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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

Lisa Gill - JP Morgan Chase & Co

Ross Muken - Deutsche Bank AG

Ricky Goldwasser - Morgan Stanley

Steven Valiquette - UBS Investment Bank

Garen Sarafian - Citigroup Inc

Robert Willoughby

Lawrence Marsh - Barclays Capital

Thomas Gallucci - Lazard Capital Markets LLC

Express Scripts (ESRX) Q3 2010 Earnings Call October 28, 2010 9:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Express Scripts Third Quarter 2010 Earnings Call. [Operator Instructions] Now with that being said, I'll turn the conference now to the Vice President of Investor Relations, Mr. David Myers.

David Myers

Thank you, and good morning, everyone. With me today are George Paz, our Chairman and 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 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 filings with the SEC.

For clarity purposes, all numbers we talk about today will be on an adjusted basis. Please refer to the tables in 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. The earnings release is posted on our website.

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

Jeffrey Hall

Thank you, David. Today, we are pleased to report another record quarter and provide guidance for 2011. Our strong results and outlook for the future are the result of our differentiated strategy. Our business model of alignment, enabled by our behavior-centric approach, supported by market-leading technology and service levels. Our execution of this strategy helps our clients and patients drive out wasteful spending, which in turn helps us continue to deliver superior returns to our stockholders.

Third quarter earnings per share reached a record of $0.65, up 55% over last year. The majority of these growth came from EBITDA, which grew at 45% over last year and 5% sequentially. During the quarter, we made significant progress executing our integration plans. We have now transitioned 90% of the WellPoint Live to our IT platform, and expect to complete the final migration of Live at year end. This will position us to finish the integration, retire the NextRx system and rationalize our operational footprint in the first quarter.

Metrics for the quarter were strong and reflect our integration progress. Adjusted claims grew at 48% to $186.9 million. Total operating expenses were in line with our expectations, although the mix of expenses is weighted more towards cost of goods sold and forecasted through the excess capacity that remains in the system today. Despite this excess capacity, gross profit improved to 7.2%, up 30 basis points sequentially. We expect gross profit margin will continue to improve as the underlying fundamentals of our business continue to improve, the completion of the integration and the optimization of capacity.

EBITDA for adjusted Rx reached $3.30, up sequentially from $3.10 last quarter, and year-to-date cash flow from operations increased 99% to $1.8 billion. During the quarter, we repurchased 16.4 million shares and repaid the remaining balance of our term loan. Based on these results and our positive outlook for the remainder of the year, we have narrowed our 2010 EPS guidance range to $2.48 to $2.50. This represents growth of 26% to 27% over 2009 on an adjusted basis.

Moving on to 2011 guidance, we expect that 2011 EPS will be in the range of $3.15 to $3.25, representing growth of 27% to 31% over 2010. We are confident we will complete the integration and achieve our synergy targets in the year. And as a result, our 2011 guidance include $1 billion of incremental EBITDA.

Since the acquisition will be fully integrated next year and our guidance includes the achievement of synergy targets, and keeping with our long-standing practice of not commenting on specific clients, we will no longer discuss WellPoint-specific results.

Cash flow from operations is expected to be between $2.2 billion and $2.4 billion. We see a lot of exciting opportunities, and our EPS guidance include significant investments in 2011. In addition to these significant investments flowing through our P&L, we also expect to spend $140 million to $170 million in capital investments in the year.

We are pleased with how our team has executed in 2010 and look forward to continuing to deliver strong performance in 2011 and beyond.

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

George Paz

Thank you, Jeff, and good morning, everyone. Since our inception, we have been focused on alignment and our ability to innovate and execute. These qualities are as strong as ever, and we are now deploying new capabilities enabled by our groundbreaking work in Consumerology. This week, we had our National Accounts Advisory Board meeting. Annually, we hold this meeting to bring in our diverse set of our National Account clients to get input on market conditions, medical trends and our pipeline of new products. At this meeting, I gathered feedback from many of our clients. They are overwhelmingly pleased with our ability to drive out wasteful spending while improving health outcomes, with high levels of member satisfaction.

