Express Scripts' CEO Discusses Q3 2011 Results - Earnings Call Transcript

Oct.26.11 | About: Express Scripts, (ESRX)

Express Scripts (NASDAQ:ESRX)

Q3 2011 Earnings Call

October 26, 2011 9:30 am ET

Executives

David Myers - Vice President of Investor Relations

George Paz - Chairman, Chief Executive Officer and President

Jeffrey L. Hall - Chief Financial Officer and Executive Vice President

Analysts

Ross Muken - Deutsche Bank AG, Research Division

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

John Kreger - William Blair & Company L.L.C., Research Division

Steven Valiquette - UBS Investment Bank, Research Division

Lawrence C. Marsh - Barclays Capital, Research Division

Charles Rhyee - Cowen and Company, LLC, Research Division

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Lisa C Gill - JP Morgan Chase & Co, Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2011 Earnings Conference Call [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to Vice President of Investor Relations, Mr. David Myers. Please go ahead, sir.

David Myers

Thank you, operator, and good morning, everyone. With me today are George Paz, 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 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'll discuss our financial results.

Jeffrey L. Hall

Thank you, David. We reported another quarter of strong growth, with EPS up 22% from the prior year and cash flow from operations at $957 million. U.S. claims declined 2% year-over-year, mostly reflecting the current economic environment. This was partially offset by stronger Script performance in Canada, which is a lower margin business. Claims from midyear starts were in line with our original estimates.

The quarter reflects additional spending in both cost of goods sold and SG&A, including acceleration of projects to free up capacity for integration activities next year, investing to support clients and members as they move away from Walgreens and compliance with new regulatory guidance. Spending in these areas is expected to increase in the fourth quarter.

As a result of our aligned business model, gross profit margin increased 7.5%, up from 7.2% last year and 7.1% last quarter. This improvement reflects several factors, including supply chain efficiencies, productivity improvements, increased contributions from generics and the launch of our group purchasing organization, or GPO.

SG&A costs were down year-over-year, reflecting lower management compensation and synergies resulting from the NextRx integration. These items were partially offset by the additional spending this year I referred to earlier. As a result, EBITDA was up 11% over last year, and EBITDA per our adjusted Rx rose to $3.72, up 13%.

During the quarter, one of our accelerated share purchase agreement was settled, resulting in the receipt of 1.9 million additional shares. The remaining ASR agreement is expected to be settled in the fourth quarter, and we anticipate receiving approximately 1.8 million additional shares.

We remain on track to achieve the full year EPS in the range of $2.95 to $3.05, growth of 18% to 22% over last year. In response to our revised earnings guidance earlier this month, we believe sell side estimates for the year are reasonable. After much thought and consideration, we have decided not to provide 2012 guidance at this time. Since the Medco acquisition has not closed, it's too early to provide combined guidance. But based on our continued expectation that the acquisition will close in the first half of next year, we do not believe it makes sense to provide stand-alone guidance.

Stand-alone 2012 results would not be representative for a number of reasons. The halting of share repurchases, significant time and money spent on integration planning, the acceleration of IT and operational projects to free up resources to focus on integration next year and other transaction-related items. Similar to the NextRx acquisition, we will provide combined guidance after the transaction closes. We anticipate closing the proposed transaction in the first half of 2012.

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

George Paz

Thank you, Jeff, and good morning, everyone. For a quarter of a century, we have focused on delivering innovative solutions to drive out waste and improve health outcomes for our clients and patients.

Our focus on execution has translated into superior growth for our stockholders through our business model of alignment. This focus has not changed. There are several major initiatives underway to reduce costs and improve health outcomes.

As you know, branded drug inflation, utilization and new generics provide significant economic benefits to the pharmaceutical supply chain. Our job has always been to work on behalf of our clients to temper the increase in pharmaceutical costs. We do this by continuously negotiating deeper discounts on drug procurement from our network pharmacies, securing larger rebates from drug manufacturers and obtaining deeper discounts on drugs procured for our mail-order pharmacies.

