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Executives

David Myers – VP, IR

Jeff Hall – EVP and CFO

George Paz – Chairman, President and CEO

Analysts

John Kreger – William Blair

Robert Willoughby – Banc of America/Merrill Lynch

Ricky Goldwasser – UBS

Ross Muken – Deutsche Bank

Alex Balakhnin – Goldman Sachs

Lawrence Marsh – Barclays Capital

Lisa Gill – JPMorgan

Express Scripts, Inc. (ESRX) Q1 2009 Earnings Call Transcript April 30, 2009 10:00 AM ET

Operator

Welcome to the First Quarter 2009 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions being given at that time. (Operator instructions) As a reminder this conference is being recorded.

I'd now like to turn the conference over to our host, VP of Investor Relations, Mr. David Myers. Please go ahead.

David Myers

Thank you and good morning everyone. With me today on the call are George Paz our CEO, and Jeff Hall our CFO. Before we begin, I need to read the following safe harbor statement.

Statements or comments made on this conference call may be forward-looking statements and may include, but are not necessarily limited to, financial projections or other statements for the company's plans, objectives expectations or intentions. These matters involve certain risks and uncertainties.

The company's actual results may differ significantly from those projected or suggested in any forward-looking statements due to a variety of factors, which were discussed in detail in our SEC filings. In addition, a reconciliation of EBITDA to net income can be found in our earnings release, which is posted on our website.

At this point, I'd like turn the call over to Jeff, who will discuss our financial results.

Jeff Hall

Thank you, David. Before I begin my comments on the quarter, I have two administrative comments. First, as we have said we expect the NextRx acquisition to close in the second half of 2009. As a result related with the first-quarter results we provide today the earning forward guidance includes any impact related to NextRx.

Second, last night we found a typo in the 10-Q we filed, a comment that said we had a $2.6 million one-time tax benefit in the first quarter of 2009, should have read that we had a $2.6 million one-time tax benefit in the first quarter of 2008. With that said Express Scripts is off to a strong start in 2009.

Q1 EPS was $0.86 up 23% year-over-year and better than expectations as a result of strong margin growth and tight SG&A controlled. Cash flow from operations was $286 million, up 15% from the prior quarter and EBITDA per RS grew to $3.06, up 24% from the prior year. And we're increasing guidance for the year for EBITDA per RS with $3.20 to $3.30, an annual increase of 20%.

We attribute this success to the unwavering focus on our model of alignment. We make money when our clients save money. And now more than ever this focus on cost savings, combined with our behavior centric approach is resonating in the marketplace. As a result, we are also increasing our EPS guidance for the year.

Before I get into the details, let me just spend a minute talking about segments. As I have been telling you for the past few quarters, in order to improve the growth and profitability of our specialty business we have been integrating the sales in back office support function with the PBM.

This consolidation helped our specialty business realize an 84% growth and profitability for 2008. This consolidation is now complete and as a result going forward our specialty result will be included with our PBM result. Now let us take a look at our quarterly results in a bit more detail.

Gross profit increased almost 15% from the prior year and was better than our prior guidance. The primary driver of this performance was our model of alignment and focused on driving cost savings. We are seeing high levels of interest in our behavior centric cost savings program and we expect this strong margin performance to continue.

Our generic fill rate reads 67.7% in the quarter, up 2.6 points from last year. We believe there are significantly more rooms to grow the use of generics and low-cost brand and further increase the savings for client sponsors and members. As we have discussed in the past, the impact of generics is more backend loaded this year with two thirds of the benefit from new generic coming in the second half of the year.

As expected, SG&A expenses were down significantly in Q1 as seasonal and one-time costs in Q4 did not recover, we finished of the projects and we successfully completed the implementation of 226 new clients. That said strong expense control brought in SG&A expense lower than our previous forecast.

Going forward, we expect SG&A to increase as we began a new set of growth projects and make the investments necessary to support our growth. But as we said last quarter we still expect SG&A through 2009 to be at 2008 levels. The combination of these results led to record EBITDA per script of $3.06 in the quarter.

