Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

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

Ricky Goldwasser - Morgan Stanley

Ross Muken - Deutsche Bank AG

Steven Valiquette - UBS Investment Bank

Lawrence Marsh - Barclays Capital

Glen Santangelo - Crédit Suisse AG

Thomas Gallucci - Lazard Capital Markets LLC

Robert Willoughby

Express Scripts (ESRX) Q4 2010 Earnings Call February 17, 2011 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Express Scripts Fourth Quarter 2010 Earnings Call. [Operator Instructions] And I'd like to turn the conference over to the Vice President of Investor Relations, Mr. David Myers. Please go ahead, sir.

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 SEC filings.

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 the reconciliation of GAAP to the adjusted numbers we will discussing. The reconciliation of EBITDA to net income can also be found in our earnings release. Earnings release is posted on our website.

At this point, I'd like to turn the call over to Jeff, who'll discuss our fourth quarter results.

Jeffrey Hall

Thank you, David. Today, we are pleased to report another strong quarter. As I told you last quarter, we believe there are only a few metrics that truly matter with the creation of long-term shareholder value: claim, earnings per share, EBITDA, cash flow, and of course return on invested capital.

Our performance on all of these metrics for both the quarter and the year was strong. Adjusted claims grew to $753.9 million for the year. Earnings per share was $0.71 for the quarter and $2.50 for the year, reflecting 40% growth over full year 2009. All of this growth in EPS came from operations, as EBITDA was up 42% year-over-year. Cash flow from operations for the year increased 20% to $2.1 billion, and return on invested capital was 20.5%. And I note that this calculation includes all intangible assets in the base.

On last quarter's call, we discussed our view on guidance, which we believe may be slightly different than some of our peers. To reiterate, we focused on forecast accuracy, guide to only the metrics that matter and create long-term shareholder value by delivering on these metrics.

For 2011, we still expect EPS to be in a range of $3.15 to $3.25, representing growth of 26% to 30% over 2010. As it is still early in the year, the range around the midpoint has not narrowed. As we move through the year, there are several factors that could move our performance above or below the midpoint of this range.

In keeping with our view on guidance, our policy is not to provide quarterly forecast, as we believe that would only distract us from our long-term goals. However, as we transitioned out of integration, we'd like to provide a point of clarity. As I said last quarter, earnings per share for 2011 would be more back-end loaded than normal.

First quarter 2011 EPS is expected to be below fourth quarter of 2010 EPS. This expected decline is driven by the normal seasonality of client renewals, increased call volumes as a result of planned changes, which is even higher this year as a result of the Health Care Reform changes. And unlike prior years, we expect only a minimal increase in generic fill rate in the first quarter to offset these normal seasonal patterns.

The strong historical performance and outlook for the future I just summarized can be attributed to our focus on the metrics that matter and the consistent execution of our business model of alignment. We follow a simple four-step process to develop and implement field-tested and market-ready innovations to our clients. We work tirelessly to listen, study and understand our clients' needs. We analyze of these needs in terms of both clinical and financial components. Then utilizing our advanced understanding of human behavior, we design and pilot innovative approaches to eliminate waste and improve outcome while maximizing member acceptance. Finally, we closely monitor program performance against design expectations to continually refine and optimize financial and clinical outcome.

All of this is done in a clinical-first culture, where decisions are data driven and based on facts derived from randomized controlled trials. The significant investment have made in our research and new solutions lab, which is unique in the industry, is a testament to our belief in the power of this differentiated model. This model creates value for our clients and their patients, and because we are aligned, creates superior shareholder value for our stockholders. And with that, I'll turn it over to George.

George Paz

Thank you, Jeff, and good morning, everyone. The milestones we reached this year are tangible proof of the strength of our business model and the commitment of our employees to improve clinical outcomes, while driving out wasteful spending. As a result of our focus, dedication and passion for service, we delivered record earnings and record cash flow, while accomplishing the following. The seamless and efficient migration of NextRx Live with minimal disruption.

Thanks to great cooperation from both companies, we were able to achieve our goals in this area on forecast. This alliance now opens new horizons for improving healthcare outcomes. The near completion of rationalizing our footprint and realization of synergies, the opening of our new technology and innovation center, which secures our best-in-class pharmacy technology leadership, and as Jeff mentioned, the launch of our new research and new lab solutions while We are expanding the application scope and valid of Consumerology.

During December, we hosted two important events, our annual kickoff meeting with our national sales force and our annual consultant summit, where we bring together leading PBM consultants to discuss our unique and differentiated approach to the marketplace. In all my Express Scripts years, I don't remember a time that both groups were as bullish on our valued proposition and product offering as they are today.

