Express Scripts Holding Company (ESRX) The Henry Fund Stock Rating

The Henry Fund
Henry B. Tippie School of Management
Charles Schaller [[email protected]]
April 10th, 2016
Express Scripts Holding Company (ESRX)
Stock Rating
Healthcare – Pharmacy Benefits Management
Investment Thesis
Target Price
Henry Fund DCF
Henry Fund DDM
Relative Multiple
Price Data
Current Price
52wk Range
Consensus 1yr Target
Key Statistics
Market Cap (B)
Shares Outstanding (M)
Institutional Ownership
Five Year Beta
Dividend Yield
Est. 5yr Revenue Growth
Price/Earnings (TTM)
Price/Earnings (FY1)
Price/Sales (TTM)
Price/Book (mrq)
Profitability
Operating Margin
Profit Margin
Return on Assets (TTM)
Return on Equity (TTM)
We issue a HOLD recommendation for Express Scripts Holding company, a St.
Louis based Pharmaceutical Benefits Management company. Mergers and
Acquisitions have been the largest source of revenue growth within the PBM
industry and we believe that there are no more sizeable candidates for M&A.
This, paired with slow demand growth, significantly hinders future growth
potential.
Drivers of Thesis
Highly Concentrated Industry. Revenue growth in the industry has been
strongly tied to Mergers and Acquisitions. Due to M&A the number of PBM
companies has shrunk from 93 to 56 since 2006 with the top 3 companies
owning nearly 80% of the market share. ESRX is the largest PBM but there
are few candidates for further M&A.
Muted revenue growth of 2% over the next 5 years is likely, due to fewer
patent expirations and the recent rise of “Blockbuster Drugs” which
command a high price and earn very low profits for PBM’s.
Relatively thin profit margins (3%) combined with demand factors that are
largely out of control make dramatic income growth unlikely.
Lack of diversification of product and service offerings compared to peers.
Risks to Thesis
An (unlikely) merger with one of ESRX’s 2 large competitors (CVS Caremark
or UnitedHealth Group) would lead to massive market share and
significantly increased bargaining power with drug companies. This would
be a very favorable development for ESRX and likely lead to higher margins
and doubled revenues.
Hold
$70-75
$73.02
$63.29
$62.02
$70.09
$65.55 – 94.61
$82.85
$44.35
632.8
98.10%
1.01
0%
6.98%
19.7
11.1
0.5
2.7
10.79%
2.43%
4.65%
14.25%
Congressional action to dramatically shorten the patent lives of high priced
drugs. A government created patent cliff would greatly benefit ESRX as it
would lead to widespread release of generic drugs, which are highly
profitable to PBM’s
Earnings Estimates
Year
EPS
growth
2013
$2.45
49.39%
2014
$2.76
12.68%
2015
$3.66
32.32%
2016E
$3.98
8.68%
2017E
$4.56
14.68%
2018E
$4.86
6.56%
Data Source: FactSet
12 Month Performance
ESRX
25%
Company Description
S&P 500
Express Scripts is a St. Louis based Pharmacy
Benefits Management company. Express Scripts
works as a third party administrator of
prescription drug programs. They are responsible
for negotiating discounted drug rates, processing
and paying prescription drug claims. Founded in
1986, Express Scripts has grown through mergers
and acquisitions to become the largest PBM in the
country by revenue.
15%
5%
-5%
-15%
-25%
A
M
J
J
A
S
O
N
D
J
F
M
A
Data Source: FactSet
Important disclosures appear on the last page of this report.
2. Creating formularies of preferred medicines,
offering tiered prices based on negotiating
discounts.
3. Establishing networks with pharmacies for drug
dispensing.
4. Developing automated processes for determining
eligibility at point of sale.
5. Providing mail order drug services.2
EXECUTIVE SUMMARY
We give a hold recommendation for Express Scripts
Holding Company. The Pharmacy Benefits Management
(PBM) industry is heavily concentrated. Demand is largely
dictated by the number of prescriptions written by
Doctors, which is forecasted to slow to 2% growth in the
next 5 years. PBM’s can boost profitability through
negotiating lower drug prices with drug manufacturers but
with profit margins as thin as 3% it will not make enough
of a difference to offset the slow-down in demand.
Over the last 10 years. the most significant revenue growth
has happened through Mergers and Acquisitions. As a
result the number of PBM’s in the US has shrunk from 93
in 2006 to 56 in 2015. This has left 3 companies owning
nearly 80% of the market share.1
With few profitable potential mergers remaining and
facing slow prescription growth Express Scripts finds itself
with no clear ways to increase revenues. Express Scripts
will likely continue to see over $100 billion in yearly
revenue and remain the largest PBM in the nation.
However in light of their future growth reality we believe
that the stock is fairly valued at $70. Thus, we issue a hold.
PBM’s generate revenue through membership fees they
collect from their customer contracts. Their profitability is
dependent on the number of contracts they are able to
generate and maintain as well as the margins they are able
to sustain between their negotiated price with drug
manufacturers and the price they ultimately charge the
customer for the medication. As a result of this client
retention is an important issue for PBM’s. This issue is
further compounded by the fact that every year Express
Scripts must renegotiate contracts with about one-third of
its customer base. PBM companies set extremely high
customer retention goals. A retention goal of 97% would
not be uncommon for a major PBM.
PBM’s rarely manage plans for individual clients, but
rather manage thousands of large client groups including:
Insurance Carriers
Employers
Third-Party Administrators
Public Sector Employees
Workers Comp
Union-Sponsored Benefit Plans
Managed Care Organizations.3
Pharmacy Benefit Management Industry
Pharmacy Benefit Managers (PBM’s) are companies that
manage prescription drug benefits for over 200 million
insured Americans. They use their size and access to tens
of millions of clients as leverage in negotiating reduced
rates and rebates on drug prices from drug manufacturers.
While PBM’s tend to perform similar services there is not
a typical structure for a PBM. Some companies (Such as
Express Scripts) focus exclusively on the pricing and
delivery of prescription drugs. Other companies (such as
CVS Caremark and UnitedHealth Group) function as the
PBM wings of a larger healthcare company. Additionally
some smaller PBM’s specialize on offering services at
multiple levels of the prescription drug supply chain
In general, PBM’s create value for their customers in 5
ways:
1. Negotiating drug prices with drug manufacturers
for discounts or rebates on behalf of their
customers.
PBM’s are shown to be a very effective means of lowering
drug costs. In a study commissioned by the PCMA it was
found that PBM’s can reduce prescription drug plan costs
by about 35% on average for a PBM member.4
COMPANY DESCRIPTION
St. Louis based Express Scripts is the nation’s largest
pharmacy benefit management company. Express Scripts
provides a wide variety of pharmacy benefit related
services, including claims processing, home delivery,
specialty
benefit
management,
benefit-design
consultation, drug utilizations review, formulary
management and medical & drug data analysis services.5
Page 2
Unlike many of their competitors who are diversified in
their service offerings across the healthcare industry,
Express Scripts works exclusively in the PBM space.
computer and payment services and drug counseling
plans.
2015 Revenue by Product Line
Company Analysis:
Network
Key Statistics6:
Home Delivery
26,000 employees
3,500 client groups
1.3 Billion Prescriptions filled annually
82.9% generic dispensing ratio
$101.7 Billion in revenue for 2015
Other
Service
As a PBM Express Scripts earns nearly all of their revenue
through three means:
Monthly membership fees: These fees are charged to
their client groups (usually a company or organization’s
healthcare plan) in exchange for drug price benefits. Most
clients receive PBM benefits through their health
insurance provider, who in turn outsource the role to
Express Scripts. As such many of Express Scripts tens of
millions of customers may not even know they are Express
Scripts customers.
Prescription drug price spread. The key role of a PBM
from the customer perspective is their ability to negotiate
discounted prices on prescription drugs. PBM’s negotiate
a lower price on the drugs with the drug company and then
structure a tiered lists of drugs, separated by price scales,
which is called a formulary.
When an Express Scripts customer goes to a pharmacy to
fill a prescription they pay a co-pay and Express Scripts
covers the rest of the charge (although the client actually
pays a good deal more when you factor in their annual
PBM membership fee). The amount that a PBM pays the
pharmacy is based on a pre-determined pricing agreement
with the drug manufacturers. Therefore the profitability
of a PBM is negotiating good enough discounts so that
they can offer the drugs at a lower price point, plus a profit
margin for themselves and still be perceived as offering
enough value to their customers to continue receiving
their business.
Service / Other revenues: In addition to the two
previously mentioned revenue sources Express Scripts
brings in a small amount of revenue (about 2-3%) through
PBM services. These include point of sale devices,
Data Source: ESRX 2015 10K
Express Scripts delivers drugs to their clients in two ways,
pharmacies and mail-order shipping:
Pharmacies have long been the standard means of
dispensing drugs to prescription holders. PBM’s have a
complex and somewhat contentious relationship with
pharmacies. After all, in an idea world, if the PBM’s do
their job well the drug companies sell more drugs, the
customers save money on prescriptions and the PBM
makes a profit. In the midst of this is the Pharmacy, who
functions as a middle man between the drug companies
and the customers. Pharmacies purchase the drugs from
the drug companies which they sell to the customer
through the intermediary of the PBM. They sell the drugs
at a predetermined price (plus their service fee), however
they have no say over the predetermined price. We
forecast that Pharmacy revenues as a % of sales will drop
by about 3% each year, reaching 40% by 2020 ( $44,143 B).
Pharmacies are obviously a crucial part of the prescription
drugs supply chain, but they are also the most expensive
means of getting the drugs to the end user. PBM’s invest
large amounts of money in payment systems, insurance
validation, consultation and benefit management services,
not to mention the pharmacy fees they pay through doing
business with the pharmacy. In recent years a new
development has presented a more attractive delivery
option, PBM run mail-order shipping.
Mail-Order Shipping. PBM’s have seen a significant
growth in business conducted through mail-order
shipping. If a customer is on a long-term medication (such
as Albuterol for Asthma or Omeprazole for Acid Reflux),
PBM’s can offer a bulk subscription delivery service for
their prescription drugs.
Page 3
The reason they are able to offer these details is the
increased scale it brings. A customer is much more likely
to forget to fill a prescription if they have to get it renewed,
drive to the pharmacy and fill it. Express Scripts maintains
relationships with Doctors’ offices, requesting and
obtaining continued prescription renewals in certain
cases. This is a much more financially advantageous
situation for a PBM to be in, and as such we have seen
consistent growth in their Home Delivery revenue stream.
Just 5 years ago Home Delivery made up less than onethird of Express Scripts total revenue. We forecast that by
2020 it will make up more than half of total revenue.
86%
3%
84%
3%
82%
2%
80%
2%
78%
1%
76%
1%
74%
Profit Margin
Generic Fill Rate
Generic Fill Rate vs. Profit Margin
This delivery method’s benefits are myriad. First of all they
are able to simplify the supply chain by removing the
overhead-heavy retail pharmacy from the equation. They
are able to centralize all of their benefits management,
payment and distribution to a few specific hubs located
across the country. Additionally these services are offered
at considerable discount (increasing perceived value) in
exchange for purchasing in bulk.
The previously
mentioned customer can get 3 albuterol inhalers for $35
each instead of a single inhaler for $50 each. Express
Scripts even offers free prescriptions for certain generics
(again increasing perceived value).
0%
2012
2013
GFR
2014
2015
Profit Margin
Data Source: ESRX 10K 2015
As seen on the previous chart profit margins seem to grow
almost in tandem with Generic Fill Rate. Unfortunately for
Express Scripts the chart also indicates that Generic Fill
Rates are currently nearing 90% (meaning that 90% of
prescriptions filled are generic) which begs the question
many analysts are asking “how much more bigger and
more profitable can Express Scripts really get?”