This is a metric we are extremely proud of because it reflects tremendous value we create for our clients and members by driving greater use of generics, home delivery, and enhanced specialty management. Last quarter we saw that the adjusted claims will be down 2% to 3% for the year and we are still on track to meet that the original guidance.

As I said earlier, we expect to close the acquisition of NextRx in the second half of 2009 and as a result, we have suspended our share repurchase program. The last of the purchases in the year reduces our previous EPS guidance by $0.07 to $0.09. This decline is more than offset by lower interest rate and improvements in profitability.

We have added a table with the details to our press release, but the bottom line is excluding the negative impact from sale repurchases, we are increasing our EPS guidance for the year by $0.11 to $0.13 to $3.67 to $3.77. At the midpoint this represents 20% growth over the prior year and is entirely driven by operating income.

As a reminder, this guidance range excludes the profits that we hold for the NextRx transaction and NextRx results. And we now expect EBITDA per RS to be in the range of $3.20 to $3.30 and we expect SG&A to be relatively flat from last year. And with that I will turn it over to George for more commentary.

George Paz

Thank you, Jeff, and good morning everyone. We logged another solid quarter at Express Scripts by executing on our business model alignment and achieving our mission of making these prescription drugs safer and more affordable, which in turn translates into increased returns for our shareholders. We have a healthy outlook for the future and the early results from our selling season are promising.

We won over 60 new accounts, including three signature accounts and we expect to see 95% of client retention again this year. I spent last week at our annual outcomes conference here in St. Louis. We met with hundreds of clients and prospects to discuss the pharmacy landscape. I received feedback from our innovative behavior centric approach to pharmacy benefit management is resonating well with our clients.

In addition, they are very interested in our integrated suite of trend and health programs to drive lowest net costs, while optimizing health outcomes. In conjunction with our outcomes conference we released our drug trend report, which noted that overall cost trend for our clients was at a record low.

We also found that failure to take full advantage of clinically appropriate, lower-cost alternatives, for more expensive brand drugs, cost Americans $42 billion in 2008. Therefore significant opportunity exists for us to do what we do best, eliminating this waste from a pharmacy benefit for optimizing health outcomes.

We have been pioneers in applying the principles of behavioral economics to healthcare since we last launched our center for cost effective consumerism last year. We deployed the types of segmentation by tailoring individual messaging to change behavior. In addition, we have taken the application of behavioral economics further by using certain proven psychological principles to develop tools and products that encourage positive choices.

An example of success in this area comes from our products of our select home delivery program that we begin at the beginning of the year with over two dozen of our clients. Many of our clients have seen home delivery penetration nearly triple. And we have moved this offering from pilot phase to full production.

We are delivering innovation that matters today and it is clear that marketplace is adopting our approach. As the call for healthcare reform intensifies our proven track records of managing out ways, while improving health outcomes will be an important component of this reform. We support the administrations focus on healthcare information technology including e-prescribing.

We've seen an uptick in electronic prescriptions that are encouraged by increased adoption by doctors. We are optimistic about the bipartisan support we are seeing for creation of a pathway to introduce generic versions of expensive biotech drugs. The availability of these more cost drugs will significantly change the industry landscape and provide opportunities to leverage our expertise in innovative ways.

Finally, I wanted to briefly mention our proposed acquisition of WellPoint's NextRx subsidiaries. When we announced the transaction, we spoke about the alliance as a great strategic fit for advancing healthcare and is a strong cultural fit between our two organizations.

Now a little over two weeks post announcement, we’ve had the opportunity to speak with clients and prospects and spend time with our counterparts from WellPoint. Due to these discussions we are more confident than ever that this transaction has arrived new for us. Our shared commitment to improving health outcomes and driving our ways positions both Express Scripts and WellPoint for a significant growth.

We are excited about our strong first quarter results, which further validates our business model of alignment, which is structured to eliminate waste while improving health outcomes and therefore paving the way for continued shareholder value creation. That concludes our prepared remarks and now we will be happy to answer any questions. Operator.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of John Kreger please go ahead of William Blair.