The NextRx acquisition is another good example of innovation and execution at work. We closed the transaction just 11 months ago. And through the focused effort of both companies, the migration of Live is nearing completion. The transition of Live was seamless and efficient with very little noise or disruption. As Jeff mentioned, we now consider NextRx part of our core business. Completing the critical migration so quickly is important so that we can focus on the potential of this strategic alliance. It will open new horizons for improving outcomes for members while driving all [ph] down our overall health care costs.

As the selling season winds down, let me summarize the results. As we pointed out last quarter, we saw high retention rates for signature accounts. Notwithstanding the stickiness in the marketplace, we won three signature accounts and again, grew our share in the middle market. Even with the client losses discussed last quarter, we expect the retention to exceed 95%. Based on our new sales activities and retention rate, we expect claims to be flat to up 4% for 2011. Our 2011 guidance not only provides strong earnings growth, it also provides for significant investments designed to keep us ahead of the competition in the evolving healthcare landscape. These projects include preparation for EBIT changes, Medicare regulations and healthcare reform. We are investing in opportunities to continue to differentiate ourselves in the marketplace by creating new products and services that meet and exceed the needs of tomorrow's marketplace.

In addition to the investments in our Consumerology platform, I'm particularly excited about two specific initiatives. First, we are investing heavily in our next-generation specialty offering that will be rolled out next year. This offering will enhance our ability manage the cost and quality, especially drug care. Part of the programs in this area had been enthusiastically endorsed by clients for their ability to drive out significant ways to the specially drug spend, the fastest-growing area of pharmaceutical costs. Second, we're tackling the issue of non-adherence by making significant investments in our predictive modeling capabilities. Through these efforts, we are able to identify in advance, those patients that are unlikely to adhere to medication therapies. We then intervene and customize ways to improve adherence. Although early, we are seeing significant improvements in medication adherence in our pilot programs.

Our core business is strong, and we are positive on the underlying trends and opportunities in our space. This is why we are investing to position ourselves for a long-term growth. Our ability to manage trend, coupled with our behavior-centric approach, will drive out ways for clients, improve health outcomes for patients and deliver strong earnings growth for our stockholders.

At this point, I'd like to open it up to questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] First in line is Tom Gallucci with Lazard Capital Markets.

Thomas Gallucci - Lazard Capital Markets LLC

First, just wondering, you sort of mentioned significant investments within the 2011 expectations. Is there any way you can frame or quantify the magnitude of what we're looking at here?

George Paz

I can let Jeff chime in on that as well, but as you probably know, CMS, before healthcare reform was ultimately passed, and certainly, quickly thereafter, continued to issue more and more guidance. There was a lot of uncertainty and ambiguity in the Medicare provisions that exist. And so CMS has been very proactive in trying to get guidance out to the providers and to the insurance companies. And so as that guidance has come down, there's two ways you can approach this. We can do the minimum and make sure we hit that guidance so we can think about how we want to position ourselves in an evolving world and make sure that we can, not only meet the guidance requirements, but be ahead of the game with respect to new product innovation and meet the needs of that guidance may imply with respect to the needs of our clients and patients. So our IT and operational departments and our sales and comm management product development all work in unison to both meet the guidance requirements, as well as drive new product innovation. That, coupled with all the requirements from HIPAA, HITECH, we had DIDAD coming through, which is the new standard by which everyone has to be geared up for by 2012, in order to handle the ingredient components of compounds and expands fields. There's a tremendous amount of work that has to take place. Again, it's not just meeting those needs, but making sure that we meet them better than the competition and use it for new product innovation. Those have to go hand-in-hand. And of course, there's healthcare reform. So quite frankly, I don't want to get into the specifics but we don't want to give guidance by line items on our financials. But I will tell you that our investments in technology and operations and product development have significantly improved. They were quite a bit higher in 2010 as the year ramped out. And then in 2011, we expect continued increases. When we give our -- you often asked us how we feel about the deployment of our capital. And one of the things we say is we always like to invest in ourself first. I think that's critically important because I don't know what else gets better returns than investing in our own business. And as we look at this, that's exactly what we're doing. We're investing in ourself. Well, we invest in ourself, either it has to come through to two places, either it has to come through expenses or it has come through capital investments, depending on the type of project it is, and that's what you're seeing in the guidance we're giving.

