Seeking Alpha
Research analyst, oil & gas, tech, mid-cap
Profile| Send Message| ()  

Express Script Company (ESRX) has transformed itself with the acquisition of Medco Health Solutions as after this acquisition the company reported bumper revenue of $27.00 billion up 133% Y/Y. Express Scripts is one of the favored stocks among several Hedge Funds. At the end of 3Q12 as many as 69 funds hold disclosed their position in this stock. Michael Lowenstein the founder of Kensico Capital placed Express Script at the 5th position among his top five holdings with 3,350,300 shares and representing 6.29% of its total portfolio.

Talking about its peer group companies Walgreen and CVS are also making strategic moves in order to ramp up their earnings.

Walgreen (WAG): Walgreen with its international presence and having the benefit of low costs promises strong growth. The company acquired Alliance Boots by purchasing a 45% stake in it. With this diversification it hopes to enhance its market share and further expects increased benefits in the near future. This combination will put extra pressure on the other companies in this field like Pfizer and Abbott Laboratories. Further, Walgreen has introduced its WellTransitions (health care program) which will bring hospitals and health institutions in tandem with Walgreen. Their coordinated efforts will also reduce the medical costs and readmission rates. Walgreen in October announced that it has been chosen as the preferred pharmacy network for the Medicare Part D plan which will benefit members in regard to cost saving and faster access to the pharmacy services.

CVS Caremark Corporation (CVS): The company benefited from the Express Scripts and Walgreen dispute and captured ~60% (which was 50% earlier) of the market share. The Company's 3Q12 net income increased to $1.01 billion as compared to $868 million last year. At present CVS operates with 7400 pharmacy stores and serves ~60 million plan members. Moreover its generic drug business is also helping it to grow. Since the generic drugs are ~40-70% cheaper than the branded ones CVS is filling most of its prescriptions with the generics.

With most of the branded drugs expiring in 2016, it would be interesting to see how these pharma companies are looking to cash this opportunity. Coming on to Express Scripts, the long term fundamentals discussed below look impressive for the company's future growth:

Successful Medco acquisition: Express Scripts acquired Medco Health solution in April, 2012 for $29.1 billion with intent that it will reduce the cost of prescription drugs and will further improvise the Healthcare quality. And the company expects cost synergies worth $1 billion with this acquisition. Express Script has increased its scalability with this and expects to cross $100 billion in revenue in the next year. This deal will put Express Scripts in a dominant position and position it as an industry leader providing respectable earnings over the next five years. The integration seems to be successful and has helped the company to meet its expectations.

Generic to be the growth driver: With the growing demand of generics Express Scripts top line will be boosted. The Company's generic drugs generate more profit compared to the branded ones and the increasing price gap between these two is always beneficial to Express Script. The Company is making efforts to cut down the cost for its consumers to increase the use of generic drugs and make good profit out of that. I think that the generic drugs sold through the mail order pharmacy remain an opportunity for the company in the coming years. And its Select mail Program will enhance mail penetration in line with its peers which will be a significant advantage in its generic business.

To sum up, as these fundamentals are taking the company on a long way its cash flow is also giving it a strong foothold in the market which will be used for buybacks. Express Scripts had a successful selling season where the company won 215 new contracts and expects a ~94% retention rate. Its Medco Health Solution acquisition made it the largest PBM (Pharmacy Benefit Manager) in regard to the prescription drugs volume. The company is currently trading at ~$55.32 up 15% year to date. I would recommend buying this stock.

Source: Express Scripts: Moving Ahead With Un-Branding