Unlike the other pharmacies in our networks, Walgreens is not only attempting to retain the entire windfall from new generics and brand inflation, but they are also trying to change the terms and definitions of our contract in order to significantly increase the reimbursement rate. These actions by Walgreens will considerably drive up the cost of healthcare, while plan sponsors are working hard to provide an affordable pharmacy benefit in these tough economic times.

This is inconsistent with our business model of alignment and is not acceptable to us, our clients or our patients. The vast majority of our clients are aligned with us and support us. As a result, greater than 95% of our clients' prescription volume will move forward into 2012 without Walgreens as a network provider.

We are investing to support clients and members as they move away from Walgreens pharmacies. To date, we have corresponded with millions of our patients through letters, e-mails and outbound phone calls to aid in this transition.

Fortunately, the process for transferring a prescription is incredibly straightforward and easy. A patient simply needs to bring their pill bottle for their prescription into a new pharmacy in order to obtain a refill.

We are also making significant investments in other areas, non-adherence to prescription medications is responsible for over $250 billion of waste each year from unnecessary hospital visits and other health-related costs. As part of our behavioral platform, our predictive modeling capabilities are generating significant interest due to the ability to reliably indicate in advance whether an individual member is at risk for non-adherence. Through Consumerology, we can deliver an appropriate intervention tailored to resonate with each patient.

One of the fastest-growing areas of healthcare is government-sponsored programs. As such, we continue to invest to position our company as the best in class in serving our clients in the Medicare and Medicaid marketplace, as well as preparing for the Health Care Reform environment. We have also accelerated spending on certain projects to complete them this year to create capacity for integration projects next year.

As Jeff mentioned, while we will not be providing 2012 earnings guidance at this time, we can provide some color on our outlook. We expect the challenging macroeconomic environment to continue to impact utilization and organic growth. However, we realized greater than 97% client retention and the sales season that has yielded 3 signature wins, as a result, we expect claims growth in 2012 to be in the range of 0% to 2%. In addition, our ability to drive positive clinical behavior through Consumerology continues to gain traction in the marketplace.

Moving to a longer-term focus, we remain bullish on the PBM space, as evidenced by our proposed combination with Medco. Although it's in its early stages, integration planning is on track. We continue to believe this is the transaction the nation needs now. The combination of our complementary strengths will accelerate our clinical offerings, which will reduce healthcare costs and improve health outcomes.

We are making progress working through the regulatory review process, and we believe we are on track to close the Medco transaction in the first half of 2012. While we are being impacted in the near-term due to the challenging macroeconomic environment and our increased spending due to our pending Medco acquisition, we continue to be well-positioned to take advantage of the long-term growth opportunities inherent in the PBM marketplace. We remain focused on delivering superior value for our clients, our patients and our stockholders.

At this point, we'd be happy to answer any questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Lisa Gill with JPMorgan.

Lisa C Gill - JP Morgan Chase & Co, Research Division

George, can you maybe just talk about Walgreens in regards to better pricing with your customers? So if you're not able to come to an agreement by January 1, will you be giving better pricing to your customers around networking? That would be my first question. And then secondly, can you maybe talk about the renewal impact after the announcement? So my understanding is that you still had some business that had to renew this fall, what were clients saying around not having Walgreens in the network?