Notable M&A’s
Like the other major players in the PBM industry Express
Scripts owes the majority of its major revenue growth to
M&A activity. Notable Mergers and Acquisitions include:8
Generic Fill Rate
Generic drugs are the key to profitability in the PBM
industry. When a company’s drug patent expires, it is no
longer possible for them to charge premium prices as
competitors enter the market. Generic drug price points
allow Express Scripts to offer them at a very low price
(often $5 – $25) while still maintaining a healthy margin
for themselves. This is not the case with high priced drugs,
which are sometimes sold at extremely low margins or
even a loss for the company. As such the Generic Fill Rate
is an important statistic for PBM’s. This is the percentage
of total prescriptions filled that were generic drugs. All
other things being equal a PBM with a higher generic drug
fill rate will be more profitable. Express Scripts Generic Fill
Rate has climbed to the 85%7 in 2015 and with it profit
margins have also risen.
Page 4
1998: 12 year old company Express Scripts
acquires ValueRX from Columbia/HCA Healthcare
Group.
1999: Express Scripts purchases Diversified
Pharmaceutical Services from SmithKline
Beecham
2006: Express Scripts fails to purchase Caremark
after CVS enters late-stage negotiations. This
acquisition would lead to the creation of CVS
Caremark, who would become one of Express
Scripts biggest competitors. This was a significant
loss for Express Scripts
2007: Express Scripts acquires ConnectYourCare,
they would later divest in 2012
2009: Then the 3rd largest PBM in the country
Express Scripts purchases the subsidiaries of
Wellpoint for $4.6 Billion.
2012: In their largest deal to date Express Scripts
acquires Medco Health Solutions for $2.9 Billion.
This acquisition solidified Express Scripts’
position as largest PBM in the industry, a position
they have now held for 4 years.
Revenue vs COGS
120000
100000
80000
Sizeable Clients
60000
Express Scripts manages thousands of client groups of
varying size. Notable among their clients are their
contracts with Health Services company Anthem and the
United States Department of Defense (DoD). These two
clients collectively represented 29.4% and 25.9% of
Express Scripts revenues during 2015 and 2014
respectively.9 Both of these contracts are up for renewal
in 2019, which leaves a sizeable amount of future revenue
uncertain.
In December 2009 Express Scripts purchased 100% of the
shares and equity interests of NetRx, a subsidiary of
Anthem that provides PBM services. Express Scripts also
entered into a 10 year contract with Anthem under which
Express Scripts will provide PBM services for Anthem’s
health services members.
40000
2011
2012
Revenue
2013
2014
2015
COGS
Data Source: ESRX 10K 2015
Two things are visible in this chart: First, the significant
growth that Express Scripts experienced through M&A in
2012, paired with the relatively leveling off in the M&A
free years that followed. Second, the additional profit
margin created by the additional growth. Notice the
visible growth in the cap between revenue and COGS. This
is attributable to the additional bargaining power gained
through more customers as well as the growing Generic
Fill
Rate.
RECENT DEVELOPMENTS
A number of recent developments have significantly
impacted the PBM industry.
Major Clients as % of Revenue 2015
2010 – 2015 The Patent Price Cliff
16%
Anthem
13%
71%
Dept. of Defense
Other
Data Source: ESRX 10K 2015
Costs and Expenses
Nearly all of Express Scripts’ costs are COGS. This makes
sense as they are effectively the party paying the majority
of the drug cost provided to their customers. A look at the
chart below shows Revenue vs. COGS.
The PBM industry saw historic revenues between 2010
and 2015. This was largely due to a large number of
popular drug patents expiring in the same time period
(known as a patent cliff). Traditional pharmaceutical
patent lives run for 20 years and during that time the drugs
can command a premium price. Upon the expiration of
the patent the formula for the drug can be reproduced by
other drug companies which all but eliminates the price
premium. The new drugs (known as generics) are not
nearly as profitable for the drug companies, however they
are much more profitable for PBM’s.
A flood of new generic drugs into the market led to a boom
for PBM’s. The industry saw revenues more than double
over 5 years, growing from 147 billion in 2010 to 365 billion
in 2015. The potential to own a greater share of this
growing revenue was a great impetus for mergers and
acquisitions.
Page 5
2014 -2015 – The Rise of “Blockbuster Drugs”
A large portion of increased revenues (although not
profits) in recent years is attributed to the rise of
“Blockbuster drugs.” Some drug companies, specifically in
the biotech, have begun to specialize on treatment of
more obscure, chronic diseases that impact a smaller
portion of the population. The result has been several
highly successful drugs that have commanded extremely
high price premiums.
company which acquires another also acquires their full
client roster, which drives up revenues.
Rapid
consolidation has shrunk the number of PBM’s in the
United States by 40% (93 in 2006 to 56 in 2015).12 This
trend is expected to continue, reducing the number of
PBM’s to 35 by 2020.13
Number of PBM's Operating In US
100
80
A hot topic within the specialty drug world continues to be
Hepatitis C medications. Only a few years ago treatment
could take nearly a year and had a cure rate of only 50%.
Now there is a nearly 100% cure rate in 8-12 weeks. Along
with those better results come a much higher price tag.10
Specialty drugs pose a significant risk to PBM’s. First,
because they command such a high price PBM’s tend to be
unsuccessful at negotiating discounts and as a result
specialty drugs are not very profitable for PBM’s.
Additionally, they are expected to continue to increase as
a percentage of healthcare spending. Specialty drug
spending is projected to increase by 17-20% each year,
accounting for 50% of plan budgets by 2018.11
One of the only bargaining pieces that PBM’s have in their
specialty drug price negotiation is exclusion from their
formulary. If a drug is excluded from a PBM’s formulary
their customers will be forced to pay full price or use a
competitor’s drug instead. Notably, Express Scripts has
opted to exclude Gilead Science’s breakthrough Hepatitis
C drugs (Harvoni and Sovaldi) from their formularies.
2015 - 2020 – Strong Patents, High Prices
The patent cliff has largely ended for the foreseeable
future. Industry wide 2015 – 2020 will be a period in which
we do not see another wide-spread patent expiration
event. As a result there will be fewer new generics
entering the market, which will likely lead to slower
revenue
growth.
60
40
20
0
Historical
Estimated
Data Source: IbisWorld
There are multiple reasons that Mergers and Acquisitions
are attractive to PBM’s. First, they increase their
bargaining power and as a result increase their
profitability. The more client groups a PBM manages the
more economy of scale they can offer drug manufacturers.
Indeed, the size of their customer base is their biggest
leverage in the negotiation of drug prices. Lower
negotiated prices ensure a larger price spread which
increases their profitability.
Additionally, revenue growth is one of the only ways to
significantly increase revenues during times of slow or
stagnant product demand. PBM revenue is dependent on
prescription drug demand, which in turn is tied to a large
number of factors outside of the control of PBM’s. A
strategic merger or acquisition could double revenues
without having to attempt to woo client groups away from
the competition.
Extreme Consolidation
As a result of widespread M&A the PBM industry has
become very consolidated with three companies (Express
Scripts, CVS Caremark and UnitedHealth) holding nearly ¾
of the market share. This industry reality has positives and
negatives.
INDUSTRY TRENDS
Mergers and Acquisitions
The largest cause of increased revenues over the last 10
years has been through mergers and acquisitions. A
Page 6
Major PBM Players by Market Share
26%
28%
Express Scipts
CVS Caremark
UnitedHealth/Catamaran
2%
Aetna
17%
Other
27%
Data Source: IBISWorld
Pro’s of Consolidation: Larger firms will have much more
bargaining power with drug manufacturers. Better
negotiated rates allow for a higher profit spread for the
PBM. This creates a win-win for both the PBM and their
clients as the clients save more on drug purchases and the
PBM’s are able to earn higher profits.
Con’s of Consolidation: It is extremely difficult for a
smaller PBM to compete with the larger companies and
even more difficult for a company to enter into the
industry. As a result these smaller PBM’s are not likely to
grow and we are not likely to see many new entrants into
the market. In an industry that has used M&A’s as a key
strategy in revenue growth this is problematic for the Big
Three PBM companies. We are rapidly approaching a
point in time in which there will be no more attractive
M&A prospects. This rationale is one of the major reasons
analysts have given such a low P/E to Express Scripts.
Our model forecasts no significant M&A activity over the
next 5 years. A merger of equals with either CVS and
UnitedHealth is unlikely as they are parts of larger parent
companies. The next potential candidate would be Aetna,
who only makes up 2% of the market share. As such all of
our forecasted revenue growth is due to increased drug
revenues.
Cost Cutting
Profit margins are relatively thin in the PBM industry
(around 2%). As such cost cutting is an important means
of maintaining profits and PBM’s are under constant
pressure to reduce costs. There are a number of strategies
PBM’s can employ to reduce costs.14
Reduce service costs through mail-order. A
growing trend in the PBM industry is the rise
of mail-order pharmaceutical delivery. This is
Page 7
a cost effective to using pharmacies for a
number of reasons. First it cuts the middle
man out of the picture, as pharmacies have
high overhead whereas mail-order is relatively
cheap with few added costs. Additionally mail
ordered prescriptions often deal in bulk,
delivering 3 months’ worth of medication
instead of one. Customers are billed as soon
as the medication ships and due to the nature
of their medications once a product has been
shipped it cannot be returned by the
customers. This serves to create a sort of
prescription drug prescription service which is
not dependent on the customer remembering
to go to the pharmacy and renew their
prescription. Mail order is steadily growing as
a percentage of total revenues. We project it
to bypass Network Revenues to become the
largest generator of revenues in 2018.
Reduce payments to pharmacies. This is an
effective strategy in terms of reducing costs,
however Express Scripts cannot play this card
too often, as their continued relationship with
pharmacies is vital, competition is fierce and
they cannot risk alienating their pharmacy
relationships.
Demand higher rebates from drug
manufacturers. A PBM’s profitability comes
from the spread between the price they are
able to negotiate with drug manufacturers
and the price they charge their customers. In
the PBM industry size equals leverage, which
means the largest companies can often
negotiate the best drug deals. In recent years
this concept has been upended with the rise
of Blockbuster Drugs which command an
extremely high price premium. In response to
extremely high prices Express Scripts has
excluded a number of ultra-high priced drugs
from its formulary.
Implementation of step-therapy programs to
drive patients to use generics. Step-therapy is
when a patient is first prescribed and
approved for the cheapest and most likely to
be effective drug. If that treatment does not
work the patient step up to the next slightly
more costly, slightly more risky option.15
Porter’s Five Forces:
Porter's Five Forces Analysis:
PBM Industry
Rivalry
Substitutes
New Entrants
10
8
6
4
2
0
insurance likely also has a client relationship with a
PBM.
Buyer Power: Medium. Clients do not have the
power to price the drugs, but they do have the power
to leave one PBM for another if their drug prices
prove to be unattractive. This is the case with
Anthem, who is currently seeking the freedom to
leave their contract in search of better rates.
Summary of Porter’s Five Forces:
The stage has been set in the PBM industry for 3 major
players to duke it out in the coming years for the best deals
with drug companies.
Express Scripts, CVS, and
UnitedHealth’s growth options will now come from
attempting to woo each other’s current customers based
on more attractive deals.
Buyer
Supplier
MARKETS AND COMPETITION
Data Source: Henry Fund
Threat of Entry: Very Low. Size guarantees leverage
in negotiation with drug companies. Because of this
a new entrant would find it very difficult to succeed
in the industry, especially with the narrow profit
margins.
