Comeback Stock: Express Scripts Kicked Walgreens’ Tail and Now Seeks to Close a Big Merger
That crowd in front of the Supreme Court last week fights over a lot of health care issues, but it’s pretty much in agreement on one thing: health care should be cheaper. This universal mission, repeated daily on national news, must just delight the executive team at Express Scripts (ESRX), a company in the business of lowering health care bills.
Certainly, investors have marked Express Scripts a winner in whatever conclusion the Court reaches on health care reform. Nineteen out of 21 analysts that follow the shares recommend buying them. YCharts Pro gives the company a strong rating on fundamentals. Express Scripts’ shares made a late-year turnaround last year, and its share price is up nearly 50% since then.
The comeback follows realizations that investors probably underestimated Express Scripts on a couple of fronts. First, investors got a little too freaked last June when Express Scripts pulled its clients out of Walgreens' (WAG) 8,200 pharmacies because the drug store wouldn’t give them the prescription deals it wanted. Surely, the worry went, insurance companies, corporations and government entities would walk away from Express Scripts if they couldn’t get their prescriptions filled at the country’s largest drug store chain.
Turns out the clients would take a little inconvenience if it meant saving money. More than 95% of them stayed with Express Scripts post Walgreens. If there were any lingering doubts about which business was hurt more by the rift, they were put to rest Tuesday when Walgreens admitted that a profit decline was partially due to Express Scripts’ exit. This is not a problem Express Scripts shares, as investors have come to understand in recent months.
Investors also have doubted Express Scripts could pull off a $29 billion merger with Medco Health Solutions (MHS) announced in July, considering the antitrust issues sure to arise in merging two of the largest pharmacy benefits management companies in the nation. It’s not a done deal yet, but more industry watchers now believe the merger will get approval in the next few months. That would subject the prices of about 40% of all U.S. prescriptions to Express Scripts’ negotiating power.
Even without the merger, Express Scripts remains a powerhouse in this business. It’s one of the few companies that doesn’t mix pharmacy benefits management with some other major business, like insurance or retail drug stores. Earnings and revenues have grown steadily since a major merger a few years ago, and its market cap is above $25.8 billion.
With a $29 billion merger still on the table, evaluating Express Scripts’ share price on traditional historic ratios doesn’t work very well. This leaves investors to look at other metrics aimed at measuring how well Express Scripts’ management makes money. The Walgreens’ win is a big coup in that department; the company is obviously good at its job. Express Scripts’ return on invested capital is better than the other major players in the business, especially those that operate PMBs as subsidiaries of insurance or retailing companies.
Express Scripts may have a problem if more insurers or other types of companies dive into the business. For example, UnitedHealth Group (UNH), the kind of insurer Express Scripts normally represents, recently moved its PBM work in-house. Even CVS Caremark (CVS), owned by that giant pharmacy retail chain, is making money as a PBM now – and stealing a couple of big Medco customers in the process.
Express Scripts has no direct control over whether medical insurance bills for you or I get bigger or smaller. The clients – the insurers -- decide whether to pass on the savings or cost increases that result from Express Scripts’ work to the individuals that use the policies. But everyone wants lower medical costs, and that’s exactly what Express Scripts is doing a pretty good job of selling.