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Express Scripts Plans Buyback

It will repurchase shares if its Caremark bid falls short.

Express Scripts


has delivered some potent operational results that, for opponents of the company's proposed buyout of



, could prove difficult to swallow.

Notably, Express Scripts blew past profit targets for the fourth quarter and raised its guidance for the current year as well. The company reported quarterly profits of $1.02 a share, a full nickel higher than the current consensus estimate. Moreover, "as a result of strong underlying trends," the company said that it is boosting its 2007 earnings guidance by 18 cents to between $4.08 and $4.20 a share.

On average, analysts have been projecting 2007 profits of just $3.95 a share instead. Shares rose 28 cents early Thursday to $72.36.

Meanwhile, Express Scripts set a number of records in the latest period. Revenue did slip a bit to $4.53 billion, missing the consensus estimate, but net income surged 32% to $147 million. Cash flow looked especially strong, coming in at $306 million for the quarter -- compared to cash flow of $352.6 million for the past three quarters combined. Gross profit and generic utilization hit record levels as well.

Express Scripts posted its strong results during the midst of a heated battle with


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over Caremark. The company hopes to acquire Caremark and emerge as the nation's largest pharmacy benefit manager. However, Caremark itself strongly favors a so-called merger of equals with the CVS drugstore chain instead.

For its part, Express Scripts fully expects its momentum to continue -- with our without Caremark's help. The company has specifically excluded Caremark from its 2007 guidance and, rather than sweetening its bid for the company, says it will buy back $1 billion in stock if the buyout falls through.

"Without question, our first choice is to successfully complete the acquisition of Caremark as our best option for taking advantage of what we believe will be a favorable environment for PBMs," Express Scripts CEO George Paz stated. But "many have asked what the company will do if the Caremark stockholders ultimately do not agree with our position that the Express Scripts offer for Caremark is the superior offer."

In response, Paz added, "I have said many times that we are bullish on the PBM industry and bullish on our ability to compete successfully against a conflicted, vertical CVS/Caremark combination."

These days, Wall Street experts have been focusing more on Express Scripts' possible buyout of Caremark than on the company's current performance. Most simply assume that Express Scripts will continue to deliver strong operational results.

For example, SIG Susquehanna analyst Constantine Davides was looking for Express Scripts to beat both revenue and profit estimates for the fourth quarter. Davides predicted that the company would show off its industry-leading generic utilization rate -- which provides a nice boost to margins -- and the cost savings from a recent acquisition to boot.

Looking forward, Davides hopes to see Express Scripts pull off its biggest acquisition yet. He believes that Express Scripts can secure regulatory permission to buy larger Caremark and, as a result, significantly boost its earnings for years to come.

At the same time, Davides downplays concerns raised by Caremark and its preferred suitor.

"We continue to believe Caremark's claims of a combination with Express lacking strategic value are unfounded, with our channel checks confirming that the ESRX-CMX value proposition more clearly resonates with plan sponsors," Davides wrote on Monday. "While we recognize selected aspects of Caremark's perceived need to evolve and more tightly align with a retail entity, we believe the synergies associated with a CMX-ESRX merger can drive more material earnings growth and measurable pro-competitive (clinical, operational and economic) benefits to plan sponsors.

"Furthermore, we continue to discount the revenue synergy forecasts put forth by CMX/CVS, as soft synergies tend to be difficult to reliably estimate ahead of transaction completions, in our opinion."

Davides has a positive rating on Express Scripts' stock. His firm seeks to do business with the companies it covers.