December 5, 2017

Express Scripts Announces First Quarter 2017 Results

St. Louis, MO – Express Scripts Holding Company (Nasdaq: ESRX) announced 2017 first quarter net income of $546.3 million or $0.90 per diluted share. The 2017 first quarter adjusted earnings per diluted share was $1.33.*

First Quarter 2017 Results
The following compares first quarter 2017 and 2016 operating results:

  • Adjusted claims of 351.7 million, down 1%
  • GAAP net income of $546.3 million, up 4%
  • GAAP earnings per diluted share of $0.90, up 11%
  • EBITDA of $1,496.2 million, up 3% – See Table 3
  • EBITDA per adjusted claim of $4.25, up 4% – See Table 3
  • Adjusted net income of $805.4 million, up 2% – See Tables 5 and 5A
  • Adjusted earnings per diluted share of $1.33, up 9%
  • Net cash flow provided by operating activities of $1,000.4 million, up 33%

2017 Guidance
The Company increased its guidance for 2017 adjusted earnings per diluted share from a range of $6.82 to $7.02 to a range of $6.90 to $7.04, which represents growth of 9% over 2016 adjusted earnings per diluted share results at the mid-point of the range.

The Company expects total adjusted claims for the second quarter of 2017 to be in the range of 343 million to 353 million. Adjusted earnings per diluted share for the second quarter of 2017 is estimated to be in the range of $1.70 to $1.74, which represents growth of 8% to 11% over the second quarter of 2016.

Additional details on this guidance can be found in Table 6. For a discussion of the financial measures presented herein which are not calculated or presented in accordance with U.S. generally accepted accounting principles (“GAAP”), see “Supplemental Information Regarding Non-GAAP Financial Measures” below.

Update on Anthem Relationship
The Company’s current long-term PBM contract with Anthem expires on December 31, 2019, and Anthem is currently engaged in a Request for Proposal (RFP) process for a PBM service provider following the end of its contract with Express Scripts. While the Company has not formally participated in the RFP process, in recent months, management for the Company and Anthem have had several conversations in which the Company proposed providing as much as $1 billion in annual value ($3 billion in the aggregate) in the form of price concessions for 2017-2019 in connection with a negotiated contract extension for the period beyond 2019 at prevailing market rates. Although conversations have been ongoing, the Company was recently told by Anthem management that Anthem intends to move its business when the Company’s current contract with Anthem expires on December 31, 2019, and that Anthem is not interested in continuing discussions regarding pricing concessions for 2017-2019 or in receiving the Company’s proposed pricing for the period beyond 2019. As a result, today Express Scripts has elected to provide information as to its financial performance with and without Anthem, without any obligation to do so, in order to demonstrate that the Company’s core PBM business, excluding Anthem, is well positioned for future growth. See Appendix A for additional details regarding the Company’s relationship with Anthem and the history of the agreement between the parties.

“It is difficult for us to understand why Anthem has not recognized the potential value which could be brought forth by engaging in meaningful discussions regarding a mutually beneficial pricing arrangement for the remaining term of our contract and beyond,” said Tim Wentworth, President and CEO of Express Scripts. “No other party can offer Anthem savings prior to 2020, and no other party can provide updated pricing terms beyond 2019 without the risk and disruption of a lengthy and complicated implementation. As our disclosure today clearly demonstrates, Express Scripts makes well below $3 billion annually on the Anthem contract despite Anthem’s numerous public pronouncements to the contrary. Anthem’s conflicting demands for annual PBM savings, ranging from $700 million in September 2015 to $3 billion in January 2016, its subsequent litigation against us, and now its decision to discontinue discussions altogether do not make any sense to us. We just can’t explain why Anthem would choose to walk away from an opportunity to realize $1 billion in annual savings, which we have no obligation to provide under our current contract, in exchange for a contract extension at prevailing market rates with a longstanding business partner who has proven its ability to deliver value for their members,” Wentworth said.

“Express Scripts is committed to fulfilling our obligations to serve patients and Anthem members through the remaining term of the contract and the required one-year transition period, in accordance with our agreement, as well as the successful implementation of any new business added by Anthem over the next 32 months,” Wentworth added.

Contribution of Anthem, Coventry and Catamaran
While Anthem has not provided formal written notice that it does not intend to renew its contract with the Company, based on recent statements in conversations with Anthem management and other actions taken by Anthem, the Company believes it is unlikely its contract with Anthem will be extended. As a result, the Company has elected to report Anthem’s estimated 2015 and 2016 full year and 2017 first quarter contribution to financial results in order to provide visibility into the underlying performance of the Company’s PBM business excluding any contribution from Anthem. The tables below provide the portion of our estimated 2015 and 2016 full year and 2017 first quarter financial results attributable to Anthem (also see Tables 7 and 8 for further details of 2016 full year and 2017 first quarter financial results attributable to Anthem).