We're returning data-driven research into insights and the insights into real solutions that improve care and drive out weights in the pharmacy benefit. Our investments in Consumerology not only differentiates us in the marketplace but also sustain our competitive advantage. It is now clear, optimal clinical outcomes cannot be accomplished without an advanced understanding of behavior. Consumer decisions and choices often stand between doctor's orders and the patient achieving the best care at the lowest cost. We embarked on a mission nearly five years ago to understand this behavioral component and it's working.

Not only do we have industry-leading insights in the consumer health behavior, we have successfully translated those insights into solutions that have proven to be both effective and member friendly. Previously, I mentioned how enthused we are about our offerings for the selling season, here's why: We recently launched select solutions, a family of choice-based products that nudge members to positive behaviors in a radically new way. Following the success of Select Home Delivery, we applied the behavioral science to address other challenges in pharmacy benefiting, including, drug mix, therapy adherence and specialty pharmacy. Now to the power of choice, plan sponsors of members alike were able to effectively manage the pharmacy benefit, both clinically and financially.

Also, we recently launched specialty benefit services, a next-generation breakthrough that delivers enhanced patient care access across the pharmacy medical spectrum. Specialty benefit services applies proven management methods to both the pharmacy and medical components, especially spend, driving significant savings while improving health care outcomes.

We believe we are well positioned to take advantage of future opportunities in our marketplace. Clearly understanding and improving patient behavior will be more crucial than ever as we help clients and members navigate the health care environment in the wake of health care reform. We also will enhance our leading position in the management of cost and health outcomes in the fast-growing specialty pharmacy area.

Our focus on consumer behavior will allow us to be the most effective and successful PBM at maximizing health outcomes, while reducing costs through the advent of biosimilars. Our unique value proposition and innovative approach to the management of pharmacy benefit will allow us to continue our lower cost per plan sponsors, improve health outcomes for our patients and drive superior returns for our stockholders. At this point, I'll be happy to answer any questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from the line of Steven Valiquette with UBS.

Steven Valiquette - UBS Investment Bank

First, I guess let's start with the SG&A first. You guys provided guidance in 2010 for SG&A, and you actually came in much lower. Is there any sense for how that might trend for 2011 without giving specifics? Just trying to get a sense for whether that may grow or could actually be down. And then other question I'm much more focused on is the gross profit growth in the fourth quarter. Is there any sort of start-up costs related to new business, tied in that were absorbed in the fourth quarter? Just trying to get a sense for the gross profit run rates.

George Paz

I'll let Jeff answer some of the specifics around this. But keep in mind, we give guidance, and one of the problems you have when you give guidance is that the more metrics you give, the more micro components you have to manage. In reality, business has to be nimble, and we have to be able to meet the needs of the marketplace, and we have to anticipate what's coming down the pipe. So when we look at Medicare changes, Medicaid opportunities that afford themselves, new client opportunities, implementation costs, all those things going into a bucket. And our job is to deliver on what we told you we would deliver on. And to the extent that we could have higher margin, it gives us more opportunity to invest in things, to speed up, accelerate investments, to improve our long-term goals, to the extents we are overwhelmed with new clients coming on board, if you will, then we got to spend the money now to bring those up. And all those things go into an analysis, which at the beginning of the year, nobody has a crystal ball that tells you where you're going to come in. So our best guess is to try to give guidance. We like, as Jeff said in his prepared comments, our goal is to hit EBITDA targets, ROIC goals and earnings goals. And throughout the course of the year, there's going to be gives and takes on the timing of generics, when do clients actually buy clinical programs? When do they put in Select Home Delivery? All those pieces go into the numbers that could allow us to beat our midpoint of our range, to be slightly below the midpoint of our range or to give us a shift between gross margin and EBITDA. Having said all that, to your earlier question, was there unusual costs? I don't think any of us at Express Scripts truly understood the amount of confusion that was being dealt to the marketplace through Health Care Reform and all the myriad of changes that were coming in on Medicare. So we knew that there's going to be a lot. And we staffed up our call centers and our account management and gave them the tools to manage a very high volume of inquiry that was going to occur. But quite frankly, they even exceeded our expectations. And so, we had to turn up some of our flexible resources to meet those needs during the fourth quarter in order to make sure we're well positioned for 1/1. And that's -- and obviously 1/1 is very, very important to us. Our call center costs and a lot of these components do run through the cost of goods sold, so those numbers drive down margin. But again, at the end of the day, these are things that we worked our way through. January was a tough month. With everything going on from the suspension of pre-existing conditions to covering people till they're 26. Think of yourself if you're a senior and you're trying to choose all this -- all the different Medicare options you have available during the fourth quarter. There's just tons of questions that arise. And we have to staff up for that. I think we're pretty comfortable with where we came in. I think we did a very good job with that. But it's always a challenge. Jeff, do you have anything you want to add?