John Kreger – William Blair

Hi thanks very much. George and Jeff, if you're willing to, could you just talk a bit more about your expectations for NextRx and once that deal is closed and maybe elaborate a bit on where you think the synergies are going to come from?

George Paz

I will take a shy at this and then Jeff you should feel free to try in then. You know, we are, as I think we talked about when we announced the transaction. This transaction is not similar to or different from other acquisitions that we've done in the past and that there is a two-pronged approach here. One is the new contract to provide PBM services.

Two, to WellPoint that creates value for both entities and then in addition to that there is typical synergies that are created such as benefits cost leverage applying, you know our approach to driving generics mail order step therapy prior authorization, specialty drugs, all those things come together to help improve the economics as well. You know as we said earlier we are very early into this, this is only little over two weeks since we announced and I think what we like to do is leave any discussion about specifics until the point at which time we actually close the deal, get in, get deeper and come up with more formidable guidance for 2010.

John Kreger – William Blair

Fair enough. And a follow on then, realizing that now specialty is part of your core PBM, can you – do you have enough visibility to just give us a sense about how that business is doing? The strong improvement that you were seeing at the tail end of last year, are you seeing that continue here in 2009?

Jeff Hall

Pretty jumped in here, but you know just to make sure everyone is clear, you know when we go to our final presentation, specialty is a very important component of the overall PBM sales. It is the fastest-growing piece of the healthcare cost trend. You know we talked earlier about having a record all-time low of drug trends in our book of business and we have achieved that while experiencing double-digit growth in the specialty drugs.

So, you know this is becoming a hotter and hotter issue, five years ago, you know we had to go in and talk to our client sponsors about specialty, today an RFP doesn't come out where specialty is on a very important component of that RFP. So as times evolve here, our account management teams, our sales people, our clinicians, everyone at the PBM has had become very fluid, conversant in the area of specialty drugs and understand the impacts that doesn't mean we don't have specialists by disease state that administer the programs and understand the quality of care and the expertise that goes along with providing for these high-touch very expensive drug programs.

But part of the fundamental program again is managing overall drug trends. If we delivered the negative 2% trying to a client that had a, you know a 40% trend, just making up numbers and specialty, we will consider that a failure at Express Scripts. Or job is to manage the overall drug trend not just the traditional fees. That is the reason we’ve emerged these components together because it is to the same customer that has the same need, which is driving the ways out of the program and especially in the areas such high-cost drugs. So, that is the reason about putting this together.

To be honest with you to the course of last year, it became harder and harder to actually this report this segment separately because the costs were starting to run into each other to well. Having said all that if we still get a great look at profitability by that area because we can see down to – the gross margin level very easily on those drugs. And that area is still doing very well and we are excited about the addition of the NextRx business and so RS will take us to that next level and really give us even additional resources and expertise to really improve our offering to all of our clients.

John Kreger – William Blair

All right. So should we assume that the specialty gross profits are trending about with your core business a little better, a little worse?

George Paz

I think they're consistent with what you've seen last year on that ramp.

John Kreger – William Blair

Thanks very much.

Operator

Thank you. Our next question comes from the line of Robert Willoughby of Banc of America/Merrill Lynch. Please go ahead.

Robert Willoughby – Banc of America/Merrill Lynch

Hi Jeff or George, just given some of the moving contract parts, some things that should have faded off last year and what you won this year, can you give us any indication about kind of volume's that were lost versus what kind of came in from new customers in the quarter and maybe the doubts on the profitability, are there on, I really can't see exactly what you want in the quarter?

George Paz

You know probably the biggest driver, well Robert, we talked a lot about this last year and this continues into this year. As you know historically drug utilization trend have been in the 3% to 5% range, we usually budgeted it 4% to 3% range to be somewhat conservative and then we were always positively surprised that part of the reasons for our earnings expansion in the past was affected drug utilization trends came in stronger than we had budgeted.

That’s not the case over the last year and then this year. I think, we reported last year that the drug utilization was down to the 1% to 0% range and we're seeing that again this year. So, in depends of whether you consider the component pieces, but that is a pretty big number, when you look at 500 million adjusted spreads and utilization not growing versus growing to 5% you can do the math pretty easily to understand the impact.

