Stephanie Link: Express Scripts Has a Prescription For Growth

NEW YORK (TheStreet) -- Express Scripts (ESRX) is one of the largest PBM (Pharmacy Benefit Management) companies in the U.S. with over 1.5 billion in administered prescriptions a year. It is an industry bellwether, has a strong new management team and a solid balance sheet. 2013 was a decent year for the company and the stock gained 30% but I think the story gets better in 2014 and another year of strong stock returns.

The company is positioned well to see better volumes, sales and earnings - and, importantly, operating leverage in 2014 from implementation of health care exchanges, increased mail order delivery, continued generic drug penetration, and further benefits from specialty drug exposure. It also stands to benefit as the synergies kick in from its 2012 acquisition of its largest rival, Medco Health.

Express Scripts held its analyst day meeting earlier this week and management laid out a good game plan for solid long term results, as well as a pretty compelling case for 2014 improvement. It expects to see 10% to 20% earnings growth over the next 10 years driven by the strong secular trends in health care as its key customers look to outsource various services to the PBM sector and the PBMs increase their level of product offerings. Cost containment services are the critical component for its customers, and this will only increase in importance as payers look to reduce drug plan benefit costs over time.

The company also believes that with Medco, it will be able to increase its current 27% script market share over time. While the long term is favorable, given these secular trends, the short term is also pretty interesting, with the company guiding EBITDA per script (a key metric in the industry that shows profitability) this year at 14% to 16% and EBITDA at 7% to 10%, driven by specialty pharmacy market share increases, a more narrow network offering and better utilization of its formulary management. The company has made it very clear it will drop certain clients that aren't profitable, which should also drive higher EBITDA per script over time. And finally, management remains committed to return at least 50% of its free cash flow - which means further buybacks and dividends.

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