Operator

And next with Larry Marsh with Barclays Capital.

Lawrence Marsh - Barclays Capital

First on new business, George, your model's a little bit different. You're really focused on driving value to your customers and shareholders, you're focused on EBITDA and earnings, not necessarily winning new business. But obviously, over time, you got to balance the two. As we think about the next couple of years, how do we think about the opportunity for you to take share? Do you think of it that way, where would you gain share? And then how do you think of Medi in that sort of balance between margin and new business?

George Paz

Only challenged a little bit, Larry, first of all. I think if it was a stagnant world and you are selling just automobiles. You have to always worry about how do I sell the next car. Keep in mind that we have a totally different dynamic that's occurring in our market spot. We have an under-penetration of mail, we have people that aren't fully utilizing specialty drugs, the fastest-growing part of healthcare cost in the drug space, not being properly utilized and not being properly adhere to. And then we've got members aging, the baby booms getting older, people are moving through that pipeline and becoming older. And as they do, they take more prescriptions. We see in 2014, 30 plus million more people entering into the market. So there's a whole lot of things going on. So the question you have to ask yourself is where should the company's focus be? Should it be coming up with innovative product to drive mail, generic utilization, to drive specialty cost out that all these things add value to our clients, improve health outcomes for our members and drive shareholder value, or do you want to grow new business for the sake of new business growth? What gives you the biggest returns? I've said on many, many, many calls that part of a great client-company relationship has to have built into it a common desire to meet the needs of the marketplace. There are certain clients that want to do things that don't align with our model. Those aren't good clients for us. Adding those clients would be a detraction of our call center associates, our operational associates, our account management as they're trying to conform a square peg into a round hole. Our focus has to be around growing share value and you do that through ROIC. That doesn't mean we can shrink the business over time, but what it means is we have to be disciplined about that business. We need clients that are concerned about their drug costs and spend and the improvement of health outcomes for their individuals. When we align those desires and needs with the products we have to offer and our approach, we have a marriage that works quite happily. And that's what we look for, Larry. So I think we can continue to grow EBITDA, we can continue to grow our profits without getting crazy in the marketplace by just competing on the clients that make sense. And by the way, when you're offering the client something they want and you're aligned with them, then the price is always important. But the prices points doesn't match up what they're looking for and our messaging and our pricing resonates with them and we get a sale. And guess what, even though I might make more money over some period of time with that client, they're happy because we're taking far more costs out of their equation than they expected or that they originally anticipated or they've gotten in the past. And so we got a very high, happy camper. I got happy patients as they got better health outcomes and I'm driving shareholder value to all of my valuable shareholders. That's our focus.

Lawrence Marsh - Barclays Capital

And I guess a follow up and a couple of things in on overall script growth you now see is a little bit stronger than you would have said six months ago for '11. Do we assume that mail script growth is kind of consistent with that overall 0% to 4% trend? And then just on WellPoint, I know Jeff and I are talking anymore specifically about that customer going forward, but you talked about integration costs that are to be determined. How do we framework that for '11? What kind of things could there be and can you give us any guidance as to how big or small that might be?

George Paz

You're right, we did end up with three signature accounts this year. And we did -- we're having a very successful selling season in the small to middle market area. And those things aren't finished yet, and the latter one isn't finished yet. Sometimes we don't know we got a new client win until January 15 and those are usually very small. But that last piece kind of rolls out towards the end of the year. So based on our best guess is in the pipeline and where we sit today, our selling season and success is better than we had anticipated earlier in the year. Having said all that, I don't want to get into client-specific situations, but we are pleased with where we sit. As far as mail is concerned, mail is a very important focus to us. We believe mail is important because it does drive better economics for our members, we show better adherence, better health outcomes for mail. By the same token, with certain clients, when you're going through an integration, the integration has to go first. So we got to get through this year. Finish that often. So starting next year, we're absolutely focused on mail and generic programs with WellPoint. I guess, I am talking about the clients specifically, but in this situation, we will address that. For the rest of our clients, keep in mind that one of the things that we're facing is a tough economic environment. And when a member has to pay two or three copays, upfront versus paying one at the Connery retailer in an uncertain tough environment, that's a little harder to do. And so the members struggle a little bit with that, and we do see some of our membership moving from mail into retail for that reason. But we fight hard. We try to make sure that we get them back. It's good for the client, ultimately, it's good for the member. And of course, it's very good for their healthcare outcomes. So it's going to continue to be a focus for us. I would say that you going into next year because we're just getting underway with the WellPoint situation, we expect modest to low growth in mail. But keep in mind, that's based on our current economic situation. There's a lot of things that can change over next year. And we'll obviously keep you posted quarter-by-quarter on that progress.