The utilization has on overall claim counts. Having said all that though you know what we did lose at the end of last year was some very large mail-order providers, while we provided mail only services to certain clients and if you normalize for that, our mail claims would have been up roughly 6% year-over-year, quarter-over-quarter on an annualized basis.

So, mail continues to be a big driver for us, but again you know it is very important for us to get clients that are aligned with our business model of driving out the waste. You know it is very important that when we signed up clients they share a common interest with us to take out those cost to promote the generics, the lower cost brands more people demand.

And I think that this is what we look for. So we don't believe in growing at any cost, we believe in growing. So, probably clients will have a shared need, when we can put together thousands of clients that are all driven the same direction I think the evidence of that combination are the results we see in our profitability. Keep in mind, we grew our profits at a very difficult time, but as Jeff said in his prepared comments the result of that is significant, tremendous cost savings for our claims and I think that's the reason our profitability and our future is sustainable because as we grow our profits, we see of our clients so much money.

I know that's been a long answer to your question Robert, but mail would have been up significantly, with the decline in utilization. If you look year-over-year, adjusted scripts would have been only a slightly.

Robert Willoughby – Banc of America/Merrill Lynch

Okay. And just in terms of that emerging markets business now, what is going to be the management structure on that, who is in charge of that and how are we thinking about modeling that business given the revenue trajectory it has been on?

Jeff Hall

Well, those businesses are, you know the reason those are in a separate segment is because they have a different buyer. The PBM business and the specialty business goes to client sponsors whether it be a labor union of a state government, a large employer, a managed care organization, etcetera. Those businesses are usually sold, most prominently to doctors.

Our distribution business for example is sold in the doctor's offices, our specialty, our fertility business is again sold into doctors offices. That is typically the way that businesses his geared. Michael Holmes who is our Chief Administrative Officer is in-charge of those subsidiaries, so he will be responsible for managing the profitability and the growth of those companies.

Operator

Thank you. And next, we will go to the line off Ricky Goldwasser of UBS. Please go ahead

Ricky Goldwasser – UBS

Good morning and congratulations on the quarter. A couple of questions, first of all, if you can provide some additional color around the 2010 selling season and just in terms of the contract opportunities there that are contracting new businesses opportunities, in the jumbo accounts and then obviously just suspended to your buyback program, but I just think about it conceptually when you think you could resume buybacks, would it be your one post closing their transaction or should we expect it to be further out? Thank you.

Jeff Hall

So with regards to share repurchase program, it is going to depend on what our final capital structure here is and certainly our initial goal of any new capital structure will be to pay down debt as quickly as possible and get to the low levels of debt to EBITDA, So, really that is going to be our primary focus here, so it is hard to tell in any more detail in that about knowing when it's going to close and when the final capital structure is going to be, but bottom line is debt repayment can be very high in our list of cash.

Ricky Goldwasser – UBS

And what is your ideal ratio?

Jeff Hall

You know it hasn't changed, it's one or two times, which is what we've always said about that is proving out to be.

George Paz

As far as the selling seasons is concerned you know, actually at this time of the year there is several jumbos, what we call signature accounts where there is more than a 1 million scripts outstanding. Some of them will be decided as early as tomorrow and others will be decided over the next couple of months.

So, but there is a lot of them in different phases, there is quite a bit of activity that is going on this year, which we are pleased of augmenting, you know we are hopeful and we are confident that we have a business mile that resonates and we will see how in fact we will keep you posted on how those decisions are ultimately made.

Ricky Goldwasser – UBS

Is the activity for the 2010 a strong activity you are commenting about, do you view that as kind of price abnormally high versus previous years, given the fact that as clients prefer to put things out to bid?

George Paz

I think, especially in this day and age, you know most clients are going out for bids, but keep in mind and I think Medco spoke about this on their conference call as well. You know most of us have a 90% plus of retention rate, so just by definition it is pretty hard to describe large accounts and I think at the end of the day, these are relationship businesses and if you have a very good clinical manager and a very strong account team that is taking care of that client it is, you know that is usually, which you need to maintain those relationships or met the needs.