Jeffrey Hall

No. I think that's exactly right. I mean, we've been saying for several quarters, we're close on the metrics that matter. That's what we're really going after. As George said, we think that allows us to stay nimble and really create long-term shareholder value. Bottom line is that we think our business is performing well. EPS for 2010 was up 40%, the range for '11, as I said, is up $26 to 30% and all of this growth is coming from operations.

Operator

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

Lisa Gill - JP Morgan Chase & Co

Jeff, maybe just a follow-up though when we think about gross profits. Are you seeing any change in generic procurement? Some of the drug distributors have talked about the fact that there's less manufacturers, which means that there's less opportunity to really bring the cost down. So I'm just wondering what you're seeing on that side?

Jeffrey Hall

We think that is a core competency here of how we go out and how we negotiate contracts with our entire supply chain. And we continue to think that we can derive value from that space. Obviously, I don't really like to go to all the details of individual negotiations. But at the end of the day, generic drugs for the most part are commodity products, and we feel like we can negotiate good prices on those.

Lisa Gill - JP Morgan Chase & Co

So Jeff, just that we understand this, so whether there's eight manufacturers or five manufacturers, is there a big difference in how you should be able to procure the drug in the margin you can make? Is it materially different or because you're still good at buying generics, it doesn't really matter if there's five or eight manufacturers?

Jeffrey Hall

Five versus eight does not matter.

Lisa Gill - JP Morgan Chase & Co

Just secondly, George, it was interesting that you mentioned Medicaid. We've noticed that PCMA has been talking about many state governments, trying to now adopt some of the commercial methodology around generics and other things for their Medicaid programs. Do you think Medicaid is an area that Express Scripts will have more interest in participating in over the next couple of years? Would be my first question. And then secondly, as we think about those type of government contracts, maybe if you can give us your thoughts around past your pricing?

George Paz

Sure. With respect to Medicaid, that's always been a focus of ours. As you know, Lisa, we provide back office and support to many, many managed care programs. Quite a few of which are focused at Medicaid. And you're absolutely right. When you look at the state budget deficit's facing, many of the governors today, they're looking at opportunities and ways to drive out cost, and a lot of fee-for-service programs do not. But the constructive constraints around the benefit designs and access in the meaningful way. And using the tools of the PBM step therapy as per authorization programs, formularity designs, those things can really take a lot of cost out. And I think we're seeing a tremendous amount of interest by the administrations and looking at those opportunities. So this is an area we will continue to focus very heavily on and try to help our managed care companies position themselves for growth.

Lisa Gill - JP Morgan Chase & Co

So with surge of managed care companies it wouldn't be your now going trying to circumvent your managed care companies and go directly to the state?

George Paz

That's pretty -- some can carve out the pharmacy benefit. But that's usually not done. It's usually a managed care program that manages the entire spend. And I mean, obviously, we if get an RFP for a state that wants to just have a drug benefit carved out for the Medicaid drug spend, we did that. But I don't think that's where it's headed right now. I think it's more headed to more of an overall management. Because keep in mind, the drug side of this thing, it's 15% or so of the cost, and so they still want to tack that other 85% and get their arms around the whole thing. So the natural progression is to go to managed. And then at some point in the future, if they see there's value, then you would carve it out.

Lisa Gill - JP Morgan Chase & Co

And then my second question just as around past your pricing on government contracts, are you starting to see that more prevalent? I mean, obviously if you're doing Medicaid through manage care, that's probably -- my guess would be still kind of a standard PBM contract. But what about any of the other government type of contracts, what are you seeing today?

George Paz

Probably six, seven years ago or maybe even five years ago, we saw a pretty big demand on pass-through pricing. And there was a lot of request for that. We still get them, but I don't think the demand or the requirements are nearly as strong as they used to be. And I think the reason is, is because the PBMs have been able to demonstrate significant savings through their models. And i.e., that is if we can show our profit alignment to the client being in the generic side, it certainly speaks. PBM price, pass-through pricing can have the same price on average per drug on a bushel basket of drugs, whether it's pass-through or what we call spread or traditional pricing. The benefit of this pass-through or spread is you now know you've got your vendor, your PBM, aligned with you because if you put your profits in the generics, there's a more apt to try to push that. And I think more and more clients and more and more people that select our products understand that dynamic and have stayed with the traditional side. So I think it's really a case specific as to what the client's looking for.

Operator

Our next question comes from the line of Robert Willoughby with Bank of America Merrill Lynch.

