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rph_in_wi: This one’s for you :- )

http://online.barrons.com/article/SB123379461384550059.html

›Growing Demand for Controlling Drug Costs Makes Express Scripts a Particularly Timely Healthcare Stock

February 5, 2009
By JOHANNA BENNETT

With health-care costs running wild, pharmacy-benefit manager Express Scripts (ticker: ESRX) is giving clients some much needed relief.

And in doing so, its share price could flirt with new highs in 2009.

Down 26% since closing at a record high of $77.58 a share in January 2008, the stock has been battered by fears as unemployed and cash-strapped Americans forgo costly prescription medications, not to mention the bear market.

But profits should climb at a brisk pace in 2009, thanks to Express Scripts' ability to help the health insurers, pension plans and employers who hire the company to lower drug costs and widen profit margins. [So they claim.]

"It's an offensive stock in a defensive market," says Cynthia Axelrod, an analyst with Glenmede Investment Management. "This is an earnings growth story that is not being driven by cost cuts and layoffs, and these days, that's hard to find."

Founded in 1986, Express Scripts is the nation's third-largest pharmacy-benefit manager, or PBM, behind Medco Health Solutions (MHS) and Caremark, which was purchased by the retail pharmacy giant CVS (CVS) in 2007. Express Scripts handles 11% of the nearly four million prescriptions filled annually in the U.S.

The company manages drug benefits and drug costs for health plans, negotiating discounts with drugstores and drug makers.

It also encourages consumers to use cheaper-priced generic alternatives to brand-name drugs, and runs a large mail order and specialty drug pharmacies, dispensing at roughly 123 million prescriptions via the mail last year.

Despite recent gains, however, Express Scripts' price remains attractive, and could climb more than 20% in the next 12 months, according to investment pros.

That's a bigger gain than what's likely to come from shares of Medco, which have already climbed 12% so far this year and trade at a richer price-to-earnings multiple than Express Scripts'.

"We like both stocks, but after the recent moves by Medco, I would think that Express Scripts is a better buy right now," says Glenn Garmont, an analyst with ThinkEquity.

Express Scripts, which is scheduled to release quarterly financial results on Feb. 25, declined to comment for this story.

To be sure, the company faces headwinds.

Layoffs have cost many Americans their health insurance. And Express Scripts expects to process fewer claims this year.

Yet rising use of generic drugs and the mail-order pharmacy should improve profitability, and fuel future profit growth expected to average 18% annually.

Free cash flow remains steady. Debt levels are falling, and the company is repurchasing stock.

ThinkEquity launched coverage last month at a Buy. And earlier this week, Goldman Sachs upgraded Express Scripts to Buy from Neutral.

"The company has a solid, healthy outlook that hasn't been messed up by the economy," says Roger Hamilton, manager of the John Hancock Large Cap Equity Fund and the John Hancock Balanced Fund.

Express Scripts has been more successful than any other PBM pushing generic-drug use. More than two-thirds of the prescriptions processed by the company are for generic drugs. And that figure could eventually reach 80%.

Already, 75% of prescription drugs sold in the U.S. have generic alternatives. And by 2012, patents protecting brand-name drugs with annual sales totaling $55 billion will expire.

But the