Lawrence Marsh - Barclays Capital

And then any range of integration costs?

Jeffrey Hall

So Larry, the range really hasn't changed. We've been saying from the beginning that we expect about $120 million to $150 million in integration costs. I think the difference that you're picking up now on is that now that we've got guidance into 2011. We still think it's going to be $120 million to $150 million. But what we don't know what the great clarity at the moment is how much of that is going to hit into 2010 how much of that is going to hit in 2011. But if some of it does push over into 2011, we still expect the same range, $120 million to $150 million.

Operator

Our next question is from Lisa Gill with JPMorgan.

Lisa Gill - JP Morgan Chase & Co

Jeff, I know that you just commented -- George commented around mail for 2011 as it pertains to WellPoint. Can you comment as to if there's anything in your current expectations in the current guidance or will this just be the beginning stages of trying to sell through some of these programs?

George Paz

Well as I said, as we said we, I said about [ph] WellPoint kicking off their programs in 2011. The overall growth in our mail, I believe, will be slightly up year-over-year. So that encompasses the whole book.

Lisa Gill - JP Morgan Chase & Co

I think that a lot of investors have been focused on how quickly you can up sell, George, to that new book of business. And I was just curious if anything was in your expectations or if this is a [indiscernible] that we're getting the integration as we'll now have the opportunity to go out and start talking about the programs rather than having something built within your expectations?

George Paz

Well, clearly, it will be a focus of ours, Lisa. And it's certainly a focus of WellPoint. I think the reason they chose us was because they liked our approach to mail or liked our approach to generics. As we said that throughout this year though, this year had to be a focus on integration. So if we're finished on '11, then we change our focus next year to up-selling clinical programs and working, trying to work with them as a client. So as you might suspect, when you start that, January is all about planned design changes and making sure the book of business is stable and you're meeting all your service requirements. So these things don't start to look end of the first quarter to the second quarter and then you got to up-sell them, you got to work them through, you got to go out and talk to the clients. We got to put our people out on the street to go talk to them. So next year is the kick-off year.

Lisa Gill - JP Morgan Chase & Co

And then maybe could you just comment on, are you seeing any acquisition opportunities in the marketplace? This has clearly been a very successful transaction for you. What are some of your thoughts on some of the other things that are maybe out there today?

Jeffrey Hall

Our position has been pretty consistent over the last several quarters. We say the same thing every time. Certainly, there are other PBMs that we think would be very attractive acquisitions for us, but we always caveat that with at the right price and the right term. And so there are lots of rumors out in the market. We're not going to comment on individual specifics or individual rumors, but our position remains the same. There are PBMs we'd like to own at the right price and the right terms. We think we've proven that we can do this, integrate them better and faster than anybody else and we've proven that can create great shareholder value by doing this. And when the opportunities are right, we will execute.

Lisa Gill - JP Morgan Chase & Co

And then just finally, Jeff, I missed some of your prepared comments. But did you talk at all about the progression and how we should be thinking about 2011 from a quarterly progression standpoint?

Jeffrey Hall

Let me just back that up a little bit and talk just a little bit about how I see guidance and I think my position maybe slightly different than some of my other peers out there. But my view on guidance is actually relatively simple, which is do a really accurate forecast then tell investors what we really think we can do and then just hit those numbers. And certainly, since my arrival here, we have significantly improved our forecasting ability in order to execute on that vision. I also think there are only a few numbers that really matter, claims, EPS, EBITDA, cash flow. As a result, we try to only guide to those numbers because we think guiding in more detail just dilutes the focus on those metrics, the metrics that matter. We also want to stay focused on the long term so we don't guide the quarters either, again, making sure that we don't dilute our focus on hit and what matters. That said, I understand that everybody out there, all the sell-side people have models to put together. So from time to time, we give a little bit more color on different things to help you out a little bit. As we think about EPS progression for next year, I'd say it looks about like 2010 right now, a little bit more back-end loaded, quite frankly, than 2011. But just to be clear, we're not focused on hitting individual quarters. We're focused on delivering long-term shareholder value and the metrics that matter.

