Express Scripts Continues to Offer Investors Express Growth

With all the talk of the crash of commodities and resurgence of the US dollar, it is easy to forget key growth companies that have held up well in this volatile environment. As investors flood into many of the financials, it has been easy to forget some of the new healthcare companies.

Healthcare changes have been sweeping through as Medicare continues to cut reimbursement. These cuts place pressure on companies to lower costs as they see their margins cut. Pharmacy benefits managers seem well placed going forward. Not only has this group shown resiliance in a tough market environment, but they have also shown the ability to increase margins, even in the face of decreasing revenue.

The secret is the use of generic drugs. Although there are many generic drugs on the market, many of the health insurers still are paying for brand name drugs. These companies make sure their beneficiaries use generic drugs, and even though they bring in less revenue, they typically have better margins. This area is somewhat new, with the emergense of drug dispensors on site at refering clinics and the proliferation of mail-order drugs, I believe further cuts can be seen going forward. This savings has translated into large gains for investors with respect to any of the companies in this group.

Express Scripts (ESRX) is compelling. I first made the call on this stock 201 days ago and it has returned 17.78% over that time frame. This is even more impressive when compared to the S&P 500. The reason shares have continued to grow as the economy has pulled back is the basis of their business. They provide the lowest cost generic and formulary prescription brands. They do this while increasing outcomes and safety. Their cost effective delivery has increased subscriptions through large contracts with providers. The growth of this stock is based on member increases, and this group of companies has just begun to grow, so the ability to increase is exponential.

Comparatively, ESRX has seen a larger increase in the generic fill rate. They are a few percentage points higher than both Caremark (CMX) and Medco (MHS) (another company I like). ESRX offers two different plans. Plan A has a lower claim fee by one dollar, but a higher prescription rebate by $.22 per prescription. Both plans benefit ESRX as plan A has a lower price per prescription but plan B has a lower net cost by $2.83 per prescription.

ESRX has seen a major change due to messaging - by communicating directly with their customers, they have found a larger switch over to lower cost, higher margin generics. Estimates have the company doubling and tripling lower cost options over other companies. They have a four-tiered approach. In 1995, they began aggregate volume discounts. After this, they began a system of financial incentives such as three-tiered co-pays. Consumer engagement was the next emphasis as stated earlier with speaking to their clients with respect to finding what worked the best. They have now implemented an advanced consumerology, which has linked the company to its customers in finding the best way to increase net profits by providing what is best for the consumer. This was enabled by the starting of the Center for Cost-Effective Consumerism. This group takes an individualistic approach to what people need. By taking this approach, the company better delivers its product.

If we look at the first quarter of 2008 results, we see that this approach is working as EPS was up 35% vs. the same quarter of 2007. Cash flow increased $89 million over the same quarter of 2007 to $248 million, and guidance for 2008 was increased to $900 million to $1 billion in free cash flow. Generic prescription utilitzation was up 4.8%. EBITDA per adjusted claim was up 17%. EPS guidance was increased to $2.95 to $3.03 for full year 2008.

This EPS is up from just a dollar a share in 2004. EBITDA per adjusted claim was just $1.05 in 2003 and is estimated to increase to $2.35-$2.45 this year. CAGR from 2003 to 2008 is 20% while this seems to be increasing as CAGR for 2005 to 2008 is 26%.

The company estimates that over the next four to five years, generic utilization could reach 80% from the current 65.1%. Specialty utilization could increase over the next five to six years to 80% also, while they are sitting at approximately 55% now.

Home delivery penetration should continue for the next 10 years from today's 24% to 40%. This part of the market is the most exciting, as one day delivery systems could increase even more as the baby boomers get older and have less mobility. Even more interesting is the emergence of e-prescribing, as it will allow a physician to sign off over the computer and have meds sent right to a patient's home.

Analyst estimates have ESRX growing 30% this quarter. Full year estimates are for growth of 30.6%. Next year the company is expected to increase earnings 18.6%. ESRX has beaten estimates four quarters in a row. Current cash flow should allow them to pay down their $1.6 billion in debt relatively soon, while continuing to buy back shares. This stock is still a buy and you should look for any pullbacks to initiate/build a position.

Disclosure: None