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Express Scripts (NASDAQ:ESRX)

Q1 2010 Earnings Call

April 29, 2010 10:00 am ET

Executives

David Myers - Vice President of Investor Relations

Jeffrey Hall - Chief Financial Officer and Executive Vice President

George Paz - Chairman, Chief Executive Officer and President

Analysts

Ricky Goldwasser - Morgan Stanley

Thomas Gallucci - Lazard Capital Markets LLC

Robert Willoughby

Lisa Gill - JP Morgan Chase & Co

Ross Muken - Deutsche Bank AG

Lawrence Marsh - Barclays Capital

John Kreger - William Blair & Company L.L.C.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2010 Earnings Conference Call. [Operator Instructions] I now like to turn the call over to the Vice President of Investor Relations, David Myers.

David Myers

Thank you, and good morning, everyone. Welcome to our First Quarter Conference Call. With me today 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 and may include, but are not necessarily limited to, financial projections or other statements of 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 statement due to a variety of factors, which are discussed in detail in our SEC reports.

For clarity purposes, all numbers we talk about today will be on an adjusted basis. Please refer to the tables on our press release for reconciliation of GAAP to the adjusted numbers we will be discussing. The reconciliation of EBITDA to net income can also be found in our earnings release. Earnings release is posted on our website.

Now at this point, I'll turn the call over to Jeff, who'll discuss our first quarter financial results.

Jeffrey Hall

Thank you, David. Yesterday, we reported solid first quarter EPS of $1.10, which represents an increase of 25% over last year. Other highlights in the quarter were EBITDA per Rx at $2.92, the high end of our guidance range for the quarter. Cash flows from operations was strong at $761 million, up 166% from the prior year. We made significant progress with the implementation of NextRx live and now have more than 15% integrated onto our system. And we raised the low end and midpoint of our EPS guidance range for the year.

Last year, we indicated that our focus for uses of cash in the first half of the year would be the $1.3 billion of 2010 debt maturity. This is still our primary focus. However, as a result of strong cash flow, which includes $25.7 million from our 338(h)(10) election for NextRx, we were able to repurchase 2.2 million shares and repay $180 million of debt in the quarter. We still expect cash from operations for the year to be more than $2 billion.

Our Q1 results reflected a full quarter of both NextRx, which closed on December 1, and the new DoD contract, which was implemented on November 4. As you know, we began recording DoD revenues on a gross basis which increased revenues and cost of revenues by $2 billion in the quarter.

Gross profit dollars increased 35% from last year. However, as a result of the change in DoD revenue and the addition of the NextRx business, gross profit margin declined to 6.4% from 9.8%. As we continue to make progress executing our integration plan, we expect gross profit margin to increase sequentially.

During the quarter, our focus is on the successful start up of our new clients, including NextRx, which resulted in a higher level of spending charged to cost of goods sold. As a result of this focus, we also spent less on SG&A projects than we were in subsequent quarters. We continue to expect that SG&A, excluding charges and amortization, will be $865 million to $881 million for the year.

As a result of our performance so far this year, we're now expecting earnings per share, excluding transaction-related charges and amortization, to be in the range of $4.85 to $5. This range represents a growth of 23% to 27% over 2009, excluding three closed financing costs last year.

After our call last quarter, we realized that while EPS and EBITDA estimates were in line with our guidance, many of the details were not. As a result, mid-quarter, we provided specific guidance for several line items, including revenue and SG&A. We provide the details on our IR website. Please consider our detailed guidance as updated[ph], as you adjust your model for the remainder of the year.

As the year progresses, you will see us rationalize our footprint, eliminate redundancies, implement more eyes [ph] onto our system and realize synergies as we made progress towards delivering to more than $1 billion in incremental EBITDA we expect to achieve in the NextRx transaction.

And with that, I'll turn it over to George.

George Paz

Thank you, Jeff. Good morning, everyone. In addition to solid financial performance, we've been successful on a number of fronts this year. Earlier this month, we successfully integrated the first major group of NextRx slides onto our platforms. This migration represented over 15% of total membership.

Our focus on integration is continuing. This will allow us to provide Express Scripts high level of services and tools to NextRx patients and clients. In turn, this will help WellPoint maintain and grow its business.

Last week, we held our outcomes conference in St. Louis and simultaneously released our industry-leading Drug Trend Report. The Drug Trend Report quantifies and analyzes the underlying factors that influence prescription spending patterns in the United States.

