Express Scripts ( ESRX) just keeps on getting healthier.

The giant pharmacy benefit manager has been flexing its muscles all year and, just this week, promised even more powerful results to come. The company said late Monday it now expects to deliver a 2006 profit of between $3.10 and $3.22 a share -- even after 10 cents' worth of options expense -- instead of the $2.98 Wall Street had been anticipating. The company pointed to a variety of forces, ranging from rising generic drug use to specialty pharmacy growth, as major profit drivers.

"We have a great opportunity in 2006 to continue to provide value-added, fully integrated pharmacy benefit management services that will help our clients continue to better manage their drug trend," Express Scripts CEO George Paz said when he offered the company's much-awaited update. "Our positive outlook for 2006 reflects the strength of our core business and the success of our business model."

The company's stock jumped 3.2% to $83.34 following that forecast.

Early Calls

By now, investors have come to expect plenty from PBMs in general and Express Scripts in particular. Express Scripts' stock has proven to be a star performer already, rocketing past the broader market -- and even rivals Medco ( MHS) and Caremark ( CMX) -- over the past year. Thus, many people have assumed that the company would send more good news their way.

In a brief note published on Monday morning, SG Cowen analyst Kemp Dolliver portrayed the company's 2006 outlook as little more than a "short-term risk" to the stock. If anything, Dolliver assumed that the stock would at least hold steady.

Double Your Pleasure
Express Scripts accelerates

But J.P. Morgan analyst Lisa Gill felt more uneasy. After watching the stock more than double in a year, Gill began urging investors this month to start cashing in their profits ahead of the company's update. She questioned whether Express Scripts would continue to enjoy its current level of success next year.

"While growth in profitability metrics has been impressive in 2005, we do not believe this level of improvement will be sustainable going forward, as we believe ESRX has been playing catch-up and much of the low-hanging fruit has been realized," wrote Gill, who has a neutral rating on the company's stock. But "our primary area of concern relates to new business trends heading into 2006."

Specifically, Gill worries that Express Scripts will see $1 billion worth of business disappear in 2006. She cites the PBM's big contract with New York -- lost after Attorney General Eliot Spitzer launched a probe of the company -- as just one piece of business that could prove difficult to replace.

Still, Gill does see one big area of opportunity. She believes that the acquisition of Priority Healthcare, a leader in the booming specialty pharmacy space, could offset the loss of more traditional PBM business.

Thomas Weisel Partners analyst Steven Halper is especially upbeat about the company's future in this area.

"The acquisition of Priority Healthcare appears to be going smoothly," Halper wrote in mid-November, following a visit with several members of Express Scripts' senior management team. Going forward, "investors should consider ESRX a major specialty pharmacy provider, fully capable of taking advantage of strong industry trends."

Worlds of Opportunity

Halper sees other big opportunities for the company as well.

For starters, he believes that Express Scripts will continue to grow its high-margin generic business in the coming year. Indeed, he points out, the company already has laid out plans to drop Lipitor from its "formulary" -- or list of preferred drugs -- and start pushing a generic version of competing Zocor instead. Both drugs successfully lower cholesterol.

Meanwhile, Halper portrays Medicare as a "big swing factor" for the company. So far, he notes, Express Scripts has yet to rush headlong into the new Medicare Part D program like its bigger peers. However, he suggests, the company probably will emerge as a major player in that arena down the road.

Still, Halper did hint at a possible road bump before then.

"Arguably, 2005 has shaped up to be one of the strongest years for ESRX in quite some time," he acknowledged ahead of the company's update. But "investors could be disappointed if guidance only meets current expectations."

That didn't happen, of course. And Dolliver, for one, had already listed plenty of reasons to buy the stock even if it had.

"We expect higher volume, rising earnings per share contribution from specialty distribution, waning negative publicity and share repurchases to drive 15% to 20% EPS growth for several years," he wrote on Monday. In the meantime, "we expect the stock to outperform the market by 20% over the next 12 months."

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