Operator

Our next question is from Robert Willoughby with Bank of America Merrill Lynch.

Robert Willoughby

George or Jeff, you've been saying [ph] of floating rates in the past, but forgive me if someone has asked already. But you've been saying that the floating rates, when you guys moved to lock in some rates here, either turn up a bit or just take advantage of the rates you're seeing out there?

Jeffrey Hall

Certainly, we think over long periods of time in history, being floating has certainly paid off. As we look at our current debt structure, we're clearly at the low end of our range, saying that we're comfortable at 1x to 2x EBITDA, if you look at our EPS guidance for '11, we're probably a little bit below 1x now. So we certainly think that for the right opportunities, we could those debt levels could come up a little bit. If we did make that change, we would certainly be looking at the potential to float things out there. Although we're also in a really unique interest rate environment where long-term debt has very low fixed rates and certainly that's all got to come into the calculates of what we end up doing.

Robert Willoughby

So the numbers for 2011, you've basically assumed status quo here? No refinancing and what in the way [ph] share repurchase then?

Jeffrey Hall

Yes, that's right. We assume status quo. As you think about share repurchase, obviously, our guidance range does include some share repurchase. How much cash we actually use to do that share repurchase really depends on two factors: When we're going to buy the shares back; and what price we're going to buy them at. Obviously, when you look at a share count as a weighted average basis based on when you buy them back, I think if you look back in our history of share repurchases, we generally do very few share repurchases in the first quarter because of the timing of our earnings release and our 10-K filing. So certainly, when you think about how much cash we may use, you'd have to consider the fact that probably not a lot of repurchases come in the first quarter. And then as I said, what price you're going to do to math with. It's hard for us to forecast stock prices going forward. So we try not to guide to that.

Robert Willoughby

But you'd have a rough idea in terms of the cash going out the door, if it's closer to $500 million versus a $1 billion?

Jeffrey Hall

Yes, at this point, it's certainly a larger number -- a large portion of our cash flow.

Operator

Our next question is from Ricky Goldwasser with Morgan Stanley.

Ricky Goldwasser - Morgan Stanley

Jeff, I have a couple of follow-up questions here. First of all, are the 2011 investments similar in magnitude to what you've done in 2009?

George Paz

I think I tried to answer that earlier. This is George, Ricky. We've actually increased significantly -- even on the third quarter results and our fourth quarter guidance includes an ascending amount of investment in those investments. We think we're in a unique opportunity right now. When change is about to occur, those companies are most nimble and can take advantage of that change and meet the marketplace, we're going to do the best. And we think we are very nimble. We think we're very innovative and creative. And so we're positioning ourselves to take advantage of the tremendous amount of flock sets occurring in our space today. So those enhancements are up each and every year since I've taken over CEO. And certainly, there are higher -- it's of an accelerating rate at this point.

Ricky Goldwasser - Morgan Stanley

So accelerated rates from the $62 million, I think it was about $62 million that you've done in 2009.

George Paz

You're talking about CapEx. And there's two pieces to this. There's CapEx and SG&A spend and some parts, that may go through GPC. So you've got all those pieces come together. And so it's not just the investments in CapEx.

Ricky Goldwasser - Morgan Stanley

And then just one question on the third quarter, or did you forget cost in the third quarter all related to NextRx or did you also see some impact from the ramping up of the new mail facility?

Jeffrey Hall

Yes, and I would say those things are both and those things are related. As we look at -- talking about in my prepared remarks about having a little bit of excess capacity in the system today, and we're working on optimizing that capacity. We're excited about our new pharmacy here in St. Louis. It's got just unbelievable accuracy and great efficiency, and it's really, we think, a competitive advantage for us long term. But we do have a little bit of excess capacity and we've got to rationalize that in time. We're moving through all the WellPoint activity. So I would say both.