Following several years of declines, overall drug trend increased to 6.4%. Traditional PBM trend was 4.8%, while specialty trend was 19.5%. These trends were mainly driven by branded-drug price inflation of 9.1% on the traditional side and 11.5% on the specialty side.

Of course, those clients can actively take advantage of our tools, can drive their drug trends to zero or below. In order to come back to these increasing trends, we are pleased that healthcare reform legislation has empowered the FDA to establish a regulatory pathway for the approval of biogenerics. The availability of these lower cost drugs will significantly change the industry landscape and provide opportunities to leverage our expertise in innovative ways.

This year in our Drug Trend Report, we reported that a strong influence or a drug trend is patient behavior. As a result, our Drug Trend Report includes a first time analysis of pharmacy-related behaviors that if optimized, could eliminate $163 billion in annual pharmacy-related waste resulting from non-adherence, drug mix and distribution channel. Over the next 10 years, over $2 trillion could be saved by better management of prescription drug trend.

These findings could never be more timely or relevant. The message from our clients is loud and clear. In these economic times, they're willing to try new strategies to garner lower costs, optimize health outcomes and reduce member disruption.

Fortunately, we have a solution for their dilemma. And that is the application of proven programs that leverage our behavior-centric approach. The power of these programs is that they are voluntary, at the member level, but effective in encouraging the optimum clinical behavior. This means driving greater therapy adherence, greater use of generics and clinically equivalent lower-cost brands and increasing usage of home delivery.

Much of our success over the years has been attributable to our business model alignment. That is, if we save our clients and patients money, our performance improves. For example, last year, Express Scripts clients saved $1.4 billion from greater use of lower-cost brands and generics. The work with our clients in addressing patient behavior drove approximately $790 million of these savings over and above market factors, such as branded patent expirations.

Our world-class clinical tools powered by our behavior-centric approach is resonating in the marketplace. Since it is still early in the sales season, we will update you on our sales results later this year.

At this point, we'll be happy to answer any questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question today will come from the line of Larry Marsh with Barclays Capital.

Lawrence Marsh - Barclays Capital

One is, it seems like a key part of the strategy besides integrating NextRx is to continue to drive value to your customers, extending [ph] base of business. I guess my question is, how would you and Ed and his team defend any sort of efforts of aggressive pricing in the marketplace? And what are you guys hearing so far in your best and finals in terms of customer concerns or feedback around pricing?

George Paz

I think that every year, pricing is an issue for us, only because of the dynamics of our industry. When you think about what happens in our industry, is we just talk about high drug trends, inflation rates that are growing at very fast rates. So think about a static situation. In a static situation, you don't have a lot of moving parts, and so price is easier to look at. But when you have drug prices that are growing at 9%, 10%, 11%, spending of your traditional or your specialties, and you got drugs losing patent protection, you got generics, some of which are steady, some which might have a slight increase, some of them are actually declining. This is a very dynamic pricing metric with thousands and thousands of price points. And then on top of all that, we got our pricing tools. As I tell Ed and I tell our sales team and when I have a chance to talk to our clients, pricing is clearly an important component of our business. It's important piece of any business. I really don't believe though that our business is commoditized. I think that there are -- at the end of the day, it's the relationships, similar to most of your businesses where you're dealing with investors. You have to show your rates of return and you have to have the relationships, the tool and everything that helps sell your business to your clients. We have to have the same thing in our business. We have to have good account managers. We have to have clinicians that are leading edge are going after the client and discussing changes that are taking place in the marketplace and giving them options to understand the market. Our account management team has to understand the predicament or the opportunities that sit in front of our clients to understand labor contracts, changing market dynamics, the financial straits of any given corporation to understand what opportunities may exist. And then all that, once we create the strategy, is that how do you implement that strategy. And that's where consumerology kicks in. So it's not just trying to push a step therapy onto a target bunch of individuals. But instead, try to get those individuals to resonate with the message to take control of their spend and become part of the solution, as opposed to part of the problem. So I think there's a lot more to our business than pricing. Also keep in mind that not all clients were going to resonate with any given PBM. Our whole approach is around the consumer-centric side. That resonates with a lot of companies. Some companies aren't necessarily going to take that approach, and they're going to go to one of my competitors. Obviously, some of my competitors have different approaches, that's going to resonate with other clients. So I do think that as we look at the pricing environment, and you've heard me say this since 1998, every year is a tough year. Every year, we have to look at what's taking place in the marketplace and meet the needs. I'm a very competitive person. I hate to lose. But also to be smart enough not to win, if it's not right for business. If, in fact, a client is looking to go a direction that our business isn't equipped to do, in other words they're not going to promote generics, they don't want to promote mail, they don't want to put in ant kind of programs. They want to put in programs that don't line up with our formulary. Those are not clients we need to win. And keep in mind, that clients are on static either. Clients have changes in their HR department. A new person comes income that came from a different company of a new approach, and they want to shake up the company. They want to put a different type of formulary. And if it doesn't line up with our programs, we may lose that client. At the end of the day, I don't like losing clients. But if we lose it for the right reasons, then you move on. And I think every time we win or lose a major account, we just don't sale, good or bad. We sit down and we analyze what took place and try to make sure we stay competitive in the market. Pricing is just one factor that goes into the overall decision on how wide a PBM is selected.

