Zacks Investment Research



| Express Scripts Holding Company |(ESRX – NASDAQ) |$70.37 |

Note: This report contains substantially new material. Subsequent reports will have changes highlighted.

Reason for Report: Flash Update: 4Q17 Earnings

Previous Ed.: Oct 25, 2017, 3Q17 Earnings Flash Update With Estimate Revisions.

Flash Update [Note: Earnings update in progress; final report to follow]

Express Scripts Holding Company posted fourth-quarter 2017 (4Q17) adjusted earnings of $2.16 per share, which improved from $1.88 per share in the year-ago quarter (4Q16).

Revenues of $25.38 billion also increased from $25.12 billion in 4Q16.

Q4 Patient-Claim Volume Details

Express Scripts’ 4Q17 results benefited from a rise in patient claims and strong customer retention.

Adjusted network claims were 270.3 million, up 1.54% year over year (y/y).

Adjusted home delivery and specialty claims were 85.5 million in 4Q17, down 3.6% y/y.

As a result, net adjusted claims in 4Q17 were 355.8 million, flat y/y.

Notably, adjusted EBITDA (earnings before interest, tax, depreciation and amortization) per adjusted patient claim in 4Q17 was $6.04, higher than $5.79 reported in the 4Q16.

Margin Details

Adjusted gross profit in 4Q17 was $2.55 billion, up 6.5% y/y. As a percentage of revenues, adjusted gross margin expanded 42 basis points (bps) to 10% of net revenues.

Adjusted selling, general and administrative expenses were $483.2 million, up 16.3% from 4Q16.

The upside in margins was driven by operational cost improvement backed by focus on technology, digital tools, home delivery and specialty services.

Balance Sheet

Net cash flow provided by operating activities was down 39% y/y.

The company exited 4Q17 with cash and cash equivalents of $2.31 billion, down from $3.07 billion in 4Q16.

Total debt, at the end of 4Q17 was $1.03 billion, up from $722.3 million at the end of FY16. In fact, the company is striving to reduce debt level.

Guidance

Adjusted claims for the first quarter of 2018 (1Q18) are expected in the range of 335-345 million.

Adjusted earnings per share for 1Q18 are estimated in the range of $1.73-$1.78. This represents growth of 30-34% y/y.

For the full year (FY18), adjusted earnings are estimated in the band of $9.27 to $9.47, reflecting growth of 31-33% y/y. Revenues are expected in the band of $99,000 million to $102,000 million. Adjusted EBITDA is expected between $7,600 million and $7,800 million.

Coming to guidance for Express Scripts’ core business, total adjusted claims are expected in the range of 280-290 million for 1Q18. For FY18, total adjusted claims from core business are expected between 1,125 and 1,165. Net revenues are estimated in the range of $80,500-$83,000 million.

Long-term View

Buoyed by strong results in 4Q17, Express Scripts’ enterprise value initiative is estimated to cost $600-$650 million. Notably, management expects cumulative savings of nearly $1.2 billion by 2021.

Further, the company’s targeted compounded annual adjusted EBITDA growth rate for the core business from 2017-2020 of between 2% and 4% is a positive.

MORE DETAILS WILL COME IN LATER, IMMINENT EDITIONS OF ZACKS RD REPORTS ON ESRX

Portfolio Manager Executive Summary [Note: Only highlighted material has been changed.]

Express Scripts, Inc. is a leading national provider of pharmacy benefit management (PBM) services to employers, managed care organizations, worker unions, the state and federal governments. The company provides multiple services including basic claims processing, formulary development and management, disease management, mail-order pharmacies, and specialty pharmacies.

In Apr 2012, Express Scripts acquired Medco Health Solutions, Inc. for $29.1 billion ($71.36 per share) in cash and stock. Earlier, in Dec 2009, the company had acquired WellPoint Inc.’s NextRx PBM business.

Of the 16 firms covering the stock, 43.75% (seven firms) rendered neutral ratings and 43.75% (seven firms) provided positive ratings. Two firms assigned a negative rating to the stock.

Neutral outlook (7/16 firms): The neutral firms believe that while the company continues to maintain its leadership position, the competitive landscape has been intensifying. According to these firms, PBM margin growth is strained because of the pressure on mail penetration, growth in 90-day at retail, and slower increases to generic fill rates, particularly in 2017. These firms expect Express Scripts to face strong competition from players with better capabilities in terms of medical benefits or retail pharmacy network offerings. Retention and claims growth continue to be a matter of concern. Competition is gaining momentum through organic and inorganic growth. The firms are also skeptical of near-term risks related to Express Scripts’ contract with Anthem, its largest customer. Moreover, the pharmaceutical industry remains under government scrutiny and the drug pricing issues are putting the spotlight on companies and PBMs. The company is under the scanner due to the recent outcry on increasing drug prices wherein PBMs are also held responsible. There is a possibility that Anthem will switch to another PBM to focus on incremental savings on its existing PBM agreement and benefit from the Walgreens & Rite Aid combination. These firms expect the contract dispute with Anthem to remain an overhang on the shares while PBM margin growth is at risk from the pressure on mail penetration, migration of mail scripts to 90-day at retail, and slower increases to generic fill rates. These firms believe that the company’s position will be increasingly challenged by competitors with broader capabilities, including medical benefits or retail pharmacies.