Supplier Power: Medium – High. The entire PBM
business model is based around negotiating the best
possible detail with suppliers and profiting from the
spread between negotiated discount and amount
charged to customers. Because of this negotiation
with suppliers is a complex bargaining game. As
blockbuster drugs come onto the market supplier
power becomes even more powerful.
Extent of Rivalry: High. The highly consolidated
market sets the stage for intense rivalry. Proprietary
drug deals are set up to the exclusion of competitors.
Attractive M&A deals are broken up at last minute as
a competitor steps in to offer a more attractive offer.
This rivalry will only intensify as prescription rates
slow and attractive M&A opportunities have been
exhausted.
Substitutes: Low. The most logical substitute to
using a PBM would be not having insurance and
saving for your own prescription drugs.
The
Affordable Care Act makes this a fineable strategy,
making it more unattractive. Anyone who has
Prescription Benefit Managers manage prescription drug
programs. They act as the intermediary between health
plans, drug companies, retail pharmacies and patients.
Initially PBM’s worked exclusively in processing
pharmaceutical claims for health plans. Over the last
several decades they have expanded their services and
now offer reimbursements for drug claims, processing and
cost control for members. They have experienced strong
growth with likely continued growth in the industry.16
Relationships and size are vital factors in the success of a
PBM. A PBM may manage hundreds or even thousands of
client group accounts, each of which may itself contain
thousands or millions of clients. Size allows greater
negotiating leverage with drug companies as PBM’s can
offer scale to drug companies through huge networks as a
concession for price discounts. Price is often the
determining factor for which PBM is chosen and PBM’s are
under constant pressure to cut costs and get a better value
for their clients.
In light of the increased power that comes with size the
PBM industry has experienced aggressive consolidation
over the last decade. Three large PBM’s now own nearly
80% of the market share: Express Scripts, CVS Caremark
and UnitedHealth.
Page 8
markets and should be considered a serious competitive
threat to Express Scripts.
CVS Caremark
CVS Health (Formerly CVS Caremark)’s BPM division is
a one of several strategic business units in addition to
retail pharmacy ownership, online pharmacy and
MinuteClinic. CVS operates over 7,800 pharmacies
under the names CVS Pharmacy, Longs Drugs and
Navarro Discount Pharmacies.17 A notable difference
between CVS and Express Scripts is the diversified
nature of CVS’ business model. While Express Scripts
functions exclusively as a PBM, CVS owns 3 vital steps
of the supply chain, the writing of the prescriptions
(MinuteClinic), the dispensing of the drugs (CVS
Retail) and the benefits management. The argument
could be made that this puts CVS in a more opportune
position to profit in the PBM industry. Additionally
the argument could be made that a potential conflict
of interest exists as doctors working for CVS owned
clinics may be pressured to prescribe drugs which are
more financially beneficial to CVS through their PBM
contracts.
UnitedHealth Group
Like CVS, UnitedHealth’s PBM business group is one of
many services offered by the health giant. Minnetonka,
Minnesota based UnitedHealth Group is 14th on the
Fortune 500. UnitedHealth provides health insurance,
specialized care serices, Medicare & retirement programs,
transplate care management, dental and vision programs
and many other assorted specialized services. Notable
M&A’s:
2005: UnitedHealth receives regulatory approval
to purchase PacifiCare Health Systems for $9.2
Billion.
2009: UnitedHealth acquiresHealth Net Inc.
2015: UnitedHealth acquires CatamaranRx. This
was a noteable acquisition as Catamaran was the
last remaining PBM’s that owned more than 5% of
market share in the industry.19 Through their
purchase of Catamaran UnitedHealth solidified
(and potentially stratified) the Big Three
competitors and raised the question: Where will
growth come from now?
CVS has been active in the trend of M&A. Notable
acquisitions in the last 10 years include:18
2006:
CVS acquires Minneapolis-based
MinuteClinic, the company which pioneered the
concept of retail-based health clinic.
2006: CVS steps in to prevent an acquisition of
Caremark Rx by Express Scripts, presenting a more
attractive offer CVS successfully acquired
Caremark Rx. This acquisition was touted as a
merger, although CVS’ management team and
philosophy have reigned supreme over the
culture.
2008: CVS acquires Longs Drug Stores, which
operates 521 stores in the United States,
specifically focused on California.
2014: CVS purchases Navarro Discount Pharmacy,
the largest Hispanic-owned drug store un the
United States.
2015: CVS enters into a deal with Target to acquire
their pharmacy and retail clinics. This will effect
1,660 pharmacies and rebrand all Target Clinics as
MinuteClinic.
CVS has made significant expansions in the previous
decade. They continue to make inroads into new retail
Aetna
Aetna is a Fortune 100 managed health care company
which provides a wide variety of health care insurance
plans, including medical, pharmaceutical, dental,
behavioral health, long-term care, and disability plans.20
Whereas some large health insurance companies opt to
outsource their PBM services (Blue Cross Blue Shield, for
example outsrources to Express Scripts), Aetna has opted
to offer PBM along with their other services. Aetna
occupies a very small portion of the PBM market, holding
about 2% of total market share.
Peer Comparison – Notable Items
Peer comparison in the PBM industry is difficult. This is
due to the small number of major players and the differing
business structures of each group. While Express Scripts
functions almost exclusively as a PBM, CVS operates as a
PBM in the scope of a larger business model involving
retail clinics and retail pharmacies.
Additionally
UnitedHealth has a greater emphasis on insurance and
health services than either of the other major competitors.
Page 9
These differing structures give each company unique
strengths and weaknesses as they face changing market
conditions. In spite of these differences, there are several
notable obvervations that can be made.
In spite of being the largest PBM, Express Scripts has the
lowest EPS, the second lowest P/E multiple and the
lowerst forward P/E. Additionally all four companies’ P/E’s
are projected to drop by 20-30% with Express Scripts’ P/E
falling nearly 50%. As analysts are not forecasting
significant growth in EPS this shows that the street’s
opinion is we will likely see a price decrease in the coming
year. Additionally, Express Script’s low forecasted P/E is a
sign that the market feels it will be particularly vulnerable
to the slow growth as they are not diversified in their
offerings. Whereas their competitors can seek growth
through retail or medical service revenues ESRX is relient
exclusively on their PBM revenues. Express Scripts’ clients
will likely be aware of Express Scripts’ increased
vulnerability to market forces which could give them
additional bargaining power, further driving down Express
Scripts’ profits.
ESRX
CVS
UNH
AET
EPS
3.56
4.63
6.01
6.78
P/E FY15
19.69
21.93
20.91
16.06
Net Income of Top Four PBM's
P/E FY16E
10.5
15.36
14.43
12.6
8000
6000
4000
Data Source: FactSet
Another notable observation is that Express Scripts has the
second lowest ROA, and the lowest ROE and Profit Margin
of its peers. This is further evidence of the hazards Express
Scripts faces by being undiversified in their service
offerings. In an industry in which size commands
bargaining power Express Scripts should have the highest
profit margins, and they should certainly be higher than
tiny competitor Aetna.
These narrow margins
demonstrate just how small the spread is in the PBM
business. A profit of 2.5-3% is actually quite impressive in
the PBM industry. Higher peer profit margins are due to
diversified product offerings (CVS’s includes profits from
MinuteClinic, etc.).
ESRX
CVS
UNH
AET
ROA
5.74%
7.27%
6.97%
5.57
ROE
13.35%
13.91%
16.93%
15.59%
three years. Net incomes for all 4 companies reveal the
extent to which each company is invested in business units
outside of the PBM industry. Aetna (AET) for example has
only 5% the revenue of Express Script, yet their net
incomes are almost identical. This is due to Aetna’s
diversification of services provided, drawing income
through its various insurance offerings in addition to its
PBM business. Additionally we see that while CVS and
UnitedHealth trail Express Scripts in PBM revenues they
dwarf Express Scripts in terms of actual income. This could
spell trouble for Express Scripts in the future. During a
period of economic downtown and low earnings both CVS
and UnitedHealth could fall back on other business units
to supplement their PBM revenue, while Express Scripts
does not have this option. This diversification could also
be a hindrance to UnitedHealth and CVS, as their future
success is also tied to retail sales and competition within
the retail market. CVS, for example must compete with
Wallgreens, Walmart, and a host of grocery stores while
Express Scripts only has to fight off competition on a single
front.
Profit Mar.
2.43%
3.42%
3.70%
3.97%
2000
0
ESRX
CVS
2013
UNH
2014
AET
2015
Data Source: FactSet
ECONOMIC OUTLOOK
Future revenues in the PBM industry are dependent on
prescription drug spending. Prescription drugs have a
fairly strong correlation with the healthcare sector which
itself share a strong correlation with the US GDP. An
analysis of the last 6 years of financial data shows that
Healthcare has consistently hovered at about 17.4% of the
US GDP (st. dev of .001) while prescription drugs have
amounted to an average of 9.6% of healthcare costs (st.
dev of .003). This allows us to forecast prescription drug
expenditures as 1.6% of GDP (st. dev of .002). Using
government forecasts for GDP growth we can forecast
Data Source: FactSet
Net income for all companies has risen slowly over the last
Page 10
prescription drug expenditures steadily growing by 4%
(about $350 million) annually into the future.21
Number of Physican Visits
10
% Change
Health Care and Rx As a Percentage
of GDP
20.0%
15.0%
10.0%
5.0%
0.0%
5
0
Health Care as % of GPD
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
Rx as % of Healthcare
30,000
25,000
20,000
15,000
10,000
5,000
2026
2025
2024
2023
2022
2021
2020
2019
2018
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
Number of People with Private Health
Insurance.
The Affordable Care Act of 2010 greatly impacted the
Healthcare industry. The ACA sought to lower healthcare
prices through increasing competition by creating a
number of federal and state health insurance exchanges.
Additionally the ACA mandated the purchase of private
health insurance. Individuals faced a tax penalty for not
having private insurance by 2015.23
Projected GDP Growth
2017
2009
Data Source: IBISWorld
Data Source: Bureau of Economic Analysis
2016
2008
2007
-5
Data Source: Bureau of Economic Analysis
CATALYSTS FOR GROWTH
As a result the number of uninsured Americans has seen a
marked drop. According to studies conducted by the
National Health Interview Survey the number of uninsured
Americans fell by about 8% to 41 million people in the first
quarter of 2014. This drop represents 3.8 million
Americans gaining private health insurance.24 The 3.8
million people are now under a PBM, which will boost
membership fees as well as number of prescriptions filled.
Number of Physician Visits
Prescription drugs, by definition must first be prescribed
by a medical professional. Therefore the number of
physician visits per year is an important factor in industry
growth. According to the Centers for Disease Control and
Prevention, 75.1% of patient visits to physician offices
involve the use of drug therapies.22 Furthermore as more
Americans gain healthcare through the Affordable Care
Act it is expected that the number of physician visits will
likely increase.
Page 11
Insured Americans are more likely to be able to afford
medical treatment, prescription drugs and therapies.
Therefore the decline in uninsured Americans is a growth
indicator for the PBM industry.
Aging Population
There is a strong statistical correlation between age and
medical costs. The Agency for Healthcare Research and
Quality reports that more than 91% of seniors and 58% of
adults had prescription medication expenses in 2011. As
the median age of the United States grows as will the
demand for prescriptions and PBM services.
The older population – persons 65 years or older – is
projected to grow significantly in the coming decades. As
of 2013 there were 44.7 million Americans over the age of
65, the US Department of Health and Human services
forecasts that number to more than double to 98 million
by 2060.25 This spike in age as well as the fact that many
age-related medications such as statins and heart
medication are available in generic forms and are
therefore more profitable for PBM’s (as opposed to
biotech antivirals, which tend to be for more rare, non-age
related illnesses). Long terms this will lead to increased
demands for prescription drugs and increased revenues
for PBM’s.