Robert Willoughby

What wouldn't see a little bit better gross margin here in the first quarter? I saw you bought more inventory than I've seen you do historically. I presume that's branded inventory. You're bringing the mail facility down, I thought and then just lastly, didn't a considerable portion of your lives renewed to formulers that do reflect the WellPoint muscle there?

George Paz

Well, keep in mind again, think about what's happened this year and the myriad, the number of Medicare changes that came in through the course of the year. Last year, when you look back, if you go back to our history, you'll see first quarter historically has been below fourth quarter. And this last year, the last two years, I guess, we haven't had that phenomenon because the acquisition on NextRx, which provided a catalyst as we're bringing that client on board. But typically, we have to gear up. I mean, we've been saying this for 10 years, 14 years, that you have to staff up for 1/1. It's a lot of work. And when you put in the level of Medicare, compliance requirements that occur, all that stuff works this way through in the first fill or two of the new year. But all that hits you in the first quarter. See you have to staff up through the fourth quarter before both in the first quarter and then you can start tapering off towards the end of the first quarter. The other thing that's a big catalyst, obviously, is the timing of generic launches. And I think Jeff mentioned that didn't -- this first quarter of this year, we don't have that catalyst. Jeff, do you want to add anything?

Jeffrey Hall

I think that's right. i think we're not going to get into the detail.

Robert Willoughby

Well George, in my wrong, assuming the formulers have a bit more integrity this year or is that just not as bigger profit driver as I thought it was?

George Paz

Well, I don't know -- I mean, I think given you had 27% to 30% growth rate isn't too bad, Robert. I don't know. I think that's a pretty big focus, and it is driving results.

Robert Willoughby

And what changes specifically did you do with the formularies this year with Lipitor in view?

George Paz

We're trying to hold. I mean, that's a client decision, keep in mind. We go out. We have a lot of pharmacists that work for us. And the pharmacists go out and consult with the clients, but it's ultimately the client's decision. So a client has to make a decision today whether that want to keep Lipitor, if they've already got it on their formula, they want to keep it through the rest of the year and absorb the higher cost or do they want to move to generic simvastatin or so doses today. Our recommendation now is to stay with Lipitor. You're going to maximize your generic benefit. You're going to maximize your discounts. The more people you can keep up Lipitor, because keep in mind as you move those people away from Lipitor, you're going to get a lot of will go to the generic, but some percentage of those will go to other statins, branded statins, which will have a cost driver once the drug goes generic. Obviously, they're not going to go switching back again. Doctors don't like to ping-pong in this stuff. So we'd rather make that switch as effective as possible. So our goals through this year are to keep try to keep people on Lipitor. One of the big things we did when we had such success when simvastatin came up from Zocor was the effort we put on keeping people on Zocor. If you watched the drug trends, when the drugs in this last year of patent protection, you'll see the market share of that drug declined pretty significantly through the course of that year. It's not getting support typically from the manufacturer. So the detail reps are all working to move it, and our job is to try to hold it. So that's going to be the big push this year is to hold our Lipitor percentages.

Robert Willoughby

And lastly you did give cash flow guidance, I believe. What's a reasonable share repurchases assumption for the year?

Jeffrey Hall

We guided free cash flow or our cash from ops it's $2.2 billion to $2.4 billion. And what we said is that we expect to use the majority of that cash from ops or majority of the free cash flow to do share repurchases. So we haven't given a specific number, but we said the majority of it for repurchases. Obviously, how that repurchase rolled out over the course of the year tends to be pretty lumpy based on when we have a window.

Operator

Our next question comes from the line of Tom Gallucci with Lazard.

Thomas Gallucci - Lazard Capital Markets LLC

Just thinking back on the last one, you still have a very strong balance sheet, so how do we sort of think about leverage and the potential that you would either lever up to maybe invite more stock back overtime or other means? Can you give us some color there?

Jeffrey Hall

Yes, we think we have a very strong balance sheet at the moment. We're levered less than 1x EBITDA. Certainly, we could take that number higher. We've said many times our range is 1x to 2x, feels like the right leverage for us to maintain our solid BBB rating. So certainly, there's a lot of dry powder. And our use for that capital hasn't really changed. We think that really the highest and best user, the highest ROI fee tends to be internal investments, like the lab we were talking about earlier, which we think is going to have a really high return. After that, we have good accretive M&A things like WellPoint, where we can create a lot of shareholder value. And when we've filled up those two buckets, and there's still cash left, we use it for share repurchases.

Thomas Gallucci - Lazard Capital Markets LLC

How would you sort of characterize the acquisition landscape at this stage?

