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Express Scripts (NASDAQ:ESRX) reported accelerating earnings growth while generic penetration jumped 200 basis points. This was completely ignored as the coming changes to the AWP benchmark (national average of list prices charged by wholesalers to pharmacies) dominated investors' thinking. I think the fears may be a bit too exaggerated. Notes from the earnings report:

* "Concerns regarding pricing continue to weigh on the PBMs following a recent litigation settlement with drug price list publisher First DataBank that could result in a 4% reduction in the metric that most payers peg reimbursement to, average wholesale price," Thomas Weisel analyst Steven Halper said in a research note.

* In the quarter, Express Scripts' generic penetration rate grew to a record 58.3%, up 200 basis points sequentially and a staggering 380 basis points higher than the prior year. This quicker than expected growth in generic penetration paired with the an increase in mail order provided Express Scripts with a strong EBITDA of $229.5 million, a 27% increase YoY.

* Amid accelerating earnings, Express Scripts’ third quarter report was clouded by management’s reluctance to give clear insight regarding potential changes to AWP and the PBM pricing structure.

* ESRX's volume was down for the quarter, with total adjusted claims of 125.1 million, compared to 129.5 million adjusted scripts in 06. ESRX's shift away from retail claims continued, with retail volume of 93.2 million, a 3.8% sequential decline and an 11.7% decrease over the prior year.

* The integration of the specialty acquisition is a bit behind schedule. Tougher implementation than anticipated slowed earnings and included a one-time bad debt charge of $4m.

* Overall PBM operations ran smoothly with accelerating generic penetration producing accelerating earnings. The specialty business underperformed in the quarter as integration fell behind.

* ESRX's gross profitability once again rose. 3Q06 gross margin was 8.64%, a 48 basis point sequential rise and 102 basis points higher than the prior year. Gross margin benefited from increased generic and specialty utilization, lower retail volumes, and increased home delivery.

Source: Express Scripts: Pricing Concerns Weighing on Stock, But Overdone?