Chronic Illness
The treatment of chronic illnesses pose consistent revenue
streams through long-term care therapies. According to
the CDC two-thirds of adults in the United States are either
overweight (31.1%) or obese (34.9%).26
This has
contributed significantly to a number of chronic issues
which have in turn led to an increase in medical and
prescription drug costs. Obesity related diseases include
high blood pressure, heart disease, liver problems and
Type 2 diabetes; all of which are maintained through long
term prescription drugs. This creates a long-term revenue
stream for PBM’s.
INVESTMENT POSITIVES
Express Scripts has Strong client retention. CEO is
raising their client retention rate forecast to 9697%, up from 95-97%.27 Customer groups are
Page 12
under contract which creates strong revenue
security.
Largest PBM in an industry where size is a
significant factor to success. Express Scripts size
allows them significant bargaining power which in
turn yields a stronger profit margin.
Projected low but steady growth in revenues.
Demand in the healthcare industry is not likely to
drop due to the nature of their services.
INVESTMENT NEGATIVES
Low growth in prescription volume. We forecast
low growth of 1-2% over the coming five years.
Revenues are tied to the number of prescriptions
being written each year. Low growth in volume of
drugs prescribed will have a direct impact on
revenue growth.
Most growth through acquisition opportunities
have been exhausted. Opportunities to double
revenues by acquiring a competitor of nearly
equal size are not possible outside of merging with
their 2 remaining competitors.
Each year Express Scripts renegotiates contracts
with one-third of their client base. While they
maintain the majority of their customers these
negotiations frequently involve price concessions.
Lack of merger alternatives will likely lead to more
intense competition between Express Scripts, CVS
Caremark and UnitedHealth. This will lead to
competing to woo each other’s current customers
through price concessions and rebates. This
competition would cut into profits across the
industry.
Lawsuit with Anthem. ESRX is currently in an ugly
contract dispute with one of their largest clients,
health insurance provider Anthem. ESRX is
currently in a 10 year contract with Anthem,
ending in 2019. Under the conditions of the
contract there is a renegotiating period in 2016.
Anthem does not feel that ESRX has provided
enough of a value and is suing Express Scripts,
seeking to recover damages they claim came as a
result of Express Scripts overcharging for
products. The lawsuit also seeks the right to
terminate the companies’ agreement. Losing
anthem would be a significant blow to Express
Scripts revenue. The CEO of anthem recently
announced he was unsure if Anthem would
continue their relationship with Express Scripts
after the 2019 contract expires.28 The outcome of
this lawsuit factors significantly into our valuation,
which we will now elaborate on.
VALUATION
Our valuation model used a 5 year Raw Beta of 1.0129 We
then calculated a WACC of 6.77%. We assume a CV growth
of 2% annually beginning in 2021.
Revenue Growth and Contract Expiration
Revenue over the next 5 years will grow modestly but
steadily. We forecast revenue growth of about 2%
annually leading up to 2019. This depressed growth is due
to 2019 will be a significant year for Express Scripts as it is
the year that their contract with Anthem expires. Anthem
is one of Express Scripts largest customers and is currently
in the middle of a contentious lawsuit with Express Scripts.
Anthem alleges that they have been overcharged by $3
billion and is currently suing for both damages and the
legal right to terminate the contract at their discretion.
Analysts are split on whether Anthem will renew their
contract with Express Scripts, however we feel that it is
likely that they will. For one, Anthem is going to be looking
for a large PBM company to cover their benefits needs,
especially as they eye a large merger with Cigna.
UnitedHealth is one of Anthem’s largest competitors, so
they are unlikely to turn to UnitedHealth for their PBM
needs. The only alternative would be CVS Caremark.
Express Scripts will face one of three scenario’s in 2019:
Anthem will leave Express Scripts for CVS
Caremark after a bidding war between the two
PBM giants. This would lead to a 16% drop in
revenue for Express Scripts (a drop of about 18
billion in revenue). This would lead to the lowest
revenues in nearly a decade and would drop the
EPS from $5.15 to $3.96.
Anthem now merged with Cigna will follow
UnitedHealth’s lead and switch to becoming their
own in-house PBM service as a cutting costs by
occupying multiple levels of the health care supply
chain. This would lead to the same 16% drop in
revenue for Express Scripts.
Anthem will continue with Express Scripts,
however they will negotiate a significant discount
as a means of staying. Anthem is currently
accusing ESRX of cheating them out of $3 billion
through overcharges which equates to requesting
$300 million for each year of their decade long
contract.
We forecast that the third option is most likely (we would
give it 75% likelihood) and that Express Scripts will retain
Anthem’s business contract beyond 2019. We forecast
Anthem negotiating discounts of approximately 20% from
their current prices. This is a little less than the amount
that Anthem is currently suing Express Scripts for, alleging
overcharging. This would reduce revenue attributed to
Anthem from $18 Billion in 2019 to $14.6 Billion in 2020.
Annual Revenue from Anthem
20000
18000
16000
14000
12000
10000
2013 2014 2015 2016 2017 2018 2019 2020
Historical
Projected
Data Source: ESRX 10K 2015
While we believe this to be the most likely scenario,
regardless of Anthem’s decision Express Scripts faces an
almost certain dip in revenues heading into 2020.
Additionally the Department of Defense’s TriCare contract
with Express Scripts ends in 2020. We believe that the
Department of Defense will renew their contract after this
period as they do not have the contentious relationship
with Express Scripts that Anthem has.
Operating Expense Assumptions
Express Scripts has a high COGS. Over the 5 years leading
up to 2015 COGS has averaged around 90% of revenues,
slowly declining at about 0.6% per year. We forecast COGS
to remain at 89.5%, stopping the slight decline in response
to the increasing cost that blockbuster drugs may have on
COGS. Nearly all of Express Scripts’ intangible assets are
contracts which are amortized on a schedule over the life
of the contract. As such they are able to specifically
schedule amortization expenses. As such a large portion
Page 13
of Express Scripts’ assets are intangibles depreciation
makes up a very small portion of expenses, forecasted at
0.60%. We forecast SGA to continue just above the 5 year
average at 3.20%.
Historic and Forecasted Margins
12.00%
10.00%
Historical Operating Costs as
% of Revenue
8.00%
6.00%
100.00%
4.00%
90.00%
2.00%
0.00%
80.00%
2012 2013 2014 2015 2016E2017E2018E2019E2020E
70.00%
Gross Margin
EBIT margin
Profit Margin
Data Source: ESRX 10K 2015
60.00%
Product Revenue Lines Growth
50.00%
2011
2012
2013
2014
2015
COGS (except D&A)
Depreciation Expense
Amortization Expense
SG&A Expense
Data Source: ESRX 10K 2015
Peer COGS as % of Revenue
100
80
60
40
20
0
ESRX
CVS
UNH
Data Source: ESRX 10K 2015
Profit Margin Forecasts
Express Scripts earns revenue through four different areas
of business: Network Revenues, Home Delivery and
Specialty Revenues, Other Revenues and Services
Revenues. Historically Network Revenues (membership
payments from client groups) has made up the largest
portion of profits. Express Scripts has found Home delivery
to be an increasingly important portion of their revenue,
especially as it minimizes additional costs by mailing
directly to the consumer and traditionally deals in bulk by
shipping in 3 month orders. Over the 5 years leading to
2015 Network revenues as a percentage of total revenue
fell from 65.1% to 55.5%. Home Delivery in turn grew from
31.5% to 40.1%. We forecast this trend to continue with
Home Delivery overtaking Network Revenues in 2018 as
the largest source of revenue. Other Revenues and Service
Revenues make up a small (less than 5% of revenues).
They are however each growing, which we project to
continue.
Express Scripts has very thin profit margins. Over the last
4 financial years their profit margin has slightly climbed by
about 0.2% of revenue per year. Our model forecasts
continued slight increases leading to profit margins of just
under 3% in 2020. This remains a modest increase,
however it is double the profit margins of 2012.
Page 14
Our Forecast vs. Analyst Consensus
Historic and Projected Revenue Lines as
% of Revenues
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
Network Revenues
Home Delivery and Specialty Revenues
Other Revenues
Service Revenues
Data Source: ESRX 10K 2015
Model Results
Our DCF/EP results reveal that according to our model the
market’s current price of $70 is an appropriate price for
Express Scripts given the present value of their forecasted
future cash flows. While it is possible that there is a slight
upside (about 5%), Express Scripts current legal situation
with Anthem casts too much uncertainty on the
immediate future to merit the risk.
Our DDM and Relative P/E models yielded very similar
values, $63.29 and $62.02 respectively. In spite of these
similarities we feel that DDM and Relative P/E are not
effective models to use with Express Scripts. With regards
to the DDM Model Express Scripts has no history of
dividends, therefore our DDM price target is based
exclusively on the forecasted stock price in 2020 which we
do not feel is comprehensive enough. We feel Relative P/E
is also inappropriate for Express Scripts for several
reasons: First, Express Scripts operates exclusively as a
PBM company. Express Scripts’ two biggest competitors,
CVS and UnitedHealth contain a large number of business
units including additional health services and retail
pharmacy locations. Because of this their P/E’s do not
exclusively reflect the PBM industry. Additionally the
remaining PBM companies in the industry are either
privately held or less than 5% the size of Express Scripts.
Analysts are divided over the valuation of Express Scripts.
According to Thompson/First Call 15 out of 25 analysts
issue a HOLD recommendation for Express Scripts with 3
giving a strong buy, 6 giving a buy and 1 giving an
underperform.30 Analysts give a wide range of target
prices, ranging from a low of 60 to a high of 10031. The
source of this division seems to be based around estimates
of SG&A expenses. Of the 26 analyst estimates available
through Factset about half forecast SG&A expenses
following historical trends and company guidance (3.2% of
revenues). The other half forecast SG&A as 1.8% of sales.
The outcome of this forecast has significant implications
on net income and ultimately the target stock price. If
historic and company guidance numbers are accurate (as
we believe they will be) the target price will be $71. If,
however SG&A is indeed as low as some analysts project
the target price rises to $94. The source of this discrepancy
seems to be differing opinions on Express Scripts nonGAAP income statement item “Adjusted SG&A” which
does not include amortization of annual contracts. As we
feel that the higher SG&A is in keeping with historic
reported numbers and as the majority of large financial
firms (Oppenheimer, Wells Fargo, Deutsche Bank) forecast
the higher SG&A32 we have opted to use it in our
forecasting model. With regards to the rest of our forecast
our revenue, sales and other expenses follow a similar
trend to the analyst consensus.
Our target price closely match the target price given by
firms which shared our opinion on SG&A levels. Factset’s
average analyst price is $82.85, demonstrative of the
division between the analysts. Few analysts give a target
price at or near $82 with most skewing high near $95-100
or skewing lower near $65-75. Again, the chief sources of
this differing target price seems to be the interpretation of
Non-GAAP Income Statement line “Adjusted SG&A.”
Page 15
KEYS TO MONITOR
Outcome of lawsuit with Anthem. Losing the
anthem contract before 2019 would have
immediate negative consequences for Express
Script’s revenue forecasts.
Contract renewals with Anthem and the
Department of Defense. Both the status of
renewed contract and the terms of agreement
with regards to reduced prices. Losing either
account would lower annual revenues by nearly
15%. Losing both accounts would be very harmful
for Express Scripts.
Government legislation. Congressional legislation
pertaining to price ceilings, patent life changes and
relaxed biosimilars and generic regulations would
also have a significant impact on future
profitability.
Upcoming patent expirations. Popular drugs
facing a patent expiration will be favorable to
Express Scripts’ profitability. Additionally any
events that may shorten patent lives will also be
good for Express Scripts.