George Paz

Just to add on a little bit there, the site we built in St. Louis is exceeding our expectations on capacity and accuracy. We've got a program in place with zero defects. Obviously, that's pretty hard to do. But we're down to one to two defects per million and the filling [ph]. And we are truly excited about that. No other site do we have to meet those type of numbers. So we are absolutely excited about what we do. And then on a capacity side, we have significant excess capacity to meet today's needs and tomorrow's needs. So we have to go through that in the first quarter and rationalize our overall footprint.

Operator

Our next question is from Ross Muken with Deutsche Bank.

Ross Muken - Deutsche Bank AG

You talked, George, a lot about sort of the specialty opportunity longer term. In the last quarter, we did see what could we call kind of the first biosimilar of sorts to kind of come to market in terms of medroxy [ph] pairing. I mean as you think about that as maybe hopefully a catalyst event for FDA to get more constructive on biosimilars, how do you think about that in that kind of context of your business and as an opportunity going forward? And do you feel like this may be something that could be a bit more hopeful in terms of this being a more near-term opportunity or maybe a two, three-year basis?

George Paz

Absolutely. The biggest disappointment, as you know, that I had in healthcare reform is the fact that we put to this significant piece of legislation and didn't address with the way we needed to address the specialty market. We gave it lip service, if you will, by the biosimilars. And as you also know, and when you're talking about biosimilars instead of biogenerics, these products are probably going to be priced not nearly as advantageously as they would be priced from a client perspective as a generic. So we're facing a little bit of a two edged sword here. But to your point, having introduction of these products and having many of the generic manufacturers excited about this, the administration and Congress both know that there's a tremendous opportunity here. They're one of the largest users of the biotech drugs out there, and they know what this is costing the country. They know that they were facing deficits and have a tremendous issue, and I am excited about where this can go. Now we do still need some legislative changes to ultimately get to where we need to be. But our team, we've got a fairly large lobbying group in Washington, as well as Dr. Miller, my Chief Medical Officer, also spends a lot of time on the Hill. I spend time on the Hill. And our job is to make sure that we can try to get that legislation through. I think notwithstanding all of that, there's a real issue around adherence, proper channel and the use of biosimilars. So we're talking about rolling out -- I think we can get our arms around the trend and improve the health outcomes in the world we live today. And to your point, if we can actually tip the scale over and start getting better competition and better products, especially for those where patent protection is expired, I think there's such a great, great, great opportunity out there to continue to win in this space. And that truly is our focus.

Ross Muken - Deutsche Bank AG

And maybe, Jeff, I just want to touch on one thing, in terms of thinking about the profit growth here and the EBIT growth that we've seen, the guidance sort of implies roughly call it 30% type EPS growth this year. Your EPS growth CAGR over the last five years has been slightly below that. As you think about sort of going forward, I mean, and particularly given all the focus and sort from the investment community on margins and return on capital during this last three to six months where there was a bit of trepidation. And as you kind of go forward, maybe just in broad terms, I'm not asking for a forward guidance, but do you see any sort of change in your business or anything that would make you think that on a go-forward basis the trajectory is going to be meaningfully different than we've been used to seeing from Express Scripts historically?

Jeffrey Hall

Yes, unfortunately, Ross, as much as I'd like to answer that question, I think any way I would answer that, would essentially be multiyear forward guidance. So certainly, I'm going to add -- I think we said last quarter on the call that we're excited about the long-term prospects for this business. We are making significant investments as we said because we believe so strongly in our business and how our team can execute. But it's hard for me to get into any more detail.

Ross Muken - Deutsche Bank AG

Bust just in terms of like, given the assumptions for the core business from a margin perspective, et cetera. There was nothing that occurred during this last season or even next year that meant to you that all of a sudden, the profit trajectory of the business was anything meaningfully different than what we've seen.