Jeffrey Hall

We never really want to comment on M&A. I think there are things that look interesting to us. But when or if they become available sale at the right price and terms is always hard to comment on.

Thomas Gallucci - Lazard Capital Markets LLC

Before I think response to Lisa's question, you were sure talking about your contracting across the supply chain. Can you give any color at sort of any trends or nuances maybe in '11 versus prior years or future years relative to your relationships with retailers and maybe negotiating trends or purchasing trends there?

George Paz

Well, the big retailers obviously have a lot of our business, and we have a lot of their business. So when we can come with ways to work together, we try to make sure through our contracting process that the retailers make more money on generics than they do on the brands. And if we can keep that alignment, and then we've got it with our clients and we've got it with our retailer outlets, then it's a good model. I mean, then, they're aligned with us. So when you are the pharmacist working behind the counter and an Express Scripts member walks in and all of a sudden the drugs got a step therapy in front of it, hopefully, the pharmacist knows that, that's a good thing for them as well as for us and certainly for the patient. Because once they switch it by calling the doctor's office, they get the generic substitution then everybody wins. And that's something we walk a fine line on every year as we negotiate with our retailers to get the most out of economics out for our clients and our shareholders and at the same time, maintain the integrity of the aligned system throughout the supply chain. So that's something we stay very heavily focused on.

Thomas Gallucci - Lazard Capital Markets LLC

So I read between the lines there, I guess is it fair to assume that in a bigger generic year there's a little bit more margin to around there and a lesser generic year, there's a little less? Just conceptually?

George Paz

Well, absolutely. There's two things, right. The higher the brand inflation rate, the bigger the opportunity as a drive down brand discounts. Because obviously, if you had a 10% brand inflation rate, some part of that should go back to the shareholders and to the -- of their shareholders, our shareholders and to the plan sponsors, as cost reductions. Same thing to your point of a big, big generic comes through, and there's going to be a lot of players. And once it stabilizes and you get four, five, six manufacturers on it, then it's going to push down price. And if that drug goes down to 80%, 85%, 90% off wherever it ends up, that obviously is going to be a big component that's going to help drive down overall generic price points.

Thomas Gallucci - Lazard Capital Markets LLC

You mentioned the specialty benefit services, maybe could you just give an example of one or two sort of newer different that you're doing there?

George Paz

It's still 55% of all specialty drugs are going through on the medical side. Some drugs are easier to get at than others. But the idea is to -- when you have an Express Scripts card and you go in and you find out you've got a pretty severe disease, you can have -- so a lot of our blues plans now there. Our number is printed, and there's a prior authorization number. And as you know, when you go to the doctor, they always take a picture of the front and back of your card. On the back of that card will be this number you have to call. So when the doctor, before they start you out on like the specific MS drug, they would call that number first to get authorized. And it does two things for us, and that occurs both at the clinic level and could occur at the hospital level, depending on the disparity of the disease and where you're at. So we'll talk first in the hospital. But what ends up happening when they call that number, they get you on the right therapy and start by prior authorizing and prior approving which therapy you're going to be on, so that you're on the right drug, and just as importantly, at the right cost. If that clinic drug bills the health plan and those dollars are buried inside of the codes, the codes from the hospital, the clinic, trying to decipher and pull that out and make sure it's being done at the right price is often after the fact, and trying to get your arms around that is very difficult. So the goal here is to get all this stuff done ahead of time. Similarly to what we do at a pharmacy. Today when you walk into a pharmacy with your card, obviously, it's all real-time electronics. That doesn't exist with many of the clinics and hospitals. So the idea is to start using those tools and leveraging them into that space to help control those costs. And by the way, once we get that prior authorization in, we now can really start looking at the adherence levels. Because again, as you probably know, a lot of people get diagnosed with a pretty severe disease, there's a tremendous amount of issues that go around that. The members' willingness to accept it. All the things that go into managing the family approach to yours or the patient's situation. And so, it gives us the opportunity we see that the drug’s been prior approved. And then if we don't see the adjudication occur, we now have the ability to reach out to both the doctor and the patient and make sure we get that patient started on therapy. So there's a lot of health improvements that occur as well as cost reductions.

Operator

Our next question is from Glen Santangelo with Credit Suisse.

Glen Santangelo - Crédit Suisse AG

If I look at 2010, it seems like your gross profit per script and your EBITDA per script basically increase sequentially throughout the four quarters of 2010. And George and Jeff, if I hear you correctly, you kind of suggesting that in 1Q, obviously the numbers will be a little bit lower for the reasons you stated then. I'm just kind of trying to understand as '11 kind of unfolds here, and the generic contribution ramps and the expenses sort of decline from the 1Q levels, George, as you describe, should we see that steady progression of gross profit per script and EBITDA per script throughout the four quarters of '11?