REFERENCES
1. IBISWorld. Industry Reports: Pharmacy Benefit Management 2015
2. Ibid.
3. Argus Research. Express Scripts Holding Co. Report created
4/4/2016.
4. IBISWorld. Industry Reports: Pharmacy Benefit Management 2015
5. Express Scripts Corporate Overview. Lab.ExpressScripts.com
6. Ibid.
7. ESRX 2015 10K
8. Wikipedia: Express Scripts Mergers and Acquisitions History.
https://en.wikipedia.org/wiki/Express_Scripts
9. ESRX 2015 10K
10. Navitus: PBM Industry Trends.
https://www.navitus.com/Utility/newsevents/blogs/corporate/December-2014-(1)/PBM-IndustryTrends-for-2015.aspx?page=3
11. Ibid.
12. IBISWorld. Industry Reports: Pharmacy Benefit Management 2015
13. Ibid.
14. Argus Research. Express Scripts Holding Co. Report created
4/4/2016.
15. Ibid.
16. Deloitte. The PBM Industry a Sea of Constant Change.
http://blogs.deloitte.com/centerforhealthsolutions/the-pbmindustry-a-sea-of-constant-change/
17. Wikipedia: CVS Health Mergers and Acquisitions History.
https://en.wikipedia.org/wiki/CVS_Health#Caremark
18. Ibid.
19. IBISWorld. Industry Reports: Pharmacy Benefit Management 2015
20. Wikipedia: Aetna. https://en.wikipedia.org/wiki/Aetna
21. Bureau of Economic analysis: Healthcare Spending, Prescription
Spending, GDP Growth Forecasts. http://www.bea.gov/
22. IBISWorld. Industry Reports: Pharmacy Benefit Management 2015
23. Ibid.
24. New York Times: Number of Americans Without Health Insurance
Falls. http://www.nytimes.com/2014/09/16/us/number-ofamericans-without-health-insurance-falls-survey-shows.html?_r=0
25. US Department of Health and Human Services. Aging Statistics.
http://www.aoa.gov/Aging_Statistics/
26. Centers for Disease Control. Obesity Statistics
http://www.cdc.gov/obesity/data/adult.html
27. Argus Research. Express Scripts Holding Co. Report created
4/4/2016.
28. The Street. Express Scripts Stock Drops on Anthem Drug Costs
Renegotiations
http://www.thestreet.com/story/13422568/1/express-scriptsesrx-stock-drops-on-anthem-drug-costs-renegotiations.html
29. Bloomberg Terminal
30. Yahoo Finance: Express Scripts (ESRX)
31. FactSet
32. FactSet
IMPORTANT DISCLAIMER
Henry Fund reports are created by student enrolled in the
Applied Securities Management (Henry Fund) program at
the University of Iowa’s Tippie School of Management.
These reports are intended to provide potential employers
and other interested parties an example of the analytical
skills, investment knowledge, and communication abilities
of Henry Fund students. Henry Fund analysts are not
registered investment advisors, brokers or officially
licensed financial professionals. The investment opinion
contained in this report does not represent an offer or
solicitation to buy or sell any of the aforementioned
securities. Unless otherwise noted, facts and figures
included in this report are from publicly available sources.
This report is not a complete compilation of data, and its
accuracy is not guaranteed. From time to time, the
University of Iowa, its faculty, staff, students, or the Henry
Fund may hold a financial interest in the companies
mentioned in this report.
Page 16
ExpressScript
RevenueDecomposition
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
ProductRevenue
NetworkRevenues
HomeDeliveryandSpecialtyRevenues
OtherRevenues
ServiceRevenues
TotalRevenues
63,244 58,469 56,473 54,593 52,559 50,377 48,060 44,143
37,571 38,633 40,830 44,018 47,258 50,515 53,742 55,047
2,052 2,204 2,454 2,620 2,787 2,951 3,110 3,085
1,231 1,582 1,995 2,555 3,258 4,137 5,228 6,578
104,099 100,887 101,752 103,787 105,863 107,980 110,139 108,852
RevenueAttributedTo:
Anthem
USDepartmentofDefense
0.81
12,700 14,124 16,586 16,917 17,256 17,601 17,953 14,604
10,618 12,006 13,329 13,596 13,868 14,145 14,428 14,260
%ofrevenueAttributedto:
Anthem
USDepartmentofDefense
12.20%
10.20%
14.00%
11.90%
16.30%
13.10%
16.30%
13.10%
16.30%
13.10%
16.30%
13.10%
16.30%
13.10%
13.00%
13.10%
60.75%
36.09%
1.97%
1.18%
100.00%
57.95%
38.29%
2.18%
1.57%
100.00%
55.50%
40.13%
2.41%
1.96%
100.00%
52.60%
42.41%
2.52%
2.46%
100.00%
49.65%
44.64%
2.63%
3.08%
100.00%
46.65%
46.78%
2.73%
3.83%
100.00%
43.64%
48.79%
2.82%
4.75%
100.00%
40.63%
50.67%
2.84%
5.85%
100.00%
GenericFillRate:
Network
HomeDelivery
81.60%
74.60%
83.70%
77.20%
85.10%
79.50%
86.50%
81.10%
86.50%
81.40%
87.10%
81.70%
87.30%
82.00%
87.50%
82.30%
ClientRetentionRate
94-96%
94-96%
95-97%
96-97%
96-97%
96-97%
96-97%
96-97%
ProductRevenue
NetworkRevenues
HomeDeliveryandSpecialtyRevenues
OtherRevenues
ServiceRevenues
TotalRevenues
ExpressScript
IncomeStatement
FiscalYearsEndingDec.31
Sales
COGS (except D&A)
Depreciation Expense
Amortization Expense
Gross Income
SG&A Expense
EBIT (Operating Income)
Nonoperating Interest Income
Equity in Earnings of Affiliates
Other Income (Expense)
Interest Expense
Unusual Expense - Net
Pretax Income
Income Taxes
Consolidated Net Income
Minority Interest
Net Income
Total Shares Outstanding
EPS
DividendPerShare
2012
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
93,858 104,099 100,887 101,752 103,787 105,863 107,980 110,139 108,852
86,080 (95,185) (90,257) (90,773) (92,889) (94,747) (96,642) (98,575) (97,423)
284 (429) (489) (628) (452) (563) (574) (586) (598)
1,588 (2,018) (1,754) (1,731) (1,727) (1,319) (1,309) (1,303) (857)
5,906 6,467 8,387 8,620 8,719 9,234 9,455 9,676 9,975
2,358 (2,190) (3,708) (3,704) (3,321) (3,388) (3,455) (3,524) (3,483)
3,548 4,277 4,679 4,916 5,397 5,846 5,999 6,151 6,492
11 42 28 25 31 32 32 33 33
15 33 19 15 4 (617.5) (528) (511) (500) (540) (550) (561) (573) (566)
(779.6) (797) (1,148) (577) (861) (879) (896) (914) (903)
2,191 3,030 3,066 3,864 4,027 4,449 4,574 4,698 5,055
833 (1,104) (1,031) (1,364) (1,410) (1,557) (1,601) (1,644) (1,769)
1,358 1,926 2,035 2,500 2,618 2,892 2,973 3,053 3,286
17 (28) (27) (23) (26) (26) (27) (28) (27)
1,341 1,898 2,008 2,476 2,592 2,865 2,946 3,026 3,258
818 774 726 677 652 629 607 587 569
$1.64
$2.45
$2.76
$3.66
$3.98
$4.56
$4.85
$5.15
$5.73
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
ExpressScript
BalanceSheet
FiscalYearsEndingDec.31
Assets
CurrentAssets
CashandCashEquivalents
Cash
Short-TermInvestments
Receivables,net
Inventories
DeferredTaxes
PrepaidExpensesandotherCurrentAssets
CurrentAssetsofDiscontinuedOperations
TotalCurrentAssets
NetPPE
Goodwill
OtherIntangibleAssets,Net
OtherAssets
NoncurrentAssetsofDiscontinuedOperations
TotalAssets
Liabilities&Shareholders'Equity
CurrentLiabilities:
ClaimsandRebatesPayable
AccountsPayable
AccruedExpenses
CurrentMaturitiesofLong-TermDebt
CurrentLiabilitiesofDiscontinuedOperations
TotalCurrentLiabilities
Long-TermDebt
DeferredTaxes
OtherLiabilities
NoncurrentLiabilitiesofDiscontinuedOperations
TotalLiabilities
Stockholders'Equity
PreferredStock
CommonStockinTreasuryatCost
CommonStockandAdditionalPaid-InCapital
AccumulatedOtherComprehensiveIncome(Loss)
RetainedEarnings
TotalExpressScriptsStockholders'Equity
Non-ControllingInterest
TotalStockholder'sEquity
TotalLiabilitiesandStockholders'Equity
2013
2014
2,015
2016E
2017E
2018E
2019E
2020E
2,014
1,160
854
4,023
1,871
455
97
31
8,491
1,659
29,305
14,016
77
53,548
1,833
1,405
428
5,980
2,113
391
252
10,568
1,584
29,281
12,201
114
53,748
3,186
1,391
1,796
6,721
2,023
129
12,060
1,291
29,277
10,470
146
53,243
5,003 10,024 9,936 13,739 14,341
3,177 8,167 8,047 11,817 12,387
1,826 1,857 1,889 1,921 1,954
6,123 6,246 6,371 6,498 6,422
1,972 2,011 2,052 2,093 2,068
208 212 216 220 218
- - - - -
13,306 18,493 18,575 22,550 23,049
1,609 1,641 1,674 1,707 1,687
29,277 29,277 29,277 29,277 29,277
8,743 7,424 6,115 4,812 3,955
187 191 194 198 196
- - - - -
53,122 57,026 55,835 58,544 58,164
6,768
2,900
1,982
1,584
1
13,235
12,363
5,441
664
0
31,703
8,488
3,137
2,836
2,551
17,013
10,966
4,923
782
33,684
9,398
3,452
2,659
1,646
17,155
13,946
4,070
691
35,863
9,548
3,217
2,491
1,650
16,907
13,596
3,663
727
34,892
9,739
3,282
2,541
4,225
19,787
13,868
3,297
741
37,692
9,934
3,347
2,592
1,575
17,448
14,145
2,967
756
35,316
10,133
3,414
2,643
2,700
18,890
14,428
2,670
771
36,760
10,014
3,374
2,612
1,475
17,476
14,260
2,403
762
34,901
(3,905)
21,818
12
3,913
21,837
7
21,845
53,548
(8,548)
22,680
2
5,920
20,054
10
20,064
53,748
(13,223)
22,213
(14)
8,397
17,373
8
17,381
53,243
(15,073)
22,275
5
10,989
18,196
34
18,230
53,122
(16,923)
22,337
5
13,854
19,273
60
19,333