Lawrence Marsh - Barclays Capital

George, and so is it -- from where you said here early in the selling season, it sounds like you're saying -- are you seeing any difference in pricing behavior in the marketplace? Or based on what you said, is pricing always a conversation in these meetings?

George Paz

Well, I wish I could go get the tape from 1998. I think I said the same thing. It's extremely competitive market, it's always been extremely competitive because we're not selling to individuals, we're selling to businesses. Businesses are sophisticated. They're good purchasers. And so what we've got do is we got to resonate that our tools can drive down costs. I said this many time over the years, you can take an extra dime or quarter out of me, But that's a fraction of the savings. If you really want to save money, let's convert 10% from retail to mail. Let's convert a 3% increase in generics. Let's drive people to lower-cost brands if you have a high three-tier element. Let's start eliminating drugs off the formulary and getting it more focused, driving up rebates, driving up the use of low-cost brands. All those tools are going to dwarf whatever the price point is. Take my total profit and divide it by my total scripts, do the same thing for my other two biggest competitors and for the other players in the industry, there's not enough money there at the end of the day to make the big changes. The money to be made is in how you affect drug trends, and we do that through the behavioral approach. If I can go in, if the clients looking for another $0.50 of script off, but that I can drive a dollar off by influencing those behaviors with the right programs and the right outcomes, I'm a hero. And that's our job of our account management team is to be that hero for every one of those clients.

Lawrence Marsh - Barclays Capital

George, you guys are, I guess, very aggressive in 2005 in getting in front of Zocor to really promote the brand savings into simvastatin. Are there other opportunities to be creative or innovative coming into the Lipitor cliff here at the end of 11? Or is this story still too early to communicate any kind of programs?

George Paz

No, I think that's a great question. As you know, Larry, what ends up happening as drug starts to lose their patent protection, typically, they're not supported by the manufacturers. So you see there's a whole lot of erosion in market share that can take place in the year leading up to the loss of the patent. So our job is to make sure the clients understand why that erosion is taking place. Sometimes other competing products can increase rebate offers to drive behavior or do more advertising and more detailing. Our job is to give the clients their alternatives and let them decide, do they one first year economic benefits of driving to a different position, or do they want to maintain their share and get a higher pull-through on the generic when it grows. I think, again, this isn't one-size-fits-all. We've got thousands and thousands of clients in our account management team working with Dr. Miller, our Chief Medical Officer, is to go out and design the programs that make the most sense for each and every client, to meet the needs of that client.

Operator

Our next question will come from the line of Lisa Gill with JPMorgan.

Lisa Gill - JP Morgan Chase & Co

George, I just had a couple of questions around Select Home Delivery. Can you just give us some thoughts around what you're hearing in the marketplace and what the opportunities are? I know you said that it's early for 2011, but my guess would be that you're out and you're making presentations. And I'm just wondering, what you're seeing as far as interest and uptake around that program. And then secondly, on the specialty side, maybe can you quantify the opportunity in your book of business? Can you maybe give us a percentage of your PBM customers that are using your specialty business today, and what the potential opportunities are?