We've maintained greater than a 95% client retention rate for quite some time and that includes you know our client. We include in those numbers our clients have alluded us because they get purchased, which is inevitable over time and clients buy these or these are sold, so there is a high stick great, having said though, you know we tried to go with our sales team and show them how we can make a difference on our business model and clearly we've had 60 million so far this year, three of them large accounts. So, I think our model is resonating, but it is always easier when you are the incumbent to hold on to that business.

Jeff Hall

One thing out of that is that for us a little lower than average renewal year.

George Paz

So at that point that we've already well upon the path of renewal, I mean that is for 2011 and 10, a lot of those declines are up in that point have already been renewed.

Ricky Goldwasser – UBS

Thank you.

Operator

Thank you. And next, we will go to the line of Ross Muken of Deutsche Bank. Please go ahead.

Ross Muken – Deutsche Bank

Good morning, gentlemen. I'm curious George on the e-prescribing comment it seems like that confirms what we've seen on the IT side as well in terms of industry, you know is it doing anything to make you think longer-term about the cost structure of the business and the number of pharmacists you need to keep on hand?

And then two, you know in terms of the opportunity to impact mail, if the doctor has sort of a point of care device in the office so he can use to select the mail channel, is there any thought to making that process more simplified more electronic to in terms of the ramp-up because obviously one of the big negatives for mail has always been the fact that you have to go through the paperwork to sign up and I know your select program helps to kind of offset that as well. So, any comments from you, those would be helpful?

George Paz

All right thank you. You know we have seen a significant uptick in e-prescribing and as you know Medicare has put its centers and penalties in place to drive that even further. We are excited about it, but honestly we have a lot of pharmacists on staff and unfortunately a lot of those pharmacists are doing things that probably aren't in the best interest of promoting overall healthcare outcomes in other words they are hearing step therapy programs for authorization programs dealing with plan design situations and I think what most pharmacists would like to do is be more consultative in helping a patient with side effect profiles understanding the drug regimens and helping adherence. Keep in mind one of the biggest problems America faces today is the lack of adherence in key disease days.

If we could take those pharmacists through e-prescribing and relieve them of their responsibility, we are their trying administer formality because that information comes automatically to the doctor's office, instead focus them into the value-added items of staying adherence and improving the overall healthcare regimen. I think that this huge benefits for shareholders and clients and our members and I think that is what we like to see as it goes.

So there should be some significant savings when we go into e- prescribing and put some of those dollars quite frankly will be you know reinvesting if you will to (inaudible) better healthcare outcomes, which I think is good for all of us in America. I'm sorry, if there was another question there and I might have missed it.

Ross Muken – Deutsche Bank

On the mail side?

George Paz

On the mail side, yes. Well Dr. Miller is the our, he's the guy talked a lot about being our, he is our Chief Medical Officer, well he also sits in the Board of Sure Script and his mission there is to help drive e-prescribing and healthcare outcomes. He's passionate about his work and I would tell you that one of the sides of this is often driving costs, try taking out the waste, so we do try to work in partnership with all the different board members of Sure Script to make sure that the patient does understand what their alternatives are and what is most appropriate for any given situation. So, we're appropriate that mail order options should be presented in the options to drive mail utilization.

Jeff Hall

Also, one thing I will add, certainly one of the interesting things we're looking at here is that e-prescribing gets more and more into the day-to-day operations, we think that it is actually pretty interesting potentials that have almost next day delivery and take first film straight into mail and bypass retail also together with solid implementation.

Ross Muken – Deutsche Bank

Great. And Jeff, I don't know if you've commented, maybe I missed, I didn't hear it, but on the return on capital for the quarter I was curious as to what that was and how shall we think about that metric as we approach sort of the closing of the WellPoint deal in terms of any investment and needs to happen or kind of what potentially that could do to that from an accretion dilution perspective?