57,026
(18,773)
22,399
5
16,800
20,432
87
20,519
55,835
(20,623)
22,462
6
19,826
21,670
115
21,784
58,544
(22,473)
22,505
5
23,084
23,121
142
23,263
58,164
ExpressScript
CashFlowStatement
FiscalYearsEndingDec.31
CashFlowFromOperatingActivities
NetIncome
NetLossfromdiscontinuedOperations
NetIncomefromContinuingOperations
AdjustmentstoReconcileNetIncometoNetCashProvided
Depreciation
Amortization
DeferredIncomeTaxes
EmployeeStock-BasedCompensationExpense
Other,net
ChangesinOperatingAssetsandLiabilities
AccountsReceivable
Inventories
Othercurrentandnoncurrentassets
Claimsandrebatespayable
AccountsPayable
AccruedExpenses
OtherCurrentandNoncurrentLiabilities
NetCashFlowsProvidedbyOperatingActivities
Cashflowsfromintestingactivities
Purchasesofpropertyandequipment
Proceedsfromthesaleofbusiness
Changeinshort-terminvestments
Changeinlong-terminvestments
Netcashusedininvestingactivities
2016E
2017E
2018E
2019E
2020E
2,618 2,892 2,973 3,053 3,286
- - - - 2,618 2,892 2,973 3,053 3,286
452 563 574 586 598
1,727 1,319 1,309 1,303 857
(407) (366) (330) (297) (267)
598
51
(120)
151
(234)
(169)
35
4,702
(122)
(39)
(8)
191
64
50
15
4,557
(125)
(40)
(8)
195
66
51
15
4,680
(127)
(41)
(8)
199
67
52
15
4,801
76
24
5
(118)
(40)
(31)
(9)
4,380
(769) (595) (607) (619) (578)
- - - - (12) (31) (32) (32) (33)
(781) (626) (639) (651) (610)
Cashflowsfromfinancingactivities
Proceedsfromlong-termdebt,netofdiscounts
Treasurystockacquired
Repaymentoflong-termdebt
Proceedsfromissuanceofcommonstock
Netcashusedinfinancingactivities
(350)
(1,850)
4
62
(2,135)
Netincrease(decrease)incashandcashequivalents
Cashatbeginningofyear
Cashatendofyear
1,786 4,990 (120) 3,770 570
1,391 3,177 8,167 8,047 11,817
3,177 8,167 8,047 11,817 12,387
272
(1,850)
2,575
62
1,059
277
(1,850)
(2,650)
62
(4,161)
283
(1,850)
1,125
62
(380)
(169)
(1,850)
(1,225)
43
(3,200)
ExpressScript
CashFlowStatement
FiscalYearsEndingDec.31
Cashflowsfromoperatingactivities:
Net income
Net loss from discontinued operations, net of tax
Net income from continuing operations
2013
$ 1,872.7
53.6
1,926.3
2014
$ 2,035
0
2,035
2015
$ 2,499.5
0
2,499.5
Adjustmentstoreconcilenetincometonetcashprovidedbyoperatingactivities:
Depreciation and amortization
Deferred income taxes
Employee stock-based compensation expense
Other, net
2,447
(573.7)
164.7
29.2
2,242.9
(430.5)
111
(8.3)
2,359.1
(462.1)
117.1
(46.3)
1,254 (2,042.4)
(218.9)
(242.1)
94.2
(170)
(672.2) 1,720.4
15.9
271.7
450.8
948.9
(148.4)
112.4
4,768.9
4,549
(11.4)
0
4,757.5
4,549
(770.3)
90.1
78.3
909.5
318.3
(142.7)
(102.2)
4,848.3
0
4,848.3
Changesinoperatingassetsandliabilities
Accounts receivable
Inventories
Other current and noncurrent assets
Claims and rebates payable
Accounts payable
Accrued expenses
Other current and noncurrent liabilities
Net cash provided by operating activities—continuing operations
Net cash used in operating activities—discontinued operations
Net cash flows provided by operating activities
Cashflowsfrominvestingactivities:
Purchases of property and equipment
Proceeds from the sale of business
Other, net
Net cash used in investing activities—continuing operations
Net cash used in investing activities—discontinued operations
Net cash used in investing activities
(423)
356.9
(3.9)
(70)
(2.1)
(72.1)
(436.6)
0
24.7
(411.9)
0
(411.9)
(295.9)
0
27.4
(268.5)
0
(268.5)
0
2,490.1
(4,055.2)
(4,493)
(1,931.6) (2,834.3)
466
510.5
42.7
94
(16.7)
(57)
(5,494.8) (4,289.7)
(5.7)
(6.2)
13.4
0
(801.7)
(158.8)
2,793.1
1,991.4
1,991.4
1,832.6
5,500
(5,500)
(3,390.8)
183.1
58.2
(67.5)
(3,217)
(9.1)
0
1,353.7
1,832.6
3,186.3
Cashflowsfromfinancingactivities:
Proceeds from long-term debt, net of discounts
Treasury stock acquired
Repayment of long-term debt
Net proceeds from employee stock plans
Excess tax benefit relating to employee stock-based compensation
Other, net
Net cash used in financing activities
Effect of foreign currency translation adjustment
Less cash decrease attributable to discontinued operations
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Cashpaidduringtheyearfor:
Income tax payments, net of refunds
Interest
1,648.4
$ 548.1
1,310.9
$ 529.4
1,802.2
$ 518.1
ExpressScript
CommonSizeIncomeStatement
FiscalYearsEndingDec.31
Sales
COGS (except D&A)
Depreciation Expense
Amortization Expense
Gross Income
SG&A Expense
EBIT (Operating Income)
Nonoperating Interest Income
Equity in Earnings of Affiliates
Other Income (Expense)
Interest Expense
Unusual Expense - Net
Pretax Income
Income Taxes
Consolidated Net Income
Minority Interest
Net Income
2011
100.00%
92.58%
0.21%
0.34%
6.87%
1.86%
5.01%
0.03%
0.00%
0.00%
-0.65%
0.00%
4.39%
1.62%
2.77%
0.00%
2.77%
2012
100.00%
91.71%
0.30%
1.69%
6.29%
2.51%
3.78%
0.01%
0.02%
0.02%
-0.66%
-0.83%
2.33%
0.89%
1.45%
0.02%
1.43%
2013
100.00%
-91.44%
-0.41%
-1.94%
6.21%
-2.10%
4.11%
0.04%
0.03%
0.00%
-0.51%
-0.77%
2.91%
-1.06%
1.85%
-0.03%
1.82%
2014
100.00%
-89.46%
-0.49%
-1.74%
8.31%
-3.68%
4.64%
0.03%
0.02%
0.00%
-0.51%
-1.14%
3.04%
-1.02%
2.02%
-0.03%
1.99%
2015
100.00%
-89.21%
-0.62%
-1.70%
8.47%
-3.64%
4.83%
0.02%
0.00%
0.00%
-0.49%
-0.57%
3.80%
-1.34%
2.46%
-0.02%
2.43%
2016E
100.00%
89.50%
0.44%
1.66%
8.40%
3.20%
5.20%
0.03%
0.00%
0.00%
-0.52%
-0.83%
3.88%
1.36%
2.52%
0.03%
2.50%
2017E
100.00%
89.50%
0.53%
1.25%
8.72%
3.20%
5.52%
0.03%
0.00%
0.00%
-0.52%
-0.83%
4.20%
1.47%
2.73%
0.03%
2.71%
2018E
100.00%
89.50%
0.53%
1.21%
8.76%
3.20%
5.56%
0.03%
0.00%
0.00%
-0.52%
-0.83%
4.24%
1.48%
2.75%
0.03%
2.73%
2019E
100.00%
89.50%
0.53%
1.18%
8.79%
3.20%
5.59%
0.03%
0.00%
0.00%
-0.52%
-0.83%
4.27%
1.49%
2.77%
0.03%
2.75%
2020E
100.00%
89.50%
0.55%
0.79%
9.16%
3.20%
5.96%
0.03%
0.00%
0.00%
-0.52%
-0.83%
4.64%
1.63%
3.02%
0.03%
2.99%
ExpressScript
CommonSizeBalanceSheet
FiscalYearsEndingDec.31
Assets
CurrentAssets
CashandCashEquivalents
Cash
Short-TermInvestments
Receivables,net
Inventories
DeferredTaxes
PrepaidExpensesandotherCurrentAssets
CurrentAssetsofDiscontinuedOperations
TotalCurrentAssets
NetPPE
Goodwill
OtherIntangibleAssets,Net
OtherAssets
NoncurrentAssetsofDiscontinuedOperations
TotalAssets
Liabilities&Shareholders'Equity
CurrentLiabilities:
ClaimsandRebatesPayable
AccountsPayable
AccruedExpenses
CurrentMaturitiesofLong-TermDebt
CurrentLiabilitiesofDiscontinuedOperations
TotalCurrentLiabilities
Long-TermDebt
DeferredTaxes
OtherLiabilities
NoncurrentLiabilitiesofDiscontinuedOperations
TotalLiabilities
Stockholders'Equity
PreferredStock
CommonStockandAdditionalPaidInCapital
AccumulatedOtherComprehensiveIncome(Loss)
RetainedEarnings
CommonStockinTreasuryatCost
TotalExpressScriptsStockholders'Equity
Non-ControllingInterest
TotalStockholder'sEquity
TotalLiabilitiesandStockholders'Equity
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
1.93%
1.11%
0.82%
3.86%
1.80%
0.44%
0.09%
0.03%
8.16%
1.59%
28.15%
13.46%
0.07%
0.00%
51.44%
1.82%
1.39%
0.42%
5.93%
2.09%
0.39%
0.25%
0.00%
10.48%
1.57%
29.02%
12.09%
0.11%
0.00%
53.28%
3.13%
1.37%
1.76%
6.61%
1.99%
0.00%
0.13%
0.00%
11.85%
1.27%
28.77%
10.29%
0.14%
0.00%
52.33%
4.82%
3.06%
1.76%
5.90%
1.90%
0.00%
0.20%
0.00%
12.82%
1.55%
28.21%
8.42%
0.18%
0.00%
51.18%
9.47%
7.71%
1.75%
5.90%
1.90%
0.00%
0.20%
0.00%
17.47%
1.55%
27.66%
7.01%
0.18%
0.00%
53.87%
9.20%
7.45%
1.75%
5.90%
1.90%
0.00%
0.20%
0.00%
17.20%
1.55%
27.11%
5.66%
0.18%
0.00%
51.71%
12.47%
10.73%
1.74%
5.90%
1.90%
0.00%
0.20%
0.00%
20.47%
1.55%
26.58%
4.37%
0.18%
0.00%
53.15%
13.17%
11.38%
1.80%
5.90%
1.90%
0.00%
0.20%
0.00%
21.17%
1.55%
26.90%
3.63%
0.18%
0.00%
53.43%
6.50%
2.79%
1.90%
1.52%
0.00%
12.71%
11.88%
5.23%
0.64%
0.00%
30.46%
8.41%
3.11%
2.81%
2.53%
0.00%
16.86%
10.87%
4.88%
0.78%
0.00%
33.39%
9.24%
3.39%
2.61%
1.62%
0.00%
16.86%
13.71%
4.00%
0.68%
0.00%
35.25%
9.20%
3.10%
2.40%
1.59%
0.00%
16.29%
13.10%
3.53%
0.70%
0.00%
33.62%
9.20%
3.10%
2.40%
3.99%
0.00%
18.69%
13.10%
3.11%
0.70%
0.00%
35.61%
9.20%
3.10%
2.40%
1.46%
0.00%
16.16%
13.10%
2.75%
0.70%
0.00%
32.71%
9.20%
3.10%
2.40%
2.45%
0.00%
17.15%
13.10%
2.42%
0.70%
0.00%
33.38%
9.20%
3.10%
2.40%
1.36%
0.00%
16.06%
13.10%
2.21%
0.70%
0.00%
32.06%
0.00%
20.96%
0.01%
3.76%
-3.75%
20.98%
0.01%
20.98%
51.44%
0.00%
22.48%
0.00%
5.87%
-8.47%
19.88%
0.01%
19.89%
53.28%
0.00%
21.83%
-0.01%
8.25%
-13.00%
17.07%
0.01%
17.08%
52.33%
0.00%
21.46%
0.01%
10.59%
-14.52%
17.53%
0.03%
17.56%
51.18%
0.00%
21.10%
0.01%
13.09%
-15.99%
18.21%
0.06%
18.26%
53.87%
0.00%