George Paz

Sure. That's a very, very popular program. We're seeing -- if you look at same-store sales, we're up about 7%, thereabouts, in mission [ph]trends. And keep in mind, that a lot of these clients are just kicking off. So they're hitting their first block at retail. Obviously, they can opt out of that block but this is -- so it's very early on. And we're seeing some very nice pull-through again on a same-store basis. We got over 200 clients that have selected the program and seeing some very strong results. Now keep in mind, that a client is already at 40%, the pick up is going to be not nearly as great as the client that's at 5%. So the results vary by client. But still the impact, the movement of 1% or 2% is still pretty significant, especially in tough economic times. So I think the program is working very well for us. And I think what the clients like most is when we come in and we put -- it's dependent, again, on a client. If a client has a tough situation and they need immediate savings fast, then they can put in exclusive home delivery. And then obviously, they get the bump right away. They may not have a choice, they may need to do that in order to garner the savings. But where there is a choice, they can, in fact, put in Select Home Delivery and get almost to the same level of results, not quite, but they can get fairly close by just letting our teams use consumerology to drive. What we see in a couple of clients is that they've actually put in Select Home Delivery, they've ran that for a while, they took a couple of cases, they took it from low teens, up to the high 30s percent penetration rates. And then they put in exclusive home delivery because at that point, they've converted so many [indiscernible] to mail, that the next step was then just to go ahead and get the rest of them, maximize the savings, and it was already a very widely accepted benefit inside the company. So it can be -- Select Home Delivery can either be a stand-alone product or it can be a stepping stone to exclusive home delivery. So it's what the client needs in their timing. As far as specialty goes, specialty has been one of our bright spots. We don't break it out any longer, because we really do believe it's just one of our tools to battle overall drug trends. But this year has been an incredible year for us, an exclusive in specialty. We've seen margin expansion. We've seen significant increase in the number of prescriptions in this area. And so we're really excited about our specialty offering today.

Lisa Gill - JP Morgan Chase & Co

Can you give us an idea though of how penetrated your book is? And how big that opportunity remains around specialty to fully penetrate specialty and your PBM book of business? Do you have a number around that?

George Paz

There's two pieces to this. One is, how much do we penetrate into our existing book. And then the other piece is, this is clearly the fastest-growing area of PBM. So those are two -- I'm not trying to avoid your question. I just don't have a number off the top of my head. I'm not exactly sure I know what the penetration rate on my clients is today. So I'll have to try to get that for you.

Lisa Gill - JP Morgan Chase & Co

But I think it would be fair to say, George, right, that there's still a lot of runway here, that there's still a lot of opportunity around Specialty?

George Paz

Absolutely.

Jeffrey Hall

Absolutely, Lisa. There's lots of room to run in this space where, as George said, we've seen very nice growth. And we think there's lots of opportunity over the coming years, to really grow this business and grow it nicely. This is a huge area spend for our clients. This is an area where you can really help and save a lot of money. And we think we have unique offering in this space, and we're going to see this grow our business.

George Paz

The other side to that, just to pile on. I think that when you think about behaviors, this is an area that's ripe for this, and that we're going to see a massive opportunity when you think about Consumerology. The side effect profile, the results that these disease have on a given family can be devastating. And so being able to message both the doctors, the patients, the nurses, all that's up and down in that ladder, are incredibly important. And as biogenerics come into this marketplace, it's going to be very important that we're out in front of that, because once somebody gets them that first fill, it's going to be hard to get them to change if they stabilize. So giving the information to the doctors, they know what the options are, are very, very important. So this is a big, big thing for us.

Lisa Gill - JP Morgan Chase & Co

Jeff, you talked about gross profit and you talked about it improving throughout the year. Can you just help us understand this. Is it the incremental cost of employees that you had in COGS for implementation and integration that will go away? Or is there other key drivers that will drive gross profit as we move throughout the year?

Jeffrey Hall

Yes and yes, is the simple answer. Certainly, the implementation efforts have increased cost of goods sold in the first quarter, and that will trend down over time as we move through the year. But we've also got a lot of programs that's got a large acquisition that we're in the process of implementing on. We've got an operations team here, which is focused on continuous improvement and they're going to keep driving down costs. And we're just going to keep executing. And I mean, you'd heard us say this time and time again, we are focused on alignment. We make money when our clients make money, and we are going to keep doing everything we can using all of our Consumerology tools to save our clients' money. And as we do that, we'd see margin grow.

Operator

Next, we'll go to line of Bob Willoughby with Bank of America.