Jeff Hall

So, we don't actually calculate return on investment capital for the quarter because the numbers tend to move around a little bit. We were 27% for the year, historically we see that continuing to grow that for 2008 that is certainly one of interesting thing closer to the management team. As we look at WellPoint, we think it is absolutely positive to a kind of invested capital with the clients being having faced with that. So it should be incrementally positive over the long-term. The other thing on the incremental investments, for WellPoint, I think you know it is hard to know the precise details, but I think the bottom line there is, you don't see any meaningful material additions to capital as a result of this acquisition.

Ross Muken – Deutsche Bank

Great thanks very much and congratulations guys.

George Paz

Thank you very much, appreciate that.

Operator

Thank you. And our next question comes from the line of Randall Stanicky of Goldman Sachs. Please go ahead.

Alex Balakhnin – Goldman Sachs

Hello, can you hear me?

George Paz

Yes, go ahead.

Alex Balakhnin – Goldman Sachs

It is Alex Balakhnin for Randall. Good morning. Just a couple of quick ones, first of all I was wondering if you can get your updated thoughts on the specialty distribution business and what is your expectations going forward from here?

George Paz

Sure. Specialty distribution is included in that emerging market segment and you know one of the things we are trying to determine is the impact that long-term oncology drugs will have an overall drug costs and medical cost inflation. As you know when you look at the pipeline especially drugs coming to market, tremendous level

of those close to 50% are oncology related, very high cost products, which are going to require a very special handling often administered in the doctors or the clinic's office. What we're trying to do was to develop an answer for the oncology situation and we were holding onto our distribution business because we think it could be a key factor in that ultimate solution and what this had to keep in closer to overtime as to how that unfolds.

Alex Balakhnin – Goldman Sachs

Okay. And then just a quick follow-up, the emerging market segment revenue, run rate of about 300 million in the quarter, is that similar to the quarterly run rate that you are assuming for the rest of the year for that segment?

Jeff Hall

Yes that is about right.

Alex Balakhnin – Goldman Sachs

Okay. Great thanks a lot.

George Paz

Thank you.

Operator

Thank you. And next we will go to the line of Larry Marsh of Barclays Capital. Please go ahead.

Lawrence Marsh – Barclays Capital

Thanks and good morning. Just a couple of quick things. So many, some which you can talk about with consolidation with mixed Rx, but just are you able to characterize even any anecdotal client or customer feedback you're getting in some of these best and final conversations after you've been announced this transaction, what kind of things are you hearing for people and it sounds are you in a position to talk about sort of top priority once you close the deal?

George Paz

Couple of things you know. First of all I didn't mean with a lot of the prospects and clients as I said earlier in our outcomes conference, it is a great opportunity of bringing our clients together every year, but we also focus on our shared value of driving out waste and improving healthcare outcomes. We invite prospects to that as well and so, you know lot of conversation was around the depending acquisitions. Quite honestly it is a very positively seen.

It is really nicely into our model, as you’ve heard Angela discuss and I discuss in the past, we have a shared vision here for taking out the ways and proving health outcomes. I think that as we look at health care reform, what the country needs is new and innovative approaches to delivery of healthcare in this country and we are involved – both organizations focused on that and I think we will continue to work together to figure out innovative solutions for what America needs most today. So, I think all that means to our existing clients. They are with us because we have a track record of being innovative and being creative and delivering workable solutions for our clients and this will further that and so we are really excited about the prospects, as far as you know day one in getting things done.

The most important thing we do come out the (inaudible) is really to get to a single platform, that’s, you know there is tremendous value to be had when you have one platform because then what you have is a standardized delivery approach across all your books of business. Some companies run multiple platforms, when you do that it creates lots of issues because when you roll out a change, when you roll out an option something like flat-to-home delivery, you got to update each of the platforms. So by definition, if you're on the second platform to be updated you don’t get the options as quickly as the first.

And so I think there is tremendous value both on efficiencies, delivery, and consistency of delivery when you get to single platform. So that will be one of the first things we're going to go at from an operational perspective. Obviously, from a management perspective, we really believe we can do a lot to help improve the drug trends of the WellPoint’s book-of-business and so we are going to focus on working with WellPoint to generate creative programs to further take up the generic film rates and drive them out penetration. So, those two items will be major from a client perspective.