George Paz

Well, there's no stereotypic answer to any of your questions. It's really a client-by-client situation. So for example, in some situations, competition is what drives pricing in the marketplace. And so what we do is our supply chain people look out to the future, estimate what's going to happen with drug price inflation. And when we price into our products, we will assume that we are going to get a certain amount of inflation utilization, generic transfer, generic patented -- generic launches that are going to occur when the pricing components of those, others are going to roll out into the future. And we price that into our products. We do it, all of our competitors do it. And those, I guess, the best and can understand where these things are headed are the ones that fare the best and can pass along appropriate savings. So saying it a little differently, we anticipate that when drug price inflations are running at 10%, that, that won't be kept by the pharmacies that in fact, they will share some portion of that back with our plan sponsors. And we price that into our products. So when a pharmacy, all of a sudden, decides they're going to keep everything, and matter of fact, change the terms and conditions to increase pricing, that is not contemplated in our price structure that we have on the table for our clients. And therefore, if we didn't get them to give part of that inflationary and new generic launches benefits up to our clients, the cost of healthcare would in fact rise. So it really depends on when the client was contracted, what stage they're in, and as to whether or not there's any benefit is going to be derived for those clients. What I will tell you, though, is that we are working very hard and what's becoming more -- what Walgreens is helping us do is actually sell the idea of more restricted networks to our clients. Once you lose Walgreens, why not take it to the next step? And the whole concept here of finding providers that want to help drive down costs and take waste out of the system are stepping up. And we're putting together networks which are much narrower. And we're taking those out to our clients. And through this latest situation, we find much more receptivity than we've had in the past on these new concepts. And so, clients are looking at that opportunity. As you might guess, if a big chain doesn't have to compete with Walgreens, they're willing to give up -- they give more of a discount. They don't have to worry about them sharing their membership with the other providers. So they're stepping up in deeper discounts. Most of all the other providers look at that Walgreens book of business. Walgreens is a very large retail supply chain -- supplier of product. And they see a tremendous opportunity for them to increase their sales in a time of severe economic depression. So this is a huge opportunity for the rest of the retailers in our book of business to gain market share at the cost of Walgreens. So that's unfolding.

Lisa C Gill - JP Morgan Chase & Co, Research Division

George, is there any way to quantify the selection of a restricted network for the 2012 selling season? Is there any numbers around that as far as what you've seen historically versus what you've seen this year? And then secondly, have you had any contact with Walgreens? Has there been any negotiation at all? Or has this been completely negotiated by them in the public market?

George Paz

Well, going to your first question. We'll give you more -- we're still very early on, and people are coming to grips. Most people believe that Walgreens and us would come to a resolution before year-end. It looks less and less likely that, that's going to occur. So clients are starting -- are coming to grips with that and they're now deciding whether or not they should stay in a large 50K network without Walgreens or should they select the nigh tighter narrower networks. It's still very early on. So why don't we give you some updates on that as we get past -- or why don't we give better clarity. With respect to -- the only time I see where I'm negotiating with Walgreens is when I read it in the newspapers. So it's unfortunate. We have a very open door policy here. If they want to get together and talk, if they want to negotiate, I prefer not to do these things in the paper. We try to stay out of the paper on this type of stuff. This is a matter between us and Walgreens. I don't think it should be all over the news, you as an investor and the investor groups, obviously, have a vested interest in this, but I don't think we need to sell our side to you, we need to sell it to our clients.

Operator

The next question comes from Larry Marsh with Barclays Capital.

Lawrence C. Marsh - Barclays Capital, Research Division

I will ask another follow-up question on Walgreens. So George, I mean basically, it seems like you're communicating you have pretty full clarity on your 2012 impact. I mean, it feels like every single client have noticed -- or registered, so it feels like clarity is very high. And so with that, maybe a clarification. If you're able to acquire Medco, you certainly communicated confidence you will, will they be required to honor their commitment to keep Walgreens in network for '12 and '13 or such that if you're a legacy Medco member, you would keep Walgreens, and if you're a legacy Express, you wouldn't? What is your ability to combine into a new network?