George Paz

Let me try something here then Jeff can certainly add on. We always get a question about price pressure in the marketplace. And I've said for the last three years, I saw the proof's in the pudding. I said you look at the script counts and you look at what's happened on to EBITDA per script. If we couldn't compete, then those metrics would not increase. And I think what you've seen from us, is we've grown our scripts significantly over the last five years. Our EBITDA per script overall is up. Obviously, there's been acquisitions and other things that may temporarily bring them down, but then they start to ascend again. And those things point to the health, from a historical perspective, of how the business is performing. Keeping in mind, we got three-year contracts for the most part, although we with 30% of our business have seven and 10 years or effectively seven years with two option years with the DoD. Seven and 10-year business. So those things stay very strong, obviously, over those periods of time. And so, I don't know, I mean, you look at the underlying trends in the business, and we're not going to give guidance to 2012 or '13 or '14. But I will tell you, you got an aging population, you got 30 million people coming into the market, you got a need by a country and by companies to figure how to control healthcare costs, and we have answers. So you throw all those things into the hopper, you shake it up, and I like our prospects. But again, we don't want to get into specifics.

Operator

And next we'll go to Steve Valiquette with UBS.

Steven Valiquette - UBS Investment Bank

You just kind of touched on this is a little bit but I thought the 2011 EBITDA for plain [ph] guidance was pretty strong. I thought it put the rest on the concerns about PBM pricing. So I was just curious, just sort of your general comments or thoughts about the puts and takes of the projected EBIT up for claim in 2011 as any other insights you might want to add to that?

Jeffrey Hall

Yes, I think, obviously, as I said earlier, we're focused on a couple of things. And we think there a couple of things that really drive this business, that's certainly one of them. I think the team here has done just a phenomenal job getting the integration done, getting our efficiencies up, bringing in new programs. There's a lot of things that we've talked to before that generics is of slightly lower year. But thankfully for Express Scripts, we've got a lot of other leverage we can pull. We've got a great team of people that are pulling them, and we've got -- we're firing at all cylinders here, we're driving EBITDA up for Rx as we continue to execute. And we're delivering products that, as George was saying, clients want to buy. And our model of alignment works at the end of the day. The more money we can save our clients, the more money we can make. And in this environment, our clients want to save money with Consumerology, we've got the tools that can help them save money with minimal member impact and the net result is the results that we're putting out.

George Paz

That's particularly true, Jeff, when you think about a year where there are low generic utilization. One or two things can happen. We consider slow generic utilization, so we can go to our clients and say sorry, but you guys all better get prepared for bad cost trends. Well, we probably wouldn't have any clients after that conversation. So our job is not to sit on our laurels and wait for a generic launch. Our job is to be creative and equip our account managers with products and innovation that go out and make sure they can manage those trends down. And when we do that, when we execute on that, what you see is we grow our EBITDA per script. We also, by the way, meet the clients' needs that take the cost out of the equation. If you remember a couple of years back, we had a bad generic year and we grew EBITDA per script significantly during that period. And the reason was is because we see these things three years out. So we don't sit and wait until the sky's going to fall or win anything else. We actually go out with a product portfolio to meet the needs of those clients. No CFO wants to sit there with the volatility in their cost going all over the place. Our job is to control that trend on a level of basis over the life of that contract, hopefully, over more than a couple of those contract terms. And that's our job. That's what we pay our account managers, and do in bonus [ph] them to do, and they've got to do it. So we're excited about the business and what we can do. As Jeff's pointed out, we got a lot of levers. And if it's not generics in a given year, then it's something else. But we just can't sit back and be complacent. We've got to drive those numbers and that's got to be our focus. Again, going back to Larry's question, it's not a question of just going out and trying to sell. It's a question of going out and making sure we're doing what our clients need to control their cost in very volatile markets. And when we do those things well, we can grow our business and grow our EBITDA, grow our business and meet the clients' needs, and that remains our singular focus.

Steven Valiquette - UBS Investment Bank

Any chance of having that, just generally speaking, as far as your overall wins for next year, just generally, would you say they were skewed towards higher margin customers that already have decent mail pen rates or lower or that's not really one you want to comment on at this stage?

George Paz

Well, we don't really like to talk about clients specifically. I think there's a lot of noise going on in our numbers only because as you know, we have the big retailer lost unintentionally halfway through the year. And then we had -- so that's a bunch of no-mail claims out. So that's in the numbers. But as far as the winds, I think they're fairly common. I mean it's our job. I think they come to us because they have a need, and we're going to meet those needs.

Operator

That would be from the line of Garen Sarafian with Citi Investment Research.