Lawrence Marsh – Barclays Capital

Great thank you. And just a quick follow-up from that on generic fill rate, I guess you are communicating really on adjusted basis your home delivery generic fill rate was flat sequentially. I just wanted to confirm that and do you think of, you know you haven't disclosed generic filtrate for WellPoint, some delivery segment, but is your big opportunity specifically or are you in the, can you talk about what your generic fill rate is for their business or no?

Jeff Hall

Yes. So generic fill rate and home delivery was flat sequentially, but was not going to get into the details of the WellPoint. George did say that we got new revenue. There is lots of opportunities for us, which not only helps WellPoint, but it helps other members to lower their cost and improve those outcomes and the opportunity for most of them.

Lawrence Marsh – Barclays Capital

Okay. Then finally, specially the argument reporting up to write something like this is kind of confirms that from an external reporting standpoint, George do you think about it as their cost-benefit or an integration benefit of having that all integrated up through one platform versus having a separate report is that one or two benefits here?

George Paz

It is actually. The answer to that is clearly, yes, but it seems more important on the client side. You know when we first bought Sure Script, specialty was thought of as a different animal. And so we want a visitor, with our clients we would bring out two different clinicians to different accounts managers two different teams that would sit at the table and talk to our clients about, one group would talk about managing the traditional businesses and the other traditional drugs and the other group would talk about managing specialty.

Well, at the end of the day, the client really doesn’t care about that. They want to mange overall drug trends, while optimizing those health care outcomes, which means that the account mangers, your specialist of the field that are dealing with that client on a day-to-day basis has to have a knowledge of you know of all the drugs, including its specialty products. So, we worked very hard to make sure that our team is well positioned. Now when you get into the maybe a sinker season the complexities of the specialty products, we still call upon.

So, if a client has a special area whether it is causing them a lot of money or a high prevalence of a certain drug type, we will bring our specialties, but they will be under the direction of that account management team in our standalone unit. So, and then reporting is also very important providing consolidated reporting back to the clients they can proceed the whole picture and understand what is taking place. Keep in mind more than 95% of all the people on the specialty product are also on an oral solid. So again combining the programs to manage the overall drug outcome for that member is critically important and that was the idea behind the consolidation.

Lawrence Marsh – Barclays Capital

Okay, very good, thank you.

Operator

Thank you.

George Paz

Well we will have just one more question please.

Operator

Alright. And our next question will come from the line of Lisa Gill of JPMorgan. Please go ahead.

Lisa Gill – JPMorgan

Thanks very much and good morning. George, can you just talk about any mid-year plan design changes that you are seeing, just a little surprise there that you haven't really talked about the economic environment and what it means for your clients and obviously I think that the increase in mail is maybe partially due to the programs you have, but do you think any of it has to do with the overall economic environment, one. And then two, Jeff just your comment about this year being a lower renewal year, is that because you are having some contracts that are more than three years in length, if you could just give us any additional thoughts on that.

George Paz

Well, you know that obviously the economic environment is not a pleasant situation, many of my peers and my friends in the industry are facing very difficult times and we try work very closely to meet their needs. I tell you, I have been at this for a lot of years and I have seen a lot of economic turns, never gone to the extent that we are in today. But at the end of the day, you know when things are tough, we see that through the utilization numbers and I refer to that earlier when we see utilization trends of 0% to 1% that is not historic. And so clearly that is having an impact on our business, but to your point Lisa, I think we are seeing more than offsetting that decline in trend and more than offsetting, you know the lay off of employees is that those people that really do need the drugs are really need the out reach of reaching for the lower cost alternatives.