Positive outlook (7/16 firms): The bullish firms believe that Express Scripts, one of the largest PBMs, should benefit from its focus on high-margin generic drugs due to branded patent expirations in the next few years and increased utilization of the mail channel for distribution. According to these firms, while better marketing efforts boost generic drug and mail-order prescriptions, acquisitions enhance the breadth and scope of the business. Express Scripts has the ability to negotiate in favor of lower drug costs for its customers due to the size of the company. Focus on specialty pharmaceuticals, improved ability to negotiate lower drug costs for its customers and attractive cash flows, which can be used for acquisitions or stock buybacks, make the stock a great pick. The positive firms believe that with the rising price of specialty drugs and an aging population, Express Scripts will witness higher growth opportunities in the near future. Moreover, these firms are impressed by the 2017 guidance provided by the company. They believe that the company’s guidance in the face of a lighter generic year and the ongoing rolloff of the Coventry and Catamaran business is encouraging.

Some of the firms also believe that increased mail penetration and continued launch of generic drugs will drive the company’s growth. Most firms are optimistic about solid trends, double-digit brand/specialty inflation and a strong new business pipeline, all of which position Express Scripts advantageously for 2017. In spite of the uncertainty regarding the Anthem contract, most firms are encouraged by the 2017 guidance given the solid core trends.

Negative outlook (2/16 firms): Report not available.

April 19, 2017

Overview [Note: Only highlighted material has been changed.]

St. Louis, MO-based Express Scripts Holding Company is one of the largest PBMs in North America. The company, founded in 1986, provides a full range of services to its clients, which include health maintenance organizations (HMOs), health insurers, third-party administrators, employers, union-sponsored benefit plans, workers’ compensation plans and government health programs.

The company, which changed its name to Express Scripts Holding Company from Express Scripts, Inc. following its Apr 2012 acquisition of health care company Medco Health Solutions, Inc, reports through two segments: Pharmacy Benefit Management (PBM) and Other Business Operations. It offers retail drug card programs, retail network pharmacy management, home delivery pharmacy services, benefit design consultation, drug utilization review, formulary management programs, disease management as well as compliance and therapy management programs. The company also offers various specialty services including patient care as well as direct specialty home delivery of injectables and infusion biopharmaceutical products to patients; distribution of infusion drugs to patient homes, physician offices, and infusion centers; distribution of pharmaceuticals and medical supplies to providers and clinics; third-party logistics services for contracted pharma clients; fertility services to providers and patients; and bio-pharma services comprising reimbursement and customized logistics solutions.

Further information on the company can be found at its website: express-.

The firms have identified the following factors for evaluating the investment merits of Express Scripts:

|Key Positive Arguments |Key Negative Arguments |

|Rising mail orders, generic penetration rates and acquisition activity are |Competition in the PBM industry could reduce Express Scripts’ profit |

|favorable for Express Scripts’ earnings growth. |margins. The company’s main competitors include CVS Caremark, CIGNA |

| |Corp., Catamaran, MedImpact and Aetna Inc. among others. Competition is |

| |gaining momentum through organic and inorganic growth. |

|In Dec 2014, Express Scripts decided to include AbbVie’s newly approved |Customer concentration is a key area of concern for Express Scripts as |

|hepatitis C drug Viekira Pak and exclude Gilead Sciences’ expensive HCV |its two largest clients, Anthem and Department of Defense, represented |

|treatments Sovaldi and Harvoni and Johnson & Johnson’s HCV drug Olysio from |29.4% of 2016 revenues. Moreover, the uncertainty regarding the Anthem |

|its National Preferred Formulary beginning Jan 1, 2015. Moreover, in Oct 2015,|contract remains a matter of concern. |

|the company decided to include Regeneron/Sanofi’s Praluent and Amgen’s Repatha| |

|– on its National Preferred Formulary. | |

|Express Scripts expects $1.8 billion in savings from its national preferred | |

|drug formulary program despite more modest levels of drug exclusions and the | |

|continued expansion of its SafeGuardRx programs which in turn should drive | |

|further savings to client. | |

Note: The company’s financial year coincides with the calendar year.

April 19, 2017

Long-Term Growth [Note: Only highlighted material has been changed.]