In addition to disclosing the estimated impact of the Anthem contribution, the tables below include the estimated contribution of the Company’s remaining business with Coventry and Catamaran, both of which were acquired and are rolling off the Company’s book of business. The Company is providing this information to assist in an analysis of the underlying performance of the Company’s core PBM business, excluding the contributions from Coventry and Catamaran, to which we refer together as the “Transitioning Clients,” as well as Anthem.

Full Year 2016 Overview
In the first quarter of 2017 our core PBM business, excluding Anthem and the Transitioning Clients, had EBITDA growth of 0.5% and EBITDA per adjusted claim growth of 2.2% when compared to the first quarter of 2016 (see Table 7).

Our Anthem contract generated approximately $2.2 billion and $1.9 billion of adjusted EBITDA, or approximately 31% and 26% of our total adjusted EBITDA, in 2016 and 2015, respectively. Under the terms of our contract with Anthem, Anthem’s contribution to our profitability, as a percentage of our total EBITDA and adjusted EBITDA, has grown and we expect it will continue to increase and exceed its contribution to our revenues, as a percentage of our total revenues, and that revenues, EBITDA and adjusted EBITDA attributable to Anthem will increase as the contract nears its termination in 2019. The contribution of the Anthem business to our financial results reflects the underlying structure of the 10-year contract, which was negotiated and executed as part of Express Scripts’ $4.675 billion acquisition of NextRx, Anthem’s in-house PBM, in 2009. For additional background on the acquisition and the Anthem contract, see Appendix A attached hereto.

Long-Term Outlook for Core PBM
“Looking forward, we will continue to invest in our business to maintain optimal service levels, bring innovative solutions to the marketplace to help our patients and payers and generate new business. We believe that no one else provides the depth and breadth of solutions we offer, and that no one else is as singularly focused on driving out pharmacy waste, controlling client costs and improving patient outcomes. Given Anthem’s apparent decision not to consider billions of dollars in savings we could provide them between now and the end of 2019, we will certainly invest those funds to better position our core business for the future,” Wentworth said.

The Company’s diverse client base that represents greater than 65 million members and volume of more than one billion adjusted prescriptions annually position the Company for continued success, with or without Anthem as a client. The Company remains confident in the long term growth outlook based on the positive fundamental backdrop and a diverse set of opportunities that leverage its core competencies. The Company’s independent, fully-aligned model has been a market leader in lowering the cost of prescription drugs, driving out waste and improving health outcomes for many years. In the U.S., we have an aging population and there is an increased use of pharmaceuticals, given their success as a cost effective treatment modality in a fee-for-value world. The Company has a superior suite of assets to address the needs of clients and patients, including new industry leading value-based programs, specialty and home delivery pharmacies, restrictive formularies and narrow networks. Patients and payers benefit from our increased pressure on the supply chain. This is evident today in the retail and wholesale pharmacy markets, where price deflation for generic drugs is becoming commonplace. It is the work performed by Express Scripts and other PBMs that lowers pharmacy costs in the U.S. We believe the Company’s pharmacy assets will gain market share in their respective markets, as continued investments enable us to have the best relative cost position in the industry and exceptional service levels to patients and payers. Increases in generic utilization will continue to be a value driver, with biosimilars bringing the potential to be as impactful to the market as the generic drug wave that helped bring down healthcare costs over the last 10 years. Medicaid, Medicare Part D and Medicare Part B are other areas where we believe there are opportunities to manage the government’s drug spend more effectively, but this will take many disparate parts of the healthcare system to get aligned towards a common objective, and Express Scripts is purpose-built to take on that challenge.

Based on management’s assumptions regarding healthcare trends, inflation, patent expirations, industry utilization growth and the overall environment for healthcare services, the Company is targeting a compounded annual EBITDA growth rate from 2017 through 2020 in the range of 2% to 4% for the core PBM, which excludes any contribution from Anthem and the Transitioning Clients.

The Company expects to continue to generate significant cash flow from operations. Furthermore, the Company is committed to maintaining a 2.0x debt-to-EBITDA ratio and strong investment grade ratings. Similar to past periods, the Company’s leverage ratio could move higher or lower on a short-term basis depending on the Company’s needs to fund strategic initiatives. Aside from gradually paying down debt over the next two and a half years to achieve our leverage targets, the Company’s priorities for deploying capital remain the same: to fund internal growth, make strategic acquisitions and return cash to its shareholders.

The complete earnings release is available here: Express Scripts Announces First 2017 Quarter Results

Source: Express Scripts

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