George Paz

Let me address the first part of your comment first, Larry. As far as clarity is concerned, yes, it's very, very high at this point. Keep in mind what's taking place. We're going into open enrollment. Companies are now sending out their enrollment packages to their employee base. So when that stuff goes out, you have to show the network. And keep in mind that when people are choosing health care providers, what is the first thing you look at? You don't look at what pharmacies in. I've never heard of that before. What people do is the first thing they do is they look up their doctor. Changing doctors is traumatic. If you've got diabetes or you've got a heart condition, you want to make sure that the plan you're associated with has your physician, if you have confidence in them. You don't want to leave that plan. Because to shake things up because you can't go to a particular pharmacy. The second thing you do is you check your drug trend -- your drugs, "Is my drug a listed drug on the formulary of the plan that I'm in?" Those are the most important things. As far as I'm concerned, what drives healthcare costs is the proper application of medicine by the doctors and proper pharmacy controls by the PBMs and the plan sponsors. Those are what's going to drive it, not the people putting the pills in the bottle. People putting the pills in the bottle, their job is to make sure they talk about side effect profiles, help the client -- help the patient deal with their situation, but they don't control the formularies. They don't control what drugs are going to be acceptable or not. And unfortunately, when you look in mail order as an example, we have much higher generic penetration and therapy classes that are common to both retail and mail. And the reason is because we controlled the formularies, we can reach out, we have time, and we can do those things. So getting the person to the right channel is incredibly important. As far as what the situation with Medco, we haven't closed yet, Larry. We are not privy to this, as part of the FTC process. We're not privy to their rates and their conditions and where they're at. I would like to think that Walgreens and us would come together at some point and have an agreement here. It's better for everyone. But if it's not, then we'll cross that bridge when we close the Medco deal.

Lawrence C. Marsh - Barclays Capital, Research Division

Okay. Very good. Thanks, and a quick follow-up then. Lot of discussion also in the news about the Pfizer's rebating strategy around LIPITOR. We're almost a month into -- before the launch here. And given your scale, one would assume you've got appropriate pricing here, is there any way to sort of clarify how much visibility you have on your ability to drive value and margins with LIPITOR once it goes generic? Or do you feel like there's still uncertainty around how that is going to equate into your P&L for '12?

George Paz

Well, there's 2 big pieces to this, right? There's the mail order side, which obviously, we have very high clarity towards. And then there's the retail side. Certain providers, the big chains out there can go and you try to negotiate discounts and deals. Smaller chains and independents are going to have a much more difficult time. The clarity that exists around LIPITOR does exist in the mail. However, it does not necessarily exist at retail yet. We're going to have to wait and see how all this unfolds, how the access to the drug is going to -- what level of access to the generic is going to exist, and we'll keep you posted on that.

Operator

The next question comes from Tom Galluci with Lazard Capital Markets.

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

I guess, 2 follow-ups. Just on that last question. Obviously, one of your peers is sort of suggesting that they want to push the brand on the retail side of the business. So the brand of LIPITOR, during the exclusivity period, I was wondering if you have any comment on that sort of a strategy? And then number two, just back on Walgreens, you said it's sort of early, people were sort of hoping that you were going to have a deal. But what are some of the specific actions that you're taking with your clients sort of in the face of the potential of there -- no deal happening?