Our client sponsors are, a lot of them have already gone to mandatory generic programs where they have haven't really put in multiples or multitudes of step therapy programs. We have many, many clients that are running a whole suite with 14 different step therapy programs because they understand the value of the generics and the value of monitoring these in terms of overall health outcomes. In mail you are exactly right, even though our script counts were slightly, just slightly up for the year, mail orders have been up you know 6% had we not have the two clients leave us. Mail only clients and so clients are in fact allowing us to get more engaged with their membership to drive to the mail to take more of the cost out of the equation.

So, I think it is tough economic times, but the beauty of our model of alignment of making money as we save our clients money really does at the end of the day, drive the results you are seeing. You know Jeff talked about it earlier, but we are giving guidance on a 20% growth and that is all coming from or predominantly coming from earnings that will that I guess in their present capital structure on the interest side, but the majority of that is all earnings driven, which is the testament back to the model in coming out of the core. So, you know I do think it’s our tools are more important than ever to meet the needs of business supplies.

Lisa Gill – JPMorgan

And do you have any mid-year kind of planned design changes George that will potentially see and acceleration in the back half of the year or primarily you thought for January 1?

George Paz

You know, one of the things that we have done Lisa is we understand that clients can’t just be tied to certain points of the clients try to get savings because their business may nor allow for that. The economic challenges that they face, necessarily we can’t wait six months to have a solution. So, it seems like our select home delivery program we can put that in for a client tomorrow and it can just rollout because it has not a benefit design change. Dr. Miller watches our clinicians in developing step therapy programs and other things that don't require necessary benefit design changes we can implement and roll those things out.

So, ineffectively, we are shutting down formulary changes without actually drilling at where you have to file a paper work and do all the notifications. So, there is a – I do think our focus is not focusing on 7:1, but rolling out programs that matter today that can be administered today that can impact the behavior of the members today and drive the cost savings needed for our clients today.

Lisa Gill – JPMorgan

Great. And then, Jeff, any thoughts around, your comments around this year being unusually low as far as I mean earlier?

Jeff Hall

The way to think about it is we have two large clients that are not on three year contract. First the department of defense, which is approximately 20% plus of our script and the way – that is fibre contract it starts in late 2009, probably one important point at least for your modeling perspective, the way we look at –- the way we – the current DOD contract, we don't actually, they don’t jubilation in some of other services and the new contract we are going to start doing that in others. The net result of that is that we currently report revenue on a net basis starting in late 2009 when the new contract starts we are going to be recording revenue on a growth basis, which is how we report for the rest of our clients.

The net impact of that is if you see revenue increased by about $8 million in 2010. It doesn’t change margin, it just changes revenue. The other side of that is of course NextRx and DOD is a 500 contract with two – one year expansion. The other is now NextRx, which is as you know a ten year contract, so especially we are about 50 years about 50% of our book, which is now contracted for seven plus years. So, that will leave you with on average of what 15.5%, 17% of our book, which we renew every year.

And my comment was you know this year just the way the contract is falling it is actually a little bit less than that, it is up for renewal. And as George said we are off to a sort of strong start you know we expect to end with that as 95% retention of that less than 16%, 17% is actually up for renewals.

George Paz

I think this was a very important point Jeff just made. There is not a lot of businesses out there that can look to the book of business and understand that 50% of – actually it is a little greater than 50% as you have got a line side to your margins for the next seven to ten years. I mean that is in front of a situation for us and it really does allow us to be pretty bold in our forecasting understanding what the future holds for us.

So, we are really excited and I think the other of this you know in terms of I think that WellPoint will speak to this is that we are at the tip of that, so although we can forecast our margins today based on the underlying business, I think we are both fixated on changing the delivery of health care in this country and coming up with ways to save money and hopefully those savings will materialize in greater opportunities for us. So, we are really excited about what we said.

Lisa Gill – JPMorgan

Great thank you, I really appreciate the comments.

George Paz

Well thanks to everyone. I appreciate you all talking time out of your morning to join us, we are excited about our results, we are excited about where we stand in healthcare reform and what is taking place in America today, I think we have a solution that prove into work, continues to work, and continues to drive our profits into the future. So, thank you all very much and have a great day.

Operator

That does conclude our conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.

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Source: Express Scripts, Inc. Q1 2009 Earnings Call Transcript
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