Garen Sarafian - Citigroup Inc

In terms of reinvesting in your business and market opportunities, I'm curious to hear your thoughts on Medicaid. State continues to have severe budget shortfalls. Would you think PMBs with skills as yours really could help lower their costs and especially with the sophisticated tools. So what really needs to change for the market to become really appealing for you?

George Paz

We're looking at that and obviously, with 40% more individuals going to be pushed into the Medicaid space, something's got to give here. States are -- if you go back, four and five and six years ago, even two years ago, many of the platforms like governors running for office was to trying to control the budget of the states, even before the economic downturn. Medicaid was costing the states tremendous amounts of money. Many states cut-slashed Medicaid spending and cut Medicaid enrollment by changing the qualifications, and we've seen a lot of that activity. Well, now we're going to put 40% of people on top of it. And we're going to fund it in the early years and then defund it over a period of time. The states are going to have a tremendously difficult time meeting that need. And you're exactly right, there's a tremendous opportunity for us to utilize our tools, to meet the needs of that marketplace. Today, those are being met through managed Medicaid plans. We have clients who manage Medicaid. So we picked up our share through the managed Medicaid plans, but there's an awful lot of fee-for-service out there. And to the extent that you start ratcheting down spending or you need to get control of the spend, managed Medicaids probably going to play a higher and higher role. I think we've got to figure out -- that's why we're making these investments is to figure how do we play in that space to make sure we can bring our tools and expertise to an area that truly needs to be managed and worked. And s you know, the Medicaid is far different than the other plans people are transient. Most pay close to nothing if nothing for their care. So getting adherence, getting incentives, making things work is very difficult for traditional businesses. For us though, where we use Consumerology, understand the drivers of the person, who we think were in a unique position where we can use those tools to help the states manage their business. So this is truly a focus of ours over the next couple of years.

Garen Sarafian - Citigroup Inc

Any reason why upcoming elections next week would impact anything for next year as to the progress you make of the Medicaid front?

George Paz

Well, I think -- really kind of depends on everything that happens, and that goes back to being fluid and flexible because I do believe that things have to change. I'm a citizen first and a CEO second. And we are facing tremendous deficits. We've got to address that issue. We've got to get our costs as a country under control. Whether it's the Democrats or the Republicans, we can't continue to spend the way we're spending. We got to do something about taxation. We've got to do something about competitive strength of our companies to be able to compete globally. There's an awful lot out there. All those things could have an impact on what happens. If the Republicans win the house and they decide not to procreate money to the healthcare bill, where does that take us? What happens if the Federal government has the right to establish the exchanges, will the states have the right to put them in? What if states don't do it, would the Federal government do it? What if there's money not appropriated? There's a lot of uncertainty out there. At the end of the day though, all those uncertainties, I view as a wonderful thing. Because the company that can change and the company that can meet the market needs and can be first to market is the one that can win. And I don't think there's anybody out there than at Express Scripts. So I love where we sit. We know that these things are at some way or form, these things are going to happen. And I think we're very well-positioned to take advantage of those opportunities.

Garen Sarafian - Citigroup Inc

Just switching channels a bit. I know you don't speak about specific clients coming up, but overall, how do you see the 2011 selling season as it gets underway? Maybe if you could offer just some broad color as to how it compares to 2010 in terms of size and just the types of clients that are going to market next year versus this year?

Jeffrey Hall

Sure, I think you've heard us say this many times before. We've got two large clients that make up half of our book that are on longer term renewal cycles, which on average means that we've got 15% to 20% of our book up to renewal in any given year. And as we look at 2011 right now to the lower end of that range, certainly, clients up for renewal are slightly lower in '11 than it was in 2010.

Garen Sarafian - Citigroup Inc

Overall, is there opportunities in -- I mean, is the overall opportunity larger than 2010, or there might be some opportunities to bring on additional clients?

Jeffrey Hall

We're always excited about the opportunities out there. I think we've got unique products that can really help clients save money. And we're excited about what we have to offer and certainly the sales team is out there to close every opportunity we can close as long as the client we want to work with, the client is focused on taking out ways where we can add significant value.

George Paz

Well, thank you all very much. I appreciate your attentiveness this morning, and look forward to bringing you up-to-date with our fourth quarter results early next year. Thank you very much.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.

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