George Paz

Well, so to the first question, as far as whether we push a branded drug or a generic drug, I think it all comes down to what's the best cost for our patients. I mean, that's the only thing that really matters at the end of the day, is how do we save our patients money and make cost of drugs more affordable for our members. These are very difficult economic times. And if a patient can save money, we should do everything we can to do it. So if that means a brand, then we'll do the brand. If it means the generic, then we'll do the generic. We will monitor this. We will work a with our clients on a regular basis. We will stay in front of our clients to show them what's happening in the marketplace by access and supply, and what's the best interest for them. Keep in mind, if there is limited supply, having patients switch back and forth between brands and generics isn't a good answer either. So we've got to -- it's not just cost, it also has to do with supply and availability. So that's, those were all important factors that we'll have to see how this unfolds. But keep in mind, the point here is we often get accused of being a generic company, where we really are is a cost reduction company. And we would take advantage of whatever is in the best interest of our plan sponsors and our patients to reduce the overall cost, whether there's brands or generics. As far as helping our clients, I think, again, in these very difficult, tough economic times, it's very hard for a plan sponsor that's trying to control costs and laying the cost of shutting down sites, laying off individuals, trying to figure out how to continue their dividend payment streams and what have you to accept undue increases in healthcare costs. And that's what our clients are -- were looking at. We were able to work with them, show them the impact of the Walgreens rates increases. And as I've said in my prepared comments, this is very simple at the end of the day. If I'm a Walgreens user today and I have 3 pill bottles that all -- that have the labels on them, that says, what's in the medicine, how often I take it, doctors name and phone number. All I do is walk into the CVS store and hand them -- or the Rite Aid store or Wal-Mart store or the many other pharmacies, there's another 58,000 pharmacies out there that we could -- that members can go to. And they can walk in with those pill bottles, hand the pill bottles to the pharmacist, go do their shopping or go pick up some things and come back. And meanwhile, the pharmacist calls the doctor and gets the prescription refilled. It's very, very simple. And it sounds catastrophic, and it's a shame that some people are out there trying to use scare tactics on people who are elderly or maybe not in as good a position in order to scare them into making decisions, when it's a very -- really, a very simple process that we can help our clients address. Again, the worst thing that happens to an elderly person is somebody that wants to move because they may think they're going to lose their pharmacy. Move to another plan and find out all of a sudden, their cardiologist is no longer available to them, and they can't move back for a year. Think about the -- what happens to that poor person in that situation. God, I hope that doesn't happen.

Operator

The next question comes from Robert Willoughby, Bank of America Merrill Lynch.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

George, can you hazard a guess, some of the things that you've done to educate your members and to steer them to other locations? I mean, what costs you might have incurred in the quarter? Is there an EPS impact we can get our arms around?

George Paz

Yes, unfortunately, Bob, it's not an insignificant amount of money. Because we have a lot of Walgreens users. And so we've had to send out letters to start with. We do a -- phone callings. We've actually made outbound -- high utilizers, people on Medicare and others, we've actually picked up the phone and called them directly and explained to them how simple this process is to move, all those things have a cost. And we want to be very supportive of our plan sponsors and making sure that they keep their membership, and then we feel very confident that we'll be able to do that. And we took a guess at what -- all I know, this is not a guess, we've got good visibility, we took up an estimate of those numbers, and that's the 5% that we believe will -- in some form or another, stay with Walgreens. The rest are all moving. So I prefer not to get into the numbers. There's always something going on, whether it's Walgreens, whether it's Medicare compliance, whether it's integration-level activities, but it's not insignificant, Bob.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Okay. And just...

George Paz

We think -- and by the way, we also have taken down management bonuses to account for that shortfall. So we felt that as a management team, we should pay for that. So we've reduced our bonus levels accordingly.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Oh, that's admirable. And can you hazard a cash flow forecast for 2012? If not, should we just assume the same healthy premium to net income from this year?

George Paz

Jeff?

Jeffrey L. Hall

Yes, Bob. We're not going to give 2012 guidance at this point for the reasons I discussed in the prepared remarks. But as you know, we're incredibly focused on cash flow and return on invested capital and would expect the normal metrics to hold.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

There's no bleed on any of the issues in cash flow?

George Paz

No, you -- the Walgreens stuff -- once you switch, you're switched. It's like anything else. Once that patient starts walking into a CVS store on a regular basis, they're not going back to Walgreens any time soon. They're not calling us up to ask the question again. So the heavy lifting is now into '12 1/1. And there'll be some bleed over into the next -- into the first quarter of next year for those that pontificate or -- not pontificate, I'm sorry, procrastinate, got my wrong words there. Procrastinate into next year and those people will have to clean those up, and during the first quarter. There's always going to be some acute members, people that don't use their benefits that go into a Walgreens store, and then they can't get their prescriptions and who's going to call in. So -- but those calls are going to not be that great. And so that heavy cost load is going to be through the end of this year and then, a little bit into the first quarter next year.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

And you said earlier that, that may be too early to measure this. I'm -- but how would you not know that some of your members are already moving to competitors? You have no metric that you can speak to there?