Robert Willoughby

How much did the base business grow? And can you remind us what you have for start-ups as of July 1, if anything? And then secondarily, is it possible to say in any way, shape or form, of the incremental billion you hope to generate from the WellPoint deal? What you actually saw flow through, what percentage of that might have been apparent in the first quarter?

Jeffrey Hall

Bob, this is Jeff. Let me just say this just upfront. No, I'm not going to answer the second part of your question. And yes I can, and no I'm not going to. We're just not going to break it out. Actually, it's pretty hard to break it out, as it's integrated into the core business. As we think back to -- I'm sorry, I forgot the first part of -- in the core business on a Script basis, we obviously had a good selling season last year, we said. So I think we haven't been precise other than to say that, in the core business, year-over-year, we expect growth in Scripts. And so I'm not going to get a whole lot more detailed than that. But certainly, we think the core business, x WellPoint, certainly was growing.

Robert Willoughby

Is there a July 1 start-up of any consequence or...

Jeffrey Hall

No meaningful July 1. I mean, it certainly doesn't move the numbers from that, I see one way or the other.

George Paz

And we factored those already into our guidance, Bob.

Robert Willoughby

And you've given us a number of line items for guidance, but nothing on your share base. Where do you expect that to be for the year?

Jeffrey Hall

It's really hard to predict share base, so we try to stay out of that game, because it's so dependent on where the share price goes, over the course of the year. When we gave our original guidance, we assumed some kind of de minimis impact from share buybacks, 1% to 2%. We still think that we'll get about 1% to 2% of EPS gain from share buybacks. So I think you can model that in, but that would get you to a place that's probably not meaningfully different than where we are today.

Operator

Our next question is coming from John Kreger with William Blair.

John Kreger - William Blair & Company L.L.C.

George, if you think about the renewal discussions you're having today and maybe contrast them to a year ago, or clearly, in a different economic place broadly, how have those changed? And is your WellPoint combination influencing those discussions? How do clients perceive that?

George Paz

At the end of last year, throughout the third and fourth quarter and even into the first quarter, I think that many clients asked the question, how will WellPoint integration affect us? Will we lose our account manager? Will it change the timeliness of our reporting? Anytime a company goes through a major acquisition, from the client-side, there's always a little bit of noise. And the reason that noise exist, of course, is my competitors are up at their tone [ph]. The noise should exist. And as you know, we've done a lot of these things. And we've grown both organically -- we've grown organically through our acquisitions. So as we've added more and more lives into our business, we've always kept the discipline around selling and around growing the base. And that continues to be our focus. And the best thing that happened to us in the first quarter was the migration of the first tier. Because now the clients can, when they ask the question, "How am I going to be affected?" we say, "Well, how are you affected in the first quarter?" And most of them didn't sense a thing. None of them, to my knowledge, had any concerns, any issues, nothing. It's not only is it operations as normal, it's a continued focus on Consumerology and driving out the waste. And they didn't even know what occurred. And that's the best view of an integration. And I think if you reach out to the consultant community and ask that question, you'll hear that same comment that the integration is going extremely well and that there is not noise on the street.

John Kreger - William Blair & Company L.L.C.

Are you seeing client priorities change at all now that presumably, they are maybe a little less worried about the economic backdrop?

George Paz

Well, I think CEOs and CFOs, at least the ones I know, and I know quite a few, are still very worried about the economic backdrop. A lot of the companies we deal with are global in nature, and you got some issues in Greece and Spain and on and on and on. And I think that companies have to make tough decisions back in the last year in reducing workforce and making cost-cutting moves. The last thing a CEO wants to do to his organization is to have a roller coaster ride. I think it's going to take a little while before employment comes back. I think companies are going to want to make sure that, that light at the end of the tunnel isn't a train, and they're going to make sure that they, in fact, can see their way. So I think the focus today is every business is focused on cost reduction as possible. Keep in mind, that really plays into our sweet spot. We've been out there for 15 years talking about cost constraints around these things that were really better for health outcomes. And we only got so much noise. Over the last couple of years, it's resonated with companies. And now what companies realize is, in fact, they were able to get those cost savings. We didn't impact members unfavorably. We actually improved clients and member satisfaction, and at the same time, reduced cost. So once we got that training in place, with the clients understand they can take out the cost, while not adversely affecting their relationship with their members, that sets the driveway into the coming years. Even as the economy turns, I think the work we did during this last couple of years paves the way, especially to the earlier question about Lipitor, and other drugs that are coming off patent, to really position us nicely to take advantage of those opportunities. And I have to worry about member disruption to the same level.

