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Friday August 06, 2010
Express Scripts (ESRX): The right prescription
by Stephen Leeb, editor The Complete Investor  Pharmacy benefits managers (PBMs) are the main distributors of drugs to retail pharmacies and directly to consumers. The PBM sector is a must-have health care area for investors. And Express Scripts (ESRX) is a leading and fast-growing pure-play PBM that has been generating impressive results and is undervalued relative to the industry. One striking health care trend in recent years has been a dramatic rise in prescriptions. For the 10 years ended in 2009, according to a government study, the number of prescription drugs dispensed in the U.S. rose 39 percent, while U.S. population growth was just 9 percent. Further, an aging and increasingly unhealthy population ensures the trend will accelerate, particularly with health care reform giving an additional 32 million Americans access to health insurance. Beyond benefiting from the sheer rise in volume of prescriptions, PBMs also are gaining from the growing emphasis on lower-cost generic drugs, which carry higher margins for drug distributors. 
For the five years ended December 2009, its revenues grew 63 percent to almost $25 billion. Even more notable is that over the same period its profits nearly tripled, to $827 million, as margins grew from 6.25 percent in 2004 to an outstanding 9.82 percent in 2009. These results reflect both outstanding operating competence and the growth of higher-margined generics. With generics remaining a main weapon in the fight against rising health care costs, their use will keep expanding, particularly as major drugs lose patent protection and as generic biologics enter the U.S. market. Beyond organic growth, Express Scripts has an excellent record of integrating acquisitions. The most recent, and largest, acquisition was the $4.675 billion purchase of WellPoint’s NextRx subsidiaries, the nation’s fourth-largest PBM, serving 25 million Americans with 265 million adjusted prescriptions. One-time integration costs from the acquisition, which closed in December, caused a brief hiccup in earnings, but profits should bounce back and grow even faster. NextRx is expected to add more than $1 billion of EBITDA (earnings before interest, taxes, depreciation, and amortization) within 12 to 18 months of the closing. Express Scripts collected $1.6 billion of EBITDA in 2009. The company’s enlarged footprint should spur new contracts and further boost profit growth, which is projected at 21 percent a year. The balance sheet is solid; as of March, Express Scripts had around $1.4 billion in cash, easily enough to cover the $1 billion in bonds due in 2012, and $2.5 billion in total long-term debt. Its debt is rated investment-grade and stable by the major rating agencies. Despite the company’s many pluses, shares trade below 15 times estimated 2011 earnings, for a PEG of 0.7. Learn more about this financial newsletter at Stephen Leeb's The Complete Investor. |
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