George Paz

No, we did say we measured it, 95% of our -- so with 5% of our members are going to stick will still have access to Walgreens. And the reason that occurs is for -- twofold. One is they -- a lot of clients come to us and they don't buy our full suite of products. So we have several clients that only buy from us, rebate processing or we do the adjudication and handle the mail-order, but they handle their network contracting. So several -- we have several fairly large plans that do their own network contracting. Where there, we don't have the say as to whether Walgreens is in or out, and they can pay you the higher fees if they want to pay the higher fees. And those are the ones, for the most part, that we've lost. So yes, I mean, I think we have very high visibility to our numbers.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

But as you're shifting today, George, though, more -- I mean, it should be happening now, shouldn't it?

George Paz

Oh, you mean shifting from Walgreens stores into other stores?

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Yes.

George Paz

Oh, yes, yes, yes, we monitor that on a daily basis. We see that happening. Everyday, we get the adjudication engine.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Okay. And is it significant at this point? Or are we still waiting for greater impact down the line?

George Paz

It's dropping pretty quickly.

Operator

And the next question comes from Ross Muken with Deutsche Bank.

Ross Muken - Deutsche Bank AG, Research Division

So as you went through the latter half of the selling season and you obviously a -- customer conversations again and again, I mean, what has been sort of the top level of question or inquiry you're getting from the customer base, whether it's on WAG or it's on the combination or just other things you're doing in the business? Just some color on that would be kind of helpful.

George Paz

Again, I think it depends on whether it's a managed care company or an employer. From an employer perspective, employers are looking for specific solutions to specific problems. Having the right solution for that client is going to -- we will be able -- when we solve that, it doesn't really depend if we have Walgreens or not. They need access. And in limited situation, it does matter. If they're in a situation where Walgreens is by far the biggest provider, there is not a whole lot of those where there isn't other alternatives, but once in a while, it can hit us, but not very often. So we can always offer a network with adequate access. The issue really comes down to how does the business model change though in acquisition. I think we are pretty good at that, quite frankly, because we've done this so much. Keep in mind, just a couple of years ago, we were in the throughs of the WellPoint of integration. Before that, we were in the NPA. We had Priority before that, we had DPS, we had Value Rx. We've done a few of these. And we know what the clients are looking for. And what they're looking for is consistency in the way their account managers approach their business. They are looking for -- they want the same people on their accounts. They want to know that they're going to have that team that supported them and delivered them great service over the last 8 to 10 years is going to continue to provide that service. And we bring that to them. We bring them those benefits. On top of that, what we do is we bring them new tools. Medco is going to give us a plethora of new opportunities and new tools to bring down costs through clinical programs and other reporting mechanisms and other things that we are very, very excited about. And we can't sell that today. We can't bring those to our clients. But that is the hope. And I think most of what we're hearing in the marketplace are the clients are excited about the TRCs and what Medco brings to the table, combined with our Consumerology, just focusing on the diseases state specifically from a clinical program, coupled with our understanding of consumer behavior, rolled together should make a tremendous impact on bringing down the cost of healthcare and improving health outcomes. And we're incredibly excited about it, and I think that excitement is in the marketplace.

Ross Muken - Deutsche Bank AG, Research Division

Maybe just as a follow-up to that. On the call this morning, Medco talked about the generic deflation next year and the savings passed back to customers being somewhere in the magnitude of $6.5 billion, sort of 2x what people saw this year. I mean, do you think as we pass over the next 2, 3 years, that sort of magnitude of savings pass back is sort of consistent in your business as well? And how have people sort of responded to that in the context of understanding the incremental savings, proposition that both of you, either on your own or on a combined basis, are bringing to kind of the customer base?