20.74%
0.01%
15.56%
-17.39%
18.92%
0.08%
19.00%
51.71%
0.00%
20.39%
0.01%
18.00%
-18.72%
19.67%
0.10%
19.78%
53.15%
0.00%
20.67%
0.01%
21.21%
-20.65%
21.24%
0.13%
21.37%
53.43%
ExpressScript
ValueDriverEstimation
FiscalYearsEndingDec.31
NetOperatingProfitLessAdjustedTaxes(NOPLAT)
InvestedCapital(IC)
ReturnonInvestedCapital(ROIC)
FreeCashFlot(FCF)
EconomicProfit(EP)
TaxRates
StatutoryRate
+StateTaxes,netoffed.Benefit
-Non-ControllingInterest
-Investmentinforeignsubsidiaries
-Other,net
MarginalTaxRate
CalculatingNOPLAT
OperatingRevenues
-CostofGoodsSold
-SGAExpenses
-Depreciation
-AmortizationofNon-GoodwillIntangibles
-ResearchandDevelopmentExpenses
-OtherOperatingExpenses
+ImpliedInterestonOperatingLeases
AdjustedEBITA
AdjustedTaxes
IncomeTaxProvision
Less:TaxonNonoperatingInterestIncome
Less:TaxonEquityEarningsofAffiliates
Less:TaxonOtherIncome
Add:TaxShieldonInterestExpense
Add:TaxShieldonUnusualExpense-Net
Add:TaxShieldonOperatingLeaseInterest
AdjustedTaxes
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
2175
2663
2727
3111
3443
3579
3711
3962
11,702 9,064 7,998 8,096 6,951 5,630 4,315 3,469
13.80%
22.75%
30.08%
38.89%
42.53%
51.49%
65.92%
91.83%
6,229 5,301 3,793 3,013 4,588 4,900 5,026 4,808
1,108 1,870 2,113 2,569 2,895 3,109 3,330 3,670
35.0%
2.6%
-0.3%
-0.7%
-0.2%
36.4%
35.0%
2.0%
-0.3%
0.0%
-3.1%
33.6%
35.0%
0.7%
-0.2%
0.0%
-0.2%
35.3%
35.0%
35.0%
35.0%
35.0%
35.0%
104099
-95185
-2190
-429
-2018
100887
-90257
-3708
-489
-1754
101752
-90773
-3704
-628
-1731
103787
-92889
-3321
-452
-1727
105863
-94747
-3388
-563
-1319
107980
-96642
-3455
-574
-1309
110139
-98575
-3524
-586
-1303
108852
-97423
-3483
-598
-857
14
4291
14
4693
14
4930
14
5412
14
5860
15
6014
15
6166
15
6507
1104
-15.3
-11.9
1.3
192.0
290.2
5.1
1565
1031
-9.4
-6.3
0.0
171.8
385.8
4.8
1578
1364
-8.8
0.0
0.0
176.6
203.6
5.0
1741
1410
-10.9
0.0
0.0
188.9
301.5
5.0
1894
1557
-11.1
0.0
0.0
192.7
307.5
5.1
2051
1601
-11.3
0.0
0.0
196.5
313.7
5.1
2105
1644
-11.6
0.0
0.0
200.5
320.0
5.2
2158
1769
-11.4
0.0
0.0
198.1
316.2
5.2
2277
Plus:ChangeinDeferredTaxAssets/Liabilities
CurrentYearDeferredTaxAssets
CurrentYearDeferredTaxLiabilities
PreviousYearDeferredTaxAssets
PreviousYearDeferredTaxLiabilities
ChangeinDeferredTaxes
455 391 - - - - - 5,441 4,923 4,070 3,663 3,297 2,967 2,670 2,403
401 455 391 - - - - 5,937 5,441 4,923 4,070 3,663 3,297 2,967 2,670
(551) (453) (463) (407) (366) (330) (297) (267)
EBITA
-Adjustedtaxes
+ChangeinDefferedTaxes(t-1)
NOPLAT
4291
4693
4930
5412
5860
6014
6166
6507
($1,565.45) ($1,577.89) ($1,740.78) ($1,894.14) ($2,051.14) ($2,104.85) ($2,158.15) ($2,277.31)
(551) (453) (463) (407) (366) (330) (297) (267)
2175
2663
2727
3111
3443
3579
3711
3962
InvestedCapitalComputation
OperatingCurrentAssets:
NormalCash(5%ofRevenue)
AccountsReceivable,Net
Inventory
PrepaidExpenses&OperatingCurrentAssets
CurrentAssetsofDiscontinuedOperations
TotalOperatingCurrentAssets
2,014
4,023
1,871
97
31
8,036
1,833
5,980
2,113
252
10,177
3,186
6,721
2,023
129
12,060
5,003
6,123
1,972
208
13,306
5,293
6,246
2,011
212
13,762
5,399
6,371
2,052
216
14,037
5,507
6,498
2,093
220
14,318
5,443
6,422
2,068
218
14,151
OperatingCurrentLiabilities:
AccountsPayable
ClaimsandRebatesPayable
AccruedExpenses
CurrentLiabilitiesofDiscontinuedOperations
TotalOperatingCurrentLiabilities
2,900
6,768
1,982
1
11,651
3,137
8,488
2,836
14,462
3,452
9,398
2,659
15,509
3,217
9,548
2,491
15,257
3,282
9,739
2,541
15,562
3,347
9,934
2,592
15,873
3,414
10,133
2,643
16,190
3,374
10,014
2,612
16,001
TotalOperatingCurrentAssets
Less:TotalOperatingCurrentLiabilities
NetOperatingWorkingCapital
8,036 10,177 12,060 13,306 13,762 14,037 14,318 14,151
(11,651) (14,462) (15,509) (15,257) (15,562) (15,873) (16,190) (16,001)
(3,615) (4,284) (3,449) (1,950) (1,800) (1,836) (1,872) (1,850)
NetPPE
1,659 1,584 1,291 1,609 1,641 1,674 1,707 1,687
OtherOperatingAssets
OtherIntangibleAssets,net
OtherAssets
NoncurrentAssetsofDiscontinuedOperations
PVofOperatingLeases
OtherOperatingAssets
14,016
77
231
14,323
OtherOperatingLiabilities
OtherLiabilities
NoncurrentLiabilitiesofDiscontinuedOperations
OtherOperatingLiabilities
664 782 691 727 741 756 771 762
0 - - - - - - 665 782 691 727 741 756 771 762
InvestedCapital:
Add:NetOperatingWorkingCapital
Add:NetPPE
Add:OtherOperatingAssets
Less:OtherOperatingLiabilities
TotalInvestedCapital
(3,615)
1,659
14,323
(665)
11,702
ReturnOnInvestedCapital
NOPLAT/
BeginningInvestedCapital
ROIC
2,175 2,663 2,727 3,111 3,443 3,579 3,711 3,962
15,756 11,702 9,064 7,998 8,096 6,951 5,630 4,315
13.80%
22.75%
30.08%
38.89%
42.53%
51.49%
65.92%
91.83%
EconomicProfit
BeginningInvestedCapital
ROIC
WACC
EconomicProfit(BegIC*(ROIC-WACC))
15,756 11,702 9,064 7,998 8,096 6,951 5,630 4,315
13.80%
22.75%
30.08%
38.89%
42.53%
51.49%
65.92%
91.83%
6.77%
6.77%
6.77%
6.77%
6.77%
6.77%
6.77%
6.77%
1,108 1,870 2,113 2,569 2,895 3,109 3,330 3,670
FCF
NOPLAT
Add:BegInvestedCapital
Less:CurrentInvestedCapital
FCF
2,175
15,756
(11,702)
6,229
12,201
114
231
12,547
(4,284)
1,584
12,547
(782)
9,064
2,663
11,702
(9,064)
5,301
10,470
146
232
10,847
(3,449)
1,291
10,847
(691)
7,998
2,727
9,064
(7,998)
3,793
8,743
187
234
9,164
(1,950)
1,609
9,164
(727)
8,096
3,111
7,998
(8,096)
3,013
7,424
191
237
7,851
(1,800)
1,641
7,851
(741)
6,951
3,443
8,096
(6,951)
4,588
6,115
194
239
6,548
(1,836)
1,674
6,548
(756)
5,630
3,579
6,951
(5,630)
4,900
4,812
198
241
5,251
(1,872)
1,707
5,251
(771)
4,315
3,711
5,630
(4,315)
5,026
3,955
196
243
4,394
(1,850)
1,687
4,394
(762)
3,469
3,962
4,315
(3,469)
4,808
ExpressScript
WeightedAverageCostofCapital(WACC)Estimation
WACC
CostofEquity
CostofDebt
CostofPreferredStock
MarketValueofEquity(Millions)
MarketValueofTotalDebt(Millions)
MarketValueofPreferredStock
MarketValueofFirm
MarginalTaxRate
Equations:
EquityMarketRiskPremium
xBeta
+RiskfreeRate
CostofEquity
CalculatingCostofEquity
SharesOutstanding(Millions)
xCurrentPrice
EquityValue
TotalValueofEquity
CalculatingCostofDebt
MarketValueoftotaldebt
TotalValueofDebt
PreferredStockValue
6.77%
7.71%
6.13%
0.00%
$46,374.42
$15,593.00
$$61,967.42
35.00%
6.77%
7.710000%
6.13%
0.00%
$46,374.42
$15,593.00
$$61,967.42
35.00%
5.00%
1.01
2.66%
7.71%
677
68.51
46374
46374
15,593
15,593
0
FairValueofDebt
PVofoperatingLeases
ValueofTotalDebt
15,593
243
15,593
ExpressScript
DiscountedCashFlow(DCF)andEconomicProfit(EP)ValuationModels
KeyInputs:
CVGrowth
CVROIC
WACC
CostofEquity
2.00%
8.00%
6.77%
7.71%
FiscalYearsEndingDec.31
2016E
2017E
2018E
2019E
2020E
DCFModel
DiscountPeriod
NOPLAT
BeginningIC
EndingIC
ΔinInvestedCapital
1
2
3
4
5
3,111 3,443 3,579 3,711 3,962
7,998 8,096 6,951 5,630 4,315
8,096 6,951 5,630 4,315 3,469
98 (1,145) (1,321) (1,315) (846)
NOPLAT
Less:ΔinInvestedCapital
FreeCashFlow
ContinuingValue
PVocContinuingValue
PVoffreecashflows
3,111 3,443 3,579 3,711 3,962
(98) 1,145 1,321 1,315 846
3,013 4,588 4,900 5,026 4,808
62,300
47,939
2,822 4,024 4,026 3,868
ValueofOperations
+ShortTermInvestments
+ExcessCash
-TotalDebt
-Non-controllinginterest
-PVofOperatingLeases
-PVofEmployeeStockOptions
-PVofUnderfundedPension&RetirementLiabilities
ValueofEquity
SharesOutstanding
IntrinsicValue(pershare)
PriceToday
62,679
1,796
(15,593)
(2)
(232)
(185)
(42)
48,420
677
71.52
73.15
EPModel
PeriodstoDiscount
EconomicProfit
ContinuingValue
PVofTerminalYearEP
PVofEconomicProfit
SumofEP
Add:BeginningInvestedCapitalCV
ValueofOperations
+ShortTermInvestments
+ExcessCash
-TotalDebt
-Non-controllingInterest
-PVofOperatingLeases
-PVofEmployeeStockOptions
-PVofUnderfundedPension&RetirementLiabilities
ValueofEquity
SharesOutstanding
IntrinsicValue(pershare)
PriceToday
1 2 3 4 5
2,569 2,895 3,109 3,330 3,670
57,985
44,618.84
2,406.35 2,539.44 2,554.12 2,562.52 2,645.07
54,681
7,998
62,679
1,796
(15,593)
(2)
(232)
(185)
(42)
48,420
677
71.52
73.15
ExpressScript
DividendDiscountModel(DDM)orFundamentalP/EValuationModel
FiscalYearsEndingDec.31
2016E
2017E
2018E
2019E
2020E
EPS
$3.98
$4.56
$4.85
$5.15
$5.73
KeyAssumptions
CVgrowth
CVROE
CostofEquity
FutureCashFlows
P/EMultiple(CVYear)
EPS(CVYear)
FutureStockPrice
DividendsPerShare
FutureCashFlows
Periods
DiscountedCashFlows
IntrinsicValue
PriceToday
2%
14%
7.71%
15.011258
$5.73
$86.03
$$-
$$1
$$62.00
$63.29
$$2
$-
$$3
$-
4
$-
$86.03
5
$62.00
ExpressScript
RelativeValuationModels
Ticker
AET
EVHC
CVS
UNH
Company
AetnaInc.
