honestly but quite good price at the end of the day we have had work those off and there is also worked off its cause its not build up to gain overall volume.

Having said that we see the effect on EBITDA prescript because I think we have done it as we realigned our book to get clients that really do have a common interest of that that is driving the generics, driving the mail being progressive using the step there therapy programs and so the clients that we now have I think or feeding better.

Longer term I do believe we have to show you that RX growth so that will remain a focus in large. As far as capital intensity the base business you've changed no other variables the cash intensity, would not change. But however as grow mailers as there you had to buy the inventory, you had to have the inventory and house quickly for mail on the script.

So that does have a little bit of with drag on capitals we grow mail order utilization that not so huge degree. But just to make sure you keep that point in mind.

Lawrence Marsh - Barclays Capital

Okay and then as you look out beside 2009 new administration etcetera what's the biggest concern you have is in running the business and do you feel like there some obviously misunderstanding in the market place, giving your clear value proposition as you think about '09 and new administration?

George Paz - Chairman, President and Chief Executive Officer

I really would hate to see my personal taxes go up, but I am not sure that's the purpose the question, no I would tell you that I think that the new administration is going to be exceptionally challenged. I think that there is off the water, speeches going on about solving health care so what. I mean that you all look at all these plans and there is the lot of words there but I don't feel whole lot of need on a bones and I think that the reality is not going to be whole out money around.

We've got it we just we're doing up to banking systems rightfully sale. But that's a trillion dollars and there on top of that we've got it feels it's a the recessionary environmental will end. I just don't I don't I think it's a tragedy quite honestly that so many children's in United States don't have coverage.

We as a country have to solve that problem quite honestly we've got a lot of different issues go as our military has to be supported we've got to figure out what we're going to do and many different aspects of the economy and then the global environment.

I guess I think that at least for the first several years of any administration healthcare can't be or won't be. There's going to be a lot of conversation but trying to fix that on that cost money is going to be extremely difficult.

Lawrence Marsh - Barclays Capital

Okay. Thanks.

Operator

Your next question comes from the line of Ross Muken from Deutsche Bank. Please go ahead.

Ross Muken - Deutsche Bank

Good morning gentlemen, so sort of under heals of Larry's question about that the next administration there were some finalize e-prescribing lot they came out yesterday from CMS. How are you still sort of thinking about this opportunity and it eventually being a potential positive callous for your business and many of thing out sort of being discussed in the political arena that might also be something also of a positive? Maybe it's around bio-similar or something of the like.

George Paz - Chairman, President and Chief Executive Officer

That's great question. I probably really did shortchange Larry's question. I really appreciate you bringing that up. You're absolutely right. The RP prescribing situation is gaining greater and greater great clarity in the savings, and the accuracy that attributable to e-prescribing speaks for it self, and I think that that is something that Congress will in fact continue to promote and they have already promoted it to the bills.

But we'll see further advancements in this phase and we are excited about this. I think that at the end of the day, and I said this on several occasions, but if you look at the amount of money we've spent in order to try to advance our programs; first, you've got to get the clients to buy in. Then you got to get the member to buy in. Then you actually have to make it work. You got to get a hold of the doctor.

If we can get more of that done through e-prescribing, and get those members on the right medications the first time and keep them there, then we now have an annuity. That annuity for us is worth of lot of money so we've spent a lot of time and effort with individuals and people and technology to make this happen. If we can get that in the hands of the doctor to work, it's huge. It is very big for our industry, and for the population at large to take a lot of cost out of the equation. Probably, there's costs that aren't good costs.

If we end up with better outcomes at a lower price, that truly is advancement. So that's a very positive good thing. And same thing with bio-similars. I... although those bills have are... haven't come into existence yet, there's been an awful lot of work. Our Dr. Miller [ph] spends a lot of his time in Washington with different members of each House of Congress, trying to promote that. I think that that is something that is gaining a tremendous amount of traction.

We will continue to push for those bills, and I think you'll see that as well is both a big, big savings for the Federal Government as they provide 50% of all the prescriptions to United States, as well as for the commercial population. So we're excited about both of those aspects. So that was a great question. Thank you.

Ross Muken - Deutsche Bank

And also there was a lot of noise made this quarter around the new announcement from Wal-Mart, and it's probably gotten too much consideration relative to it's importance, but I'm curious to hear if you think this is something similar to what noise was created a few years ago or do you think there's something actually to be gained from this and that they're going to make an increasing presence in sort of a market that they hadn't had as much share and historically?

Jeffrey L. Hall - Vice President and Chief Financial Officer

Let us take a step back. First of all, a couple of years ago when all this stuff started, and our PBM stocks were getting rocked because everybody thought that this was going to be a huge impact on our business. I was on the podium telling people I kind of like the idea. he whole idea of somebody of Wal-Mart's caliber and size talking about generics makes it easier for our plans sponsors to accept. And at end of the day generics are the biggest savings opportunities out there, so their promotion of generics is a good thing for our industry.