George Paz

It really depends. And we don't -- we try not to give up big numbers across the book of business. Because at the end of the day, we have thousands of clients, and they're in all different unique situations. We have clients today that have 83% generic fill rates that are basically shut out all brands except for a handful of key brands you have to have. And because they're in tough economic situations. And they're closed. There may be mandatory mail, they may be mandatory generics, they may be very stringent formularies with only prior offs to get the certain drugs. And the reason they're doing that is because they have to control costs to survive. And in those situations, big generic waves aren't going to do a whole lot for them, there's already generic opportunities out there. And so for those clients, we have to have a different answer and a different proposition. Other clients that may have very open formularies that maybe a company that's not under the same economic situation, we'll then have sit-down with them talk to them about what their opportunities are, how they might tailor their programs to meet their needs, to make sure their members still have open and adequate access, but at the same time, take advantage of the upcoming generic launches. So we do it client by client, sit down with each of those clients and give them their options. And I think it's a very effective way to market them in the industry.

Operator

The next question comes from Steve Valiquette with UBS.

Steven Valiquette - UBS Investment Bank, Research Division

So just to kind of follow-up further on Walgreens. You may have to sharpen the pencil on this a bit more now on the potential maybe mid-year resolution in 2012. So maybe just, I know, it's kind of tough to walk through some of the mechanics on this, but let's say, for commercial members, if resolution is reached in mid- '12, then what's the lead time by which a re-implementation could occur for WAG, for Walgreens to be back in the network? I guess, with the switch, you can say that, yes, they're back in within 30 days or is it that some of that drag into 1/1 '13? Just trying to get more color around that.

George Paz

Well, thanks for the question, Steve. I mean, and quite honestly, if we come to an agreement on terms and everything else works, then the reimplementation can be immediate. The issue for them is going back to the client. Think about the lesson that's being taught to our clients right now. And a lot of HR people are dealing with something in the throes of facing things coming down from on top and how do I control my costs? How do I get my -- how do I control my headcount? And on all other things that HR people are having to deal with, and now they're having to deal with taking Walgreens out their network. The real question is do you want to put them back in? And the longer this goes on, the harder it may be for them to get back in, because if I've gone through this, a lot of the people don't understand this yet. But there's the concern that there is going to be some amount of people upset that's going to carry over what we call disruption into next year. I'm pretty -- I'm -- firmly believe that once you get into February and March, the disruptions over. Everybody has switched. Everybody is happy. They knew -- they know their new pharmacist. Pharmacists are great people. They're going to do just as good at the CVS stores as they are at the Walgreens counters. So at the end of the day, they're going to be happy. And once that gets done, it's over. And so they're losing share, and that share is going to be hard to bring back. And I hope they're calculating that into their equation.

Operator

The next question comes from John Kreger with William Blair.

John Kreger - William Blair & Company L.L.C., Research Division

And sorry, one more question about the Walgreens situation. If there's no resolution in on 1/1 that 90% of your volume moves into a narrower network. Do you offer them a pricing reset at that time or do you does that sort of wait until the next contracting cycle for those clients? And then similarly, do your costs with the narrower network also reset at that the point or similarly wait until the next contracting cycle?

George Paz

Well, it depends. So what I was saying earlier, John, was that some clients are just going forward with their current network without Walgreens. In that situation, the pricing anticipated certain reductions from the pharmacy. And so if Walgreens would've stayed in it would have really killed that network. It would've taken the cost way up. So taking them out just keeps the cost to where it should've been, and so those prices don't reset, it is where it is. The ones that actually moved to a narrower network and decide to make that change, those people, their pricing will stay now set because they've accepted a narrower network, they've taken them out, they've got a lower cost than they would've had, and they're learning to live without Walgreens or they've learned to live without Walgreens. And that stays the case. And it'll be up to them. Every year, they can decide whether or not they want to broaden their network or they want to stay where they're at. And quite frankly, what we usually see is people don't go the other direction. Once you take -- once you start taking drugs and put them on the third tier, you don't increase your second-tier drugs in the future, unless there's some new innovative product that comes to market. So usually, you don't see people go back the other direction when they make moves that save them money.

John Kreger - William Blair & Company L.L.C., Research Division

Great. And then, Jeff, just a kind of quick follow-up. I think You just reported an EBITDA per script improvement in the quarter of about 13% in a pretty light generic year. If you think about the next couple of years, sort of setting the Medco merger aside, is it reasonable to assume that, that trend can improve?

Jeffrey L. Hall

I think, as I said earlier, we're not going to really give forward guidance, and as much as I'd like to answer your question, I think that would equate to giving forward guidance. So I think we're going to stay away from that question for now.

Operator

That question will come from Charles Rhyee with Cowen.

Charles Rhyee - Cowen and Company, LLC, Research Division

Just 2 quick questions. George, first, you talked about your goal is to lower costs, and whether it's from a generic or a brand, it doesn't really matter to you as long as it drives costs lower. So in the case of maybe Pfizer here with very aggressive rebating, is it well understood then by your retail network that -- I can understand that in the mail channel, you'll take the rebate and you'll pass that savings onto clients is that understood then for your larger retailers who might also be buying direct from Pfizer that -- am I right to think they're getting reimbursed at that lower rebated level then or somewhere around that?

George Paz

Well, I don't know if I can talk a drug in particular, but just talk about how a situation will work. If there's a huge rebate on the drug and it makes sense to be on the branded product, then what we would do is set our adjudication engine for that client to adjudicate the brand and take the brand. So that this way, when the member goes in, they get it processed, we reimburse the pharmacy at the brand reimbursement rate, but then the rebate goes back to the client to make them whole on the reduction. And depending on the product, depending on the discounts, there could be a generic co-pay, associated with that drug even though it's a branded product. So it's just -- it's all in the mechanics of the system and the processes.

Charles Rhyee - Cowen and Company, LLC, Research Division

Okay, that's helpful. And then, Jeff, I know you just answered the last question about not wanting to give guidance, but maybe instead, obviously, Medco this morning kind of pointed people to the proxy that you guys filed a few weeks back. Is that fair to look at it, obviously, in light -- taking into account the announcement in October, the preannouncement here on 2011, is that still a good document to look at?

George Paz

We are right in the midst of working our way through the FTC situation. And we are really excited about this opportunity that's in front of us. And what we've said is that we're accelerating a lot of capital expenditures and a lot of projects into this year because we've got a big job ahead of us next year as we integrate the Medco transaction. So what we prefer to do is just wait until we close and then validate our assumptions and then come out with our earnings guidance at that point. And we're excited about our new horizons and what opportunities are confronted. But quite frankly, until we put the two companies together, we'd rather just wait until then until we give that guidance.

Charles Rhyee - Cowen and Company, LLC, Research Division

And maybe I can sneak one more in. Can you just give any update on the FTC process? You announced here in the second request, is that just -- is it fair to think it's a continual dialogue that you're having right now with FTC?

George Paz

Yes, we are meeting with them regularly. We are in front of them. We are providing all the data we can give to them, sitting down with them and walking them through whatever questions they have. I think we have a very good dialogue going with them. Obviously, it's -- they've got economists and lawyers that are going to look at this thing -- this transaction on its merits. And we're hopeful that they'll see that there is significant savings for our patients and our clients by joining these 2 great companies. So we look forward to that decision.

Well, thank you all very much for joining us this morning. We look forward to keeping you posted as we progress down this path of to -- with the FTC. And we'll definitely keep you posted and have a great week. And don't forget, the Cardinals are playing tonight. We need a win. So let's stay on top of that one. Thank you.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.

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