Anthem Contract in Focus as Express Scripts Reports In Line with Estimates

The two have been embroiled in public sparring since before Anthem sued Express Scripts for $15 billion in damages in March.
By Alicia McElhaney ,

As Express Scripts (ESRX)  prepares to reports second quarter earnings, analysts say the company's feud with Anthem (ANTM) - Get Report  will likely take center stage.

"I think the unfortunate reality is that the focus is going to be on the Anthem contract which doesn't expire until 2019 and not on the fact that ESRX is the leading [pharmacy benefit manager] out there," analyst Anthony Vendetti of Maxim Group said in an interview.

Express Scripts acts as Anthem's pharmacy benefit manager, which negotiates drug prices with pharmaceutical companies on behalf of insurers. The two have been embroiled in public sparring since before Anthem sued Express Scripts for $15 billion in damages in March.

For the three month period ended June 30 Express Scripts notes that Anthem accounted for more than 10% of its $25.2 billion in revenue.

Shares of Express Scripts fell 1.86% to $77.39 in after-hours trading after the company reported 2016 second quarter earnings in line with analysts' estimates. Express Scripts reported adjusted earnings of $1.57 per share, meeting analysts' estimates of $1.57 per share.

The St Louis-based pharmacy management company also reported $25.22 billion in revenue. This fell short of Wall Street's estimates of $25.42 billion for the period. Express Scripts raised its guidance for 2016 fiscal year earnings, to $6.33 to $6.43 from $6.31 to $6.43 per share.

Analysts expect speculation about whether Anthem will renew its contract with Express Scripts in 2019 to continue though they are confident the companies will work out a deal. 

"Express Scripts has made it clear in the past that they would like to put the acrimonious issues in the past," Vendetti said. "Most investors may not realize that Express Scripts has 30,000 employees and they are insured by Anthem's managed care program. There's a lot of reasons it makes sense for the two to work out an agreement."

Another wrinkle in the contract dispute? The Department of Justice has decided to block Anthem's acquisition of health insurance giant Cigna (CI) - Get Report .

"Anthem has less leverage because they're not as large as they would be with Cigna," Vendetti said, noting that this likely tips the scale slightly in Express Scripts' favor.

Steven Halper at FBR Capital Markets said he did not see the blocked Cigna deal as having much effect on Express Scripts' contract dispute.

"That's not my view of the world," Halper said. "Anthem by itself is pretty big. They have options to consider and to try to gain as much leverage around the contract as they can."

Both analysts noted that the company will likely highlight its share buyback plan during the earnings call.

According to Vendetti, Express Scripts has a fair amount of extra cash on hand that they tend to put toward a share buyback program. However, both he and Halper said the company could consider putting its $4 billion in free cash flow toward growth through M&A activity. Both said that no deals are imminent.

Still, though, Express Scripts will likely see at least some growth this quarter.

"Overall growth at least on the top line will continue to be somewhat modest," Halper said. "That's a function of the contract losses and challenges they've had over the last couple of years."

That said, Halper noted that the company is in a good position to have better retention rates for this year.

Express Scripts could also see increased competition in coming months, which could affect the company's projected numbers.

"It appears UnitedHealth (UNH) - Get Report with its OptumRX subsidiary has made a lot of noise in the marketplace," Halper said. "We don't know what that's doing in terms of new contract signings."

Express Scripts will host a conference call with analysts and investors at 8:30 a.m. EST on Tuesday.

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