Prospects of the PBM industry look encouraging due to an aging population that uses more prescription drugs, along with the ongoing opportunities around generics and specialty pharmacy. Express Scripts, the largest full-service PBM company in the U.S., is making acquisitions at regular intervals. Express Scripts acquired the SmartD Medicare Prescription Drug Plan (PDP) in Sep 2013, which expanded its customer base. In Apr 2012, Express Scripts acquired health care company Medco Health Solutions, Inc. The company is expected to have recorded synergies of $1 billion from the acquisition. The Medco deal is a major positive for both the companies as this merger brought together two of the biggest PBM services companies, and helped lower the cost of prescription drugs and improve the quality of health care, thus attracting more patients. In Dec 2009, Express Scripts acquired NextRx, WellPoint Inc.’s PBM segment. The deal significantly expanded Express Scripts’ PBM business and included a 10-year contract under which Express Scripts would provide PBM services to WellPoint and its designated affiliates. Express Scripts is on the lookout for more prudent deals, which will help to drive growth.

In addition to acquisitions, Express Scripts focuses on organic growth through client alignment. The company’s priorities for capital allocation include investments to drive organic growth, strategic acquisitions and returning cash to shareholders. Express Scripts’ growth drivers include home delivery and specialty drugs, health care reforms, productivity improvements and capital deployment. The company is working on improving patient experience in Home Delivery. Better safety, convenience and unhindered access to pharmacists should lead to long-term growth of Home Delivery.

Express Scripts’ long-term growth driver is Formulary management. Formularies refer to lists of drugs to which a benefit design is applied that falls under an applicable plan. Formularies are developed through a four-step process involving the work of three distinct committees – Therapeutic Assessment Committee, National Pharmacy & Therapeutics Committee and Value Assessment Committee. This paves the way for better decisions, healthier outcomes and lower cost for clients and members, as well as ensures long-term growth for shareholders. While the company does not expect any immediate benefit from health care reform plans, it believes that the government’s objective of reducing the uninsured population should lead to more prescriptions, which will contribute to the top line in the long term. Express Scripts further plans to capitalize on increasing generics in the market and the approval of a pathway for biosimilars.

April 19, 2017

Target Price/Valuation [Note: Only highlighted material has been changed.]

|Rating Distribution |

|Neutral |43.8%↓ |

|Positive |43.8%↑ |

|Negative |12.4%↑ |

|Avg. Target Price |$82.50↓ |

|Maximum Target Price |$94.00↓ |

|Minimum Target Price |$71.00↑ |

|No of analysts with Target Price/ Total |12/16 |

Recent Events [Note: Only highlighted material has been changed.]

On Apr 24, Express Scripts announced that its biggest customer – the leading health insurer Anthem Inc. (ANTM) – is not likely to extend its pharmacy-benefits management agreement, which is slated for expiration by 2019-end.In Mar 2016, Anthem had sued Express Scripts for overcharging its drugs and operational failures. Per management, Anthem has refused to participate in further discussions on pricing concessions and probable adjustments for the agreement. In fact, Anthem is likely to terminate its long-term PBM contract with Express Scripts by next year. Meanwhile, in 1Q17, Anthem accounted for about 18.3% of net revenues for Express Scripts.

On Feb 14, 2017, St. Louis, MO-based pharmacy benefit manager Express Scripts Holding Company posted fourth-quarter 2016 adjusted earnings per share of $1.88, beating the Zacks Consensus Estimate by a penny. Furthermore, adjusted earnings jumped 20.5% from the year-ago quarter.

Revenues of $24.8 billion missed the Zacks Consensus Estimate of $26.2 billion and were down 5% on a year-over-year basis.

For the full year, Express Scripts reported revenues of $100.3 billion, down from the year-ago figure of $101.7 billion.

Quarterly Highlights [Note: Only highlighted material has been changed.]

Adjusted gross profit in the fourth quarter was up 3.3% to $2.3 billion. Adjusted selling, general and administrative expenses were $863.5 million, down 17.7%.

Total adjusted claims amounted to $354.9 million, down 6% year over year due to faster roll-off of the Coventry business.

During the quarter, the company repurchased a total 74.4 million shares under its $5.57 billion repurchase program during 2016.

Guidance

For the full year, Express Scripts reaffirmed its adjusted earnings per share guidance in the band of $6.82- $7.02. Notably, this represents growth of 8% at the mid-point of the range on a year-over-year basis.

For the first quarter of 2017, adjusted earnings are estimated in the range of $1.30-$1.34 per share, representing growth of 7% to 10% on a year-over-year basis. Adjusted claims for the first quarter are projected between $345 million and $355 million.

Revenue [Note: Only highlighted material has been changed.]

Total revenue was $24.9 billion in 4Q16, down 5% y/y.

|Revenue |4Q15A |

|($ in million) | |

|Copy Editor | |

|Content Editor | |

|Lead Analyst |Nabaparna Bhattacharya |

|QCA |Urmimala Biswas |

|Reason for Update |4Q17 Flash Update |

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Mar 28, 2018

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