EnvisionHealthcare
CVSHealthCorporation
UnitedHealthGroup
ESRX
ExpressScript
ImpliedValue:
RelativeP/E(EPS15)
RelativeP/E(EPS16)
Price
$108.87
$21.15
$104.65
$125.68
EPS
2016E
$7.96
$1.46
$5.82
$7.72
$70.02
$3.98
$62.02
$63.00
EPS
2017E
$8.76
$1.68
$6.56
$8.77
Average
P/E16
13.7
14.5
18.0
16.3
15.6
P/E17
12.4
12.6
16.0
14.3
13.8
$4.56 17.6 15.4
ExpressScript
KeyManagementRatios
FiscalYearsEndingDec.31
LiquidityRatios
CurrentRatio(CurrentAssets/CurrentLiabilities)
OperatingCashFlowRatio(OperatingCF/CurrentLiabilities)
QuickRatio(Currentassets-Inventories)/CurrentLiabilities
ActivityorAsset-ManagementRatios
AssetTurnoverRatio(sales/totalassets)
InventoryTurnoverRatio(Sales/TotalInventory)
ReceivablesTurnoverRatio(Sales/AverageAccts.Receivable)
FinancialLeverageRatios
DebttoEquityRatio(TotalDebt/TotalEquity)
EquityRatio(ShareholdersEquity/TotalAssets)
InterestCoverage(EBIT/InterestExpense)
ProfitabilityRatios
ReturnonAssets(NetIncome/TotalAssets)
ReturnonEquity(Netincome/ShareholdersEquity)
GrossMargin(Revenue-Cogs)/Revenue
EBITmargin(EBIT/SALES)
ProfitMargin(NetIncome/Sales)
2012
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
82.38%
69.73%
64.16%
35.95%
50.02%
62.12%
26.74%
49.70%
70.30%
28.26%
58.50%
78.70%
27.81%
67.04%
93.46%
23.03%
83.30%
106.46%
26.82%
94.70%
119.37%
25.42%
108.29%
131.89%
25.06%
120.05%
1.62
56.81
17.30
1.94
55.64
22.03
1.88
47.74
20.17
1.91
50.29
16.02
1.95
52.63
16.16
1.86
52.63
17.12
1.93
52.63
17.12
1.88
52.63
17.12
1.87
52.63
16.85
68%
40%
5.75
64%
41%
8.11
67%
37%
9.15
90%
33%
9.83
84%
34%
10.00
94%
34%
10.62
77%
37%
10.68
79%
37%
10.74
68%
40%
11.47
2.31%
5.73%
8.29%
3.78%
1.43%
3.54%
8.69%
8.56%
4.11%
1.82%
3.74%
10.01%
10.54%
4.64%
1.99%
4.65%
14.25%
10.79%
4.83%
2.43%
4.88%
14.24%
10.50%
5.20%
2.50%
5.02%
14.87%
10.50%
5.52%
2.71%
5.28%
14.42%
10.50%
5.56%
2.73%
5.17%
13.96%
10.50%
5.59%
2.75%
5.60%
14.09%
10.50%
5.96%
2.99%
PresentValueofOperatingLeaseObligations(2015)
PresentValueofOperatingLeaseObligations(2014)
Operating
Leases
60
50
50
30
30
80
300
57
243.04
FiscalYearsEndingDec.31
2016
2017
2018
2019
2020
Thereafter
TotalMinimumPayments
Less:Interest
PVofMinimumPayments
CapitalizationofOperatingLeases
Operating
Leases
60
60
50
40
30
100
340
68
272
FiscalYearsEndingDec.31
2015
2016
2017
2018
2019
Thereafter
TotalMinimumPayments
Less:Interest
PVofMinimumPayments
CapitalizationofOperatingLeases
Pre-TaxCostofDebt
NumberYearsImpliedbyYear6Payment
Year
1
2
3
4
5
6&beyond
PVofMinimumPayments
PresentValueofOperatingLeaseObligations(2013)
Lease
Commitment
60
50
50
30
30
30
6.00%
2.7
PVLease
Payment
56.6
44.5
42.0
23.8
22.4
53.8
243.0
Operating
Leases
90
60
50
40
40
90
370
67
303
FiscalYearsEnding
2014
2015
2016
2017
2018
Thereafter
TotalMinimumPayments
Less:Interest
PVofMinimumPayments
CapitalizationofOperatingLeases
Pre-TaxCostofDebt
NumberYearsImpliedbyYear6Payment
Year
1
2
3
4
5
6&beyond
PVofMinimumPayments
PresentValueofOperatingLeaseObligations(2012)
Lease
Commitment
60
60
50
40
30
30
6.00%
3.3
PVLease
Payment
56.6
53.4
42.0
31.7
22.4
66.0
272.0
CapitalizationofOperatingLeases
Pre-TaxCostofDebt
NumberYearsImpliedbyYear6Payment
Year
1
2
3
4
5
6&beyond
PVofMinimumPayments
Operating
Leases
80
60
40
30
30
30
270
40
230
FiscalYearsEnding
2013
2014
2015
2016
2017
Thereafter
TotalMinimumPayments
Less:Interest
PVofMinimumPayments
Lease
Commitment
90
60
50
40
40
40
6.00%
2.3
PVLease
Payment
84.9
53.4
42.0
31.7
29.9
61.2
303.1
Pre-TaxCostofDebt
NumberYearsImpliedbyYear6Payment
Year
1
2
3
4
5
6&beyond
PVofMinimumPayments
Lease
Commitment
80
60
40
30
30
30
6.00%
1.0
PVLease
Payment
75.5
53.4
33.6
23.8
22.4
21.1
229.8
EffectsofESOPExerciseandShareRepurchasesonCommonStockBalanceSheetAccountandNumberofSharesOutstanding
NumberofOptionsOutstanding(shares):
AverageTimetoMaturity(years):
ExpectedAnnualNumberofOptionsExercised:
CurrentAverageStrikePrice:
CostofEquity:
CurrentStockPrice:
IncreaseinSharesOutstanding:
AverageStrikePrice:
IncreaseinCommonStockAccount:
6.3
4.90
1.29
$48.29
7.71%
$70.02
2016E
1.29
48.29
62.09
2017E
1.29
48.29
62.09
2018E
1.29
48.29
62.09
2019E
1.29
48.29
62.09
2020E
0.90
48.29
43.46
ChangeinTreasuryStock
ExpectedPriceofRepurchasedShares:
NumberofSharesRepurchased:
1,850
1,850
1,850
1,850
1,850
$70.02 $75.42 $81.23 $87.50 $94.24
26 25 23 21 20
SharesOutstanding(beginningoftheyear)
Plus:SharesIssuedThroughESOP
Less:SharesRepurchasedinTreasury
SharesOutstanding(endoftheyear)
677
652
629
607
587
1
1
1
1
1
26 25 23 21 20
652
629
607
587
569
VALUATIONOFOPTIONSGRANTEDINESOP
TickerSymbol
CurrentStockPrice
RiskFreeRate
CurrentDividendYield
AnnualizedSt.Dev.ofStockReturns
Rangeof
OutstandingOptions
Range1
Total
Number
ofShares
6.3
6
ESRX
$70.02
2.66%
0.00%
20.63%
Average
Exercise
Price
48.29
$48.29
Average
B-S
Value
Remaining
Option
ofOptions
Life(yrs)
Price
Granted
4.90 $29.31 $185
4.90 $29.31 $185
CVofROIC
9%
10%
66.60
65.94
68.77
68.77
71.69
72.57
75.83
77.98
82.18
86.25
93.11
100.50
11%
65.40
68.77
73.30
79.74
89.59
106.55
12%
64.95
68.77
73.90
81.20
92.36
111.59
$73.15
88.5%
89.0%
89.5%
90.0%
90.5%
2.00%
89.59
81.37
73.15
64.93
56.71
SGAas%ofSales
2.50%
3.20%
89.59
89.59
81.37
81.37
73.15
73.15
64.93
64.93
56.71
56.71
3.50%
89.59
81.37
73.15
64.93
56.71
4.00%
89.59
81.37
73.15
64.93
56.71
$73.15
7.0%
10.0%
13.1%
16.0%
19.0%
0.0%
$73.72
$73.44
$73.15
$72.88
$72.60
OperatingLeaseGrowthRate
20.0%
33.3%
50.0%
$73.62 $73.54 $73.40
$73.34 $73.26 $73.12
$73.05 $72.97 $72.83
$72.78 $72.70 $72.56
$72.50 $72.42 $72.28
70.0%
$73.19
$72.91
$72.62
$72.35
$72.07
MarketValueofEquity
8%
67.42
68.77
70.58
73.15
77.09
83.87
ImpactofChangesinMarketValueofDebt/EquityonWACC
MarketValueofDebt
6.77% 10,000 12,500 15,836 17,500 20,000
25,000
6.64%
6.47%
6.26%
6.17%
6.05%
35,000
6.88%
6.73%
6.55%
6.47%
6.35%
46,374
7.05%
6.92%
6.76%
6.69%
6.59%
55,000
7.14%
7.02%
6.88%
6.81%
6.72%
65,000
7.21%
7.11%
6.98%
6.92%
6.83%
SharesOutstanding
$73.15
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
Under(Over)FundedStatusofPensionPlan
$73.15 $150.00 $100.00 $42.40 $$(50.00)
610
81.01
81.09
81.19
81.26
81.34
640
77.21
77.29
77.38
77.45
77.53
677
72.99
73.06
73.15
73.22
73.29
700
70.59
70.66
70.75
70.81
70.88
730
67.69
67.76
67.84
67.90
67.97
MarginalTaxRate
CVofGrowth
7.5%
6.51%
6.53%
6.62%
6.69%
6.77%
COGSas%ofSales
ImpactofChangesinCostsofEquity/DebtonWACC
CostofEquity
6.77%
5.5%
6.0%
6.5%
7.0%
5.5%
5.02%
5.39%
5.76%
6.14%
5.6%
5.03%
5.41%
5.77%
6.15%
6.1%
5.12%
5.49%
5.86%
6.24%
6.6%
5.20%
5.57%
5.94%
6.32%
7.1%
5.28%
5.65%
6.02%
6.40%
Long-TermDebt
CostofDebt
SensitivityAnalysis
$73.15
20.00%
25.00%
30.00%
35.00%
40.00%
1.0%
90.37
84.63
78.89
73.15
67.41
NormalCashLevels
3.0%
5.0%
90.37
90.37
84.63
84.63
78.89
78.89
73.15
73.15
67.41
67.41
7.0%
90.37
84.63
78.89
73.15
67.41
9.0%
90.37
84.63
78.89
73.15
67.41