Operator

Next, we'll go to the line of Ross Muken with Deutsche Bank.

Ross Muken - Deutsche Bank AG

Given sort of the renewed focus on sort of attracting larger clients and what you'd call kind of the marquee accounts, can you talk a bit about the strategy there for this selling season? And what sort have you learned from WellPoint? And how you're using some of the newer parts of the Consumerology offering to kind of use as a differentiator as you attempt to attract those accounts?

George Paz

When we go into this year, we're looking at opportunities again. The opportunities -- there's a lot of opportunities out there, just to be clear. And we would need to find opportunities that resonate with our book of business, as I said earlier. So that's always the first call, is to make sure we can find those clients that want our offerings, that has to accept our approach, and then we can stay focused on the core things we do. So once that occurs and we find them, then I think it goes back to Consumerology and our approach. We love going into a client, and not only signing off on day one, but then selling them Select Home Delivery. In addition to that, our teams are working very hard on other programs, such as step therapies and other similar-type programs, in order to -- limited networks and curtailing are shrinking the size of the formularies. We're doing a lot of different things in using the Consumerology approach to attack those situations. Also, adherence is a major, major driver. As I said in my prepared comments, there's $163 billion, the majority of which is attributable to adherence. That's an opportunity for us to drive down overall healthcare costs. And so that's our approach to the marketplace. That's what we try to get to resonate, not just with marquee clients but any client. We're looking at opportunities in all of the different segments we operate in. And we're trying to drive better cost outcomes for our clients.

Ross Muken - Deutsche Bank AG

And Jeff, on the balance sheet, you have a lot of cash flow that's being generated this year. You're obviously paying down some debt and buying back some shares. But from an M&A standpoint, how are you thinking about sort of the environment? There's a lot of assets right now in the private market. And also, potentially, with the financing environment still being attractive, people are looking at other types of deals. How would you sort of characterize the activity you're seeing on that front?

Jeffrey Hall

Obviously, I'm not going to comment on specific deals. But I think our position, my position, hasn't really changed over the years here. It's pretty simple. We look at opportunities for our cash. And I mean, absolutely you're right, we certainly got a very strong cash flow year, and we have a very strong cash balance. So certainly, as I said in my prepared remarks, first goal is to pay down, pay off the debt that's coming due here in 2010. But even after that, we're left with a very strong cash position. And as we look at that cash position, we say, first off, we want to invest in the projects that are driving this company. We've got a bunch of great people here. They always have great ideas, and we want to invest in those ideas and keep driving our return on invested capital with new ideas. After that comes M&A. Certainly, we've had great experience with good accretive M&A over the life of this business. We're happy with the M&A. We're integrating at the moment with NextRx. And to the extent there are more opportunities out there that we think have the same kind of positive returns, we're anxious and interested at getting them done at the right price and the right terms. But other than that, it's hard to comment on specifics.

Operator

Our next question is coming from the line of Tom Gallucci with Lazard Capital Markets.

Thomas Gallucci - Lazard Capital Markets LLC

I guess on the selling season, as it pertains to WellPoint, you sort of talked about customers wondering how it was going to impact that negatively. What about from a positive standpoint, do you feel like you're positioned any different this year in the selling season for different types of customers, given the bigger scale that you've got? And is there any sort of tangible evidence of that at this point?

George Paz

Ed Ignaczak and his team is really focused on integrating our approach and our sales into the WellPoint approach. I think when you look at our website, when you look at our tools and what we can do, it's significantly better than what NextRx has to offer today. So we're trying to integrate our sales approaches and we're holding sessions with the NextRx people to update them on how to sell PBM, and how to approach the marketplace, how to be better at it. As I've told my counterpart over at WellPoint, our view is, I would prefer to grow through them as to grow directly. It's a tremendous opportunity for us to combine our forces in order to grow our joint book of business. And we are absolutely fixated on that, and it's a great approach to the marketplace. So yes, I think the real value, though, is still a couple of years out. I shouldn't say a couple years, it's probably more than a year though. And that is to really get an integrated approach to the marketplace on the overall medical and drug lab, the whole spectrum of care brought together. And I know WellPoint is absolutely fixated on that, as well as we are, to change the way healthcare is delivered in this country, and really to start taking costs out of the equation in order to meet the needs of the country. So that's something we are continuously working on. We both have set up working groups to focus on that as we go forward, and it will stay one of our priorities. And once we get to the integration, we'll keep you updated on what we're doing here. And I think we're just going to have a great offering in the future.