As far as... they're picking, quite frankly the cheaper drugs, and it's a fairly limited list, and they're I think going from 30 days to 90 days as probably it's a smart move on their part because that's probably the only way that I can see that they can get to profitability on a program. But it is what it is. I think that the reality, though is, as you know, is that a lot of people when they get their prescriptions at their local drug stores, or their at their local supermarkets and some take advantage of the Wal-Mart situation. I don't see this as a major problem to PVM industry. I think that notoriety and the discussion around generics is always a good thing, and we're a big promoter of that. So we welcome that... their aggression in this area.

Ross Muken - Deutsche Bank

Thanks gentlemen.

Operator

Your next question comes from the line of Tom Gallucci from Merrill Lynch. Please go ahead.

Tom Gallucci - Merrill Lynch

Good morning everyone. A couple of questions. First I think just going back to your prepared remarks; you mentioned a goal of having 40% male penetration or so in the future. Did you give a timeframe for that? And curious, is there any limitation within the customer mix that would either help you get there, or limit you from getting there the way it is today?

Jeffrey L. Hall - Vice President and Chief Financial Officer

Yes, that's a good question. We were looking out to 40% over the next 2 to 3 years, and I would say that there are limitations to that. Fairly as I mentioned in my earlier comment Medicare clients that's a pretty transient population that probably is not going to be but we won't be a heavy mail user. Lot of generics mostly for the local drugs stores and since they don't pay retail very small co-pack [ph].

It's a not a lot of economic advantage and trying to drive million of population so that will always be a bit of a smaller as you probably know probably large employer groups, big employers with large populations of employees and Mill has a very good answer of because it does offer the convenience of the drugs come being delivered to your homes and the cost savings for the employer and then employee. So that is the there you can see 65% mail penetration.

So the 40% we came up with is by looking at that mix just an aggressive target to be honest with you. But we like aggressive targets at Express Scripts and we think to savings to be had by our plans sponsors and a member is so big that's a worth [indiscernible].

Tom Gallucci - Merrill Lynch

Okay and than just looking at the 09 expectations, obviously generic sort driver of growth can you tell us some of other key variables in your view that get you that grows up into the mid teens?

Jeffrey L. Hall - Vice President and Chief Financial Officer

Yes the same thing that's all has been, we continue to growth a generic full rate. We continue to drive the home delivery penetration rate. Operations team continues to drive efficiencies, we're driving efficiencies through SG&A and in this case offset by some interesting growth things were investing in. It's constantly negotiation with our network suppliers, constantly negotiation with our drug suppliers. It's basically the whole executive team here comfortably focused on driving more profitability and driving more cash flows.

Tom Gallucci - Merrill Lynch

It is special to you particularly important in the upcoming year so given a turn around that would be going on there?

Jeffrey L. Hall - Vice President and Chief Financial Officer

Especially the smaller part of our business, though it has a smaller impact, but specially this clearly important focus for us. Where I thought a last quarter I am still planning I think specialty is a kind of a stairway. You keep taking one step at a time we got the right team in place, we cleaned it up. We started to integrate with the core PBM where make sense.

We're working on strategy, and as a result we're seeing the profitability step up step up step up and that's those steps are going to keep moving forward.

Tom Gallucci - Merrill Lynch

Okay. And some of the new generic next year, brands gone off potent [ph], I think may be second quarter and someway have exclusive period some of the bigger once. So I mean you'll give quarterly guidance but is there any relative growth expectations that we should have as we think about even the first half or second half of next year?

George Paz - Chairman, President and Chief Executive Officer

Yes. I mean that's all included in our guidance's as we look at you know we do very detail models on when we think generics gone hit and when they may not have exclusivity. As George said earlier that's the bay point then we go out and beat those numbers by driving even higher generic all that through those numbers. So everything is out there we believe is given our guidance right now for next year and I did think guidance you know proving all though pattern we would expect Q1 to be down from Q4.

Tom Gallucci - Merrill Lynch

Well nothing particularly different about first half and second half.

George Paz - Chairman, President and Chief Executive Officer

No.

Tom Gallucci - Merrill Lynch

Okay and then why I'm final if I could on the selling season I think you mention winning almost million and half life but we do have the script being down 23%. I guess the economy or you said current trend you would expect to continue so with your base line there, for would you may like 81% growth on volume and then the next selling season we get to down another 3% or 4% from there?

George Paz - Chairman, President and Chief Executive Officer

I don't really want to get in that level of specificity. I think we budget client by client, and every client is different. Some clients are doing layoffs and other clients are holding their own, so we go through we get a pulse by our sales and account management teams, sits down with each of their counterparts at each of the employers and health plans and get their best guesses as to what's going to happen over the next year.