Jeffrey Hall

Yes, it's hard question to answer without giving guidance on a whole bunch of metrics, by a whole bunch of quarters, which I typically don't want to do. But yes, we would expect to continue to grow the business quarter-by-quarter.

George Paz

Progression throughout '11 should be increases.

Glen Santangelo - Crédit Suisse AG

And if I could just follow-up on the question on generic pricing. George, the three drug wholesalers went out of their way on their conference calls to discuss some firming in terms of generic pricing and seen some instances have actually pretty significant price inflation on the generic side. Is that starting to show up in your results at all? And are you seeing that trend and can that become an issue or something we need to be thinking about?

George Paz

As Jeff said, we really worked this hard. And competition is a wonderful thing, especially when you have commodity products. And our job is -- if our prices go up on the generic side, then our ability to stay as competitive and drive down cost for all of our clients is at risk and we just don't -- we haven't seen it and we're not -- I just have at this point, I don't know what they're seeing. I can only tell you what we see. I think he had to push on them a little more and understand what's taking place. We think there's still awful a lot of competitors and you have big, big drugs and you've got a lot of manufacturing and you have the ability to, what’s it cost to add to bring through another million pills through that processor. The costs are usually pretty low. So on a variable basis, picking up additional volumes typically leads to an action that's taken. And we haven't seen that occur, at least not on our book.

Glen Santangelo - Crédit Suisse AG

Jeff, if I could just ask you one more with respect to share repurchase. Obviously, from where you were last quarter, the stock has moved up considerably in the last 90 days. And I was just a little bit surprised to see that you didn't really buy back any stock in the last 90 days. I'm just kind of curious if there's any reason for that?

Jeffrey Hall

I wouldn't comment on why or why not I'm buying back shares obviously. But as I said earlier, it's when we have an open window, it's based on the other uses of cash that we may have in the quarter. Certainly, at the end of Q3, we made a large repayment of debt. So I think there's lots of potential reasons, but I just don't want to comment specifically.

Operator

And our next question is from the line of Ross Muken with Deutsche Bank.

Ross Muken - Deutsche Bank AG

I'll start out with one for George, you talked about on the specialty side biosimilars and in the President's budget, there was a proposal to sort of change the exclusivity period back from 12 to seven years. As you guys think about how to plan ahead in that business and your specialty business for what may come to market over the next several years, do you think that the legislation we saw last year is kind of what we're going to have to go off of? Do you feel like with folks you have in D.C., et cetera, there's a bigger push to kind of get a bit more aggressive with getting biosimilars to market. If that were the case, what as a team, do you need to do to kind of make sure the organization is ready for that?

George Paz

One of my disappointments over the last couple of years as we were facing Health Care Reform was trying to get biogeneric legislation through, and the compromise was biosimilars. And that we lost in the seven years and ended up with the 12 years. I don't know. The pharma is a very powerful lobbying group. And it's going to be hard to get the 12 to seven. We're going to fight it incredibly hard. There's probably more of a leaning towards looking for ways to save money than we've seen in a long time. And as the Republicans and some of the key Democrats both understand, at least I hope they understand, the deficits we're facing, and this is a key move. But at the end of the day, biosimilars isn't the answer. It's biogenerics. And we've got to move down that path. And we're still a way's away from that, but that's something that our people in Washington are very focused on. Myself, Doctor Miller, our Chief Medical Officer, and Keith, our General Counsel. We have to take the responsibility for all of our clients and for America at large to try to get this fixed. Because Europe is working in Europe, there's a tremendous opportunity to drive down cost. And once we get those tools, of a biogeneric or even to that degree of biosimilar once it gets to market in place, then our tools become that much better, and our opportunities become that much greater. So it's clearly a focus of ours.

Ross Muken - Deutsche Bank AG

And Jeff, I hate to belabor a point, but we're seeing the stock kick down as we're sort of talking here, so there's a bit of confusion. As we think about sort of the profit mix for this quarter and then progression into Q1, there's a lot of things that go into that gross profit line whether to turn on investments, or just sort of mix, et cetera. So as we think about the progression to Q1 and then on the earnings line, the EBIT growth that's implied, I'm assuming in Q1 is north of 20%, as you typically don't buyback a lot of shares in the quarter. To sort of distill it maybe a bit, I mean, it's too simplistic to say that if anyone sort of assuming we're seeing a deceleration in the business that's probably not the case. And two, pricing as it currently stands, is not a huge driver right now of your business, given the sort of robust outlook you have on the EBIT line?