Thomas Gallucci - Lazard Capital Markets LLC

On Select Home Delivery, are you seeing any concentration of particular types of customers that are interested in that, ones that already have a lot a mail or don't, or employers versus health plans?

George Paz

It's been mostly on the employer side, initially, but now we've got several health plan clients that have actually rolled it out this year. So we're seeing it on both sides. I would tell you that it's also across-the-board. We've had clients with very little mail penetration and has seen significant increases in mail penetration through the programs. We've also had clients that had high penetrations. But as you know, as with an aging population, more and more people are going into maintenance medications. And this is a good way to capture those new users of prescription drugs, and convert them over to mail in a timely fashion to continue to drive down costs. So we're seeing it across the spectrum. Probably still today, more on the employer side than anywhere else, but it is across-the-board.

Thomas Gallucci - Lazard Capital Markets LLC

You've sort of looked at the Medicare PDP, your own Medicare PDP, a little bit differently than your competitors the last couple of years. And now with sort of the way reform looks, are you thinking about that any differently? Or how should we be thinking about what you're going to do with that over the next few years?

George Paz

From my perspective, and I think I've been saying this for quite some time, is that I don't think Express Scripts is a household name. So to compete in the individual market on our margins, I just don't think we have a very good offering. I don't have the money that Coca-Cola, Anheuser-Busch InBev, whatever, has these, Procter & Gamble, to spend to go after the consumer marketplace. Our best answer is, we've got great partners with WellPoint and many other brewers plants [ph] and clients that are household names in their marketplace. I would rather partner up with them and have an offering that's recognized in their given geographic area, and go in and try to sell the individual business through them, and give them the tools that they need to be successful. And we grow as they grow. That's always been our strategy. And I think it's a great strategy for them as they pick up the medical side, and it's a great strategy for us when we pick up the drug side. I think if, in fact, you see -- we will see a growth there with the 30 million people coming to the market. How many of those people want to carve out medical from drug at that point. That's a big question. But I think our clients are well positioned to gain their share of the overall comprehensive medical and drug side. And so when they lay in those clients, we'll pick up the drug side through them, which is the best of all answers. So I like where we're positioned. That didn't happen by accident. We focused on this approach, and I'm very pleased with where we sit.

Operator

That question will come from the line of Ricky Goldwasser with Morgan Stanley.

Ricky Goldwasser - Morgan Stanley

First, I think you said that 15% of lives were migrated by April 1. What percent of lives do you expect to migrate by the end of the second quarter? And then, if you can give us some more color on what percent of year-over-year change in gross profit is from DoD reallocation?

George Paz

Well, a couple of things. We're not going to get in to projecting migration, and it's not really all that relevant at the end of the day. The idea is we have to get the first one done. When you do the first one, you learn so much about the different operating platforms and the people. And so the idea is, you get the first one done, and then the other ones come in line. So we haven't laid out a schedule. We said we'd get this done in 12 to 18 months. We're still very comfortable with that approach, and that's what we're going to focus on. We'll give you updates each quarter as we progress. One of the things we have been focused on, though, is making sure that those areas that drive the highest level of synergies are first and foremost in our integration plans. So we're going after those as quickly as we can. Secondly, as far as client specifics, we don't discuss gross profits or profitability on any given client. So I really can't get into that.

Ricky Goldwasser - Morgan Stanley

I mean, I guess the question is not really on profitability. There's just been a change, kind of like reallocating in that contract?

George Paz

Well, the contract changed. We now do a lot more things, which by definition, means it's more profitable for us. And we also, because we adjudicate the claims and do many other elements of it, we gross up the numbers into revenue. But I don't want to get into specific clients. We just don't do that.

Well, again, I thank everyone for listening in to our call today. We appreciate your confidence in us. And we look forward to the integration of NextRx. We think great things are ahead of us, and we look forward to talking to you again next quarter. Thank you very much. Have a great day.

Operator

With that, ladies and gentlemen, that does conclude our conference for today. Thank you very much for your participation, and for using AT&T Teleconferencing. You may now disconnect.

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