It's important for us to be a part of that process. And then we budget client by client by looking at those specifics as we've said earlier. Trends are down; they're down below anything I've ever seeing in my... since I've been in this industry. But we've factored all that into our guidance. As I said in my comments though the trend is deceiving because if what the trend is doing is putting extra economic pressure on top of the consumers. And with our consumerology approach, the consumer doesn't necessarily want to go without their hypertensive drugs, their cholesterol, their statins or their diabetes products.

But they now need to look at ways save money, so to the extent that we can rollout mail order, and generics, than those are good solutions for those numbers and so for moving people from third tier products into second tier products or into generics, even though the trend maybe down, profitability is up and that's an important combination.

Tom Gallucci - Merrill Lynch

Thank you.

George Paz - Chairman, President and Chief Executive Officer

We'll only take one more question.

Operator

Okay. That question comes from the line of Matt Perry from Wachovia. Please go ahead.

Matt Perry - Wachovia

Hi, good morning. Just a couple of follow ups I guess on these questions about the economy. You guys have been around for a while and seen I guess a couple of the recent recessions and maybe those weren't as bad as what we're facing now, but are you thinking utilization declines more this time around, maybe because of more cost sharing?

And then second question. I agree this Wal-Mart generic program really hasn't have much of an impact on you guys, but yesterday CBS announced something a little bit similar, and then as I put that together with may be a little more sensitivity, the price of drugs from consumers in '09, is it possible the impact could be a little bit greater in '09 and '10 then it has been over the last couple of years?

George Paz - Chairman, President and Chief Executive Officer

As far as the economic situation, we have, I personally lived through interest rate escalations and internet bubbles popping and all kinds of other situations and yes I would say that we've never budgeted utilization declines as we've seen this year. But it's all in our numbers. It's in the guidance we've given. And so I would say yeah, this is a very tough economy.

Again, I do believe that whatever the situation is, there's always opportunities for those companies that are smart and aggressive. And we try to consider ourselves the least aggressive. So we go after those opportunities and try to make sure that we take advantage of those situations and I think at the end of the day, for providing those answers for our clients we will continue to do well and we have take that into our guidance.

With respect to the Wal-Mart situation at the end of the day we're talking about the lower cost drug. So I don't we... look at this all the time as you know Susanne Lien the head of our supply chain area, and she actually monitors what's taking price with respect to all of the different products in our book of business weather is third tier brand second tier brand or generics and she also monitors it by retail drug change.

So we're looking at these programs go out we're seeing what's happening at Wal-Mart we're seeing in at the other drug stores and clearly there's been shift from some of the other retailers to Wal-Mart when these things come in. But 90 days things we expenses going towards people that don't have money.

We have done a lot of studies in your more than work from go take work but there is lot of studies at there, that people will actually overpay and pay a lot more to be at less cash because if you don't have cash and you can put $4 versus $9 you may have 4, you may not have 9. Even though the 9s have much better economic deal, if you live in check-to-check that's not necessarily a good answer for you.

And so we measure all that we monitor. We look at it and keep in mind if you talk in $9 at Wal-Mart now for 90 days supply of generics. I spend a much offer where the plan sponsors member pays anyway further generics. So, and than you get the advantage of getting deliver to your home.

So I don't... we don't see that they impact on our book of business. But we're certainly out there monitoring in.

Matt Perry - Wachovia

And do you think if the CBS, 90 days generic program as something similar to Wal-Mart or could that be a different ball of game?

George Paz - Chairman, President and Chief Executive Officer

I think that most people are trying to, most retailers are trying to response to the Wal-Mart situation because I think they have been some erosion in their book over to the Wal-Mart pharmacy. And so they have got a step up and do it what they have to I think at in adding clients through in front of our clients through our plan sponsor I mean through our account managers and our sales people our team in the market understanding what's important Susan Lien as I said earlier is certainly looking at what's happing in those trends and trying to figure out how that to put to go to a product to meet the needs of our clients I think we're all focused on the right things and driving the right values as far as TVS care market in particular.

I think it's a good company and as well run and I think if you want specific about their situation in you have to ask Tom, I think you have better equip to speak about it. I don't in our book of business I think people get mail order because it deliver to their home and it's a good alternative weather it needs to be an other alternative here because individual doesn't was an safe neighborhood or there is other problems we can make arrangements as those drugs deliver to the work or any other address they would like so lot of the stuff isn't all that new but it certainly not a focus of ours in this regard I don't see there is a huge drive for our book of business.

Matt Perry - Wachovia

Great. Thanks for that answer.

Jeffrey L. Hall - Vice President and Chief Financial Officer

Well, thank you very much. I appreciate everybody getting on our call this morning and asking the questions and taking interest Express Scripts, I know for the last several months have not been a lot of fun but having said all that I really do believe our company is very uniquely position to continue that value to our clients and our members and we will continue to drive the waste out of Healthcare and that waste as we take that waste directly to its greater value for our clients and members.

So, thank you all you so much for your attention this morning and participation. And have great day.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect. .

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Source: Express Scripts Inc. Q3 2008 Earnings Conference Call Transcript
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