Jeffrey Hall

I think the metrics are pretty straightforward and pretty simple. EBITDA was up 42% in 2010, and we're guiding it up, EPS up 26% to 30% in 2011. So obviously, we feel pretty comfortable about our core business.

George Paz

To that point, we're hearing an awful lot of questions and concerns about pricing. And I understand that. I mean, I understand why some of you may be concerned. But at the end of the day, and I've been saying this for -- I don't know, I was CFO before I was CEO, so I guess, 14 years. I think when you'll see pricing pressures when we can't grow earnings any longer. And from my perspective, there's two ways to sell. You sell on results, which is drive down cost for your clients and give them a better offering, which improves health outcomes for their patients, or you drop price because you have nothing to offer. And I think this management team has always stayed incredibly disciplined, and we understand the commitment we have to make to our shareholders, the commitment we have to make to our clients and patients, and we understand that we can't sit back and rest on our laurels. We have to constantly innovate inside of our space and bring new solutions that are meeting the needs of today's problems to our clients in order to sell our services at a higher price. And not necessarily a higher price. Keep in mind what's happening here. There's inflation, generic launches and utilization trends and aging population. A lot of things are causing drug spends to go up. So the question isn't, do I have to go out to my clients and ask for an increase and price? That hasn't happened since I started here. No client ever allowed me to raise their price. What happens is that the amount of those increases and utilization trends and changing dynamics that are occurring, which is driving up drug spend, how much of that does the client get to capture as a reduction to that trend line versus how much of that profit opportunity do I get to deliver to our shareholders versus how life stabilized my patient's price. That's the dynamic that works here. And so, it's how much of those increasing trends do I get to keep? And that's what we focus on, and that's what we drive for. So each and every year or every three years and our clients come up for repricing, they get deeper discounts. What's happened over those three years, is that if you assume a eight, nine, 10, pick a number of drug cost inflation, do the math. What happened to the discount that you have to be able to deliver in order to try to make sure that those numbers stay in conformity with the trends we're trying to hit? So it's a tremendously dynamic process. And again, I think if you can make your client comfortable that you're doing everything in your power and not causing disruption of the membership to manage that drug trend and at the same time improve their health outcomes, they're willing to pay for it. And that's what we see in our numbers and that's the model we offer.

Operator

Our next version comes from the line of Larry Marsh with Barclays Capital.

Lawrence Marsh - Barclays Capital

Just a quick question on renewals and new business opportunities. George, you said half your book locked for longer period of time. So it seems to me you got maybe around $7 billion or $8 billion up for renewal in 2012, which is much lower than your peers. Is that the right ballpark? And given that your renewal book is much lower, why couldn't you be a nice share gainer in this year in the market?

George Paz

Well, obviously, the guidance on the share -- if we grow share this year, we'll come through with the 2012 results. Because everything that we're bidding on is 1/1/12. So that's going to take place over the next couple of months. Clearly, our focus is to find those clients that want to do business the way want to do business and grow our book. We are absolutely focused on growing prescriptions and one is at the right basis. So that will stay one of our key goals. Obviously, we don't give guidance to that now because it doesn't affect this year's earnings. So as the year unfolds, and you know it's already starting. And Larry, when we look at it's getting a little ahead of itself so, we see those numbers starting, clients are already out for bids for 1/1/12. But the real lion's share of this is going to come in the spring.

Lawrence Marsh - Barclays Capital

I want to get you to elaborate on something. You've mentioned, typically your customers spend about 15% of their overall health spending on drug. The several employees program has said publicly this past year that drugs now represent 30% of their spending. Does this disclosure, I guess, gives you stronger conviction that this contract structure should be changed closer to something like TPharm? And if so, when could that happen, and would you see that as an opportunity?

George Paz

Larry, I really hate to talk about the specific opportunities. But I do think that there is a tremendous amount. If you look at the government programs, they don't do a real strong job of managing the benefit. And one of our mantras and one of the things we offer is tremendous tools, both anything from mandatory programs, such as the mandatory mail, mandatory generics, all the way down to educational programs to select choice programs. And to the extent that's we find the client that wants to use our tools and we could navigate the opportunity for them and they want to cost savings, that's what we're looking for and we'd be more than happy to take part in programs where we can do what we do best.

Lawrence Marsh - Barclays Capital

Just a quick clarification on the SG&A. I think your message is very clear today than in the past. But maybe just elaborate a little bit on your comments when you said the staffing of your call centers and how that falls into cost of goods sold. Just without getting having to be too specific, how do you allocate those kind of call center and staffing costs between cost of goods sold and SG&A so that we can understand that going forward?

George Paz

Well, I mean, I think our financials follow the form of most companies, the cost varies directly with the clients'. It's going to go through cost of goods sold. So if it's more administrative functions, we're going to go through. So what ends up happening is there's an awful lot of software buildout and product buildout that has to occur as Medicare, Medicaid issue, guidance and rules and doubt a lot of those costs are going to go through infrastructure costs down in SG&A. Call centers and pharmacy costs are going to go through cost of goods sold.

Jeffrey Hall

I think it's a great example of why we focus on EBITDA. At the end of the day, what we're focused on is being the most efficient company we can be, getting a profit as high as we can be and the allocation of cost of goods sold and SG&A at the end of the day is a question for the accountant.

Operator

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

Ricky Goldwasser - Morgan Stanley

I'm having some clarification questions. So first of all, on the first quarter of guidance, given the focus is on EBITDA for adjusted scrip and that really is the key metric. Can you give us some sort of guidance for what should we expect for that metric in the first quarter, both sequentially and year-over-year?

Jeffrey Hall

Simple answer, no. We're going to stay out of that game. As George said earlier, the giving individual line items giving quarters just limits our ability to be nimble and react to changing conditions. So we're going to stay away from that. We've given guidance for the year. That's what we’re trying to hit.

Ricky Goldwasser - Morgan Stanley

And when you say changes in conditions, what are the swing factors really?

George Paz

Well those are usually going to be business opportunities. If we have a chance to bid on a large account, and some of these bidding processes are quite expensive, we put a certain amount of money in the budget. But we don't know if it's going to be in the first quarter, second quarter, third quarter when the opportunities are going to arise. So we have to be able to deploy that capital at the time it's required. And same thing happens with Medicare. Usually there's going to be a rush in Medicare right before year end for guidance coming down. But that's not necessarily the case. Guidance can come out in August, it can come out in June, and we have to react to that. And we have to plan our affairs. Most of it's got to -- period of effective date. So we had to decide when we're going to spend that money, when we're going to get up to speed, where is the clients' needs. In today's environment versus the guidance that's coming out and balancing those needs for our clients to make sure we are staying meeting the needs of the marketplace is critically important. And we like to have that flexibility to obviously we have a commitment to you to hit a number. But by the same token, we want the flexibility to meet the business needs during the year as they unfold.

Ricky Goldwasser - Morgan Stanley

So really, when you think about this selling season, I mean, it seems that this selling season is heavy on these larger accounts on large employer contracts. And historically, this is a market that you were just less penetrated that some of your peers. Now that the next direct integration is behind you, do you think that you have better tools to serve in that customer base? How do you think about this opportunity?

George Paz

I'm not sure that we're all that less penetrated. At the end of the day, we don't talk about clients. So we don't sit up and tell you a list of all of our Fortune 100, Fortune 50, Fortune 500. We have a pretty darn good representation in that space. But I just don't think it's right. If you look at -- I outsourced my hardware management to a firm. I don't think that firm would really like it if I was talking about them on the phone. I just don't think that's our place. So we manage again to try to hit our targets. We try to find the clients who are aligned with us that want to do the programs we want to do, and we go after those clients. We know a bit a lot of business, because we don't believe it's lined up with us. But we believe there's going to be opportunities in the managed care space, there's going to be opportunities on the state government spot. As we talked with earlier, there's going to be opportunities in the Medicaid business. There's going to be businesses in the small employer, large employer. Our job is to hit our five-year growth plan by making sure that we've continued to go after the business that makes sense for our shareholders and the rest of our book of business.

Ricky Goldwasser - Morgan Stanley

You talked about the new specialty offering and when you think about your book of business, what percent of your clients represent an opportunity for this product? Maybe in other words, what percent of your clients managed the specialty benefits through you? Because the way I think about it, the ones that don't are going to affect the growth opportunities.

George Paz

Well, there's two pieces to that question. The specialty pharmacy piece is well in excess of 50% of our clients are using our specialty pharmacy services. The piece that's not being managed is the piece that's going through the medical benefit. That's the piece that we are focused on. And quite frankly, we're just kicking this off. So we don't have a lot and we've got several clients that are either in pilot phase or signed up and executing today, where we're rolling out to our clients through this year, next year and into the future.

Well, thank you, all, very much for attending our year-end conference call and earnings. We look forward to working with you through the first quarter, and have a great day. Thank you.

Operator

Ladies and gentlemen, today's conference call will be available for replay beginning today and running through February 24. You may access the AT&T playback system by dialing 1 (800) 475-6701 and enter the access code of 190749. That does conclude our conference for today. We thank you for your participation and choosing AT&T executive teleconference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Express Scripts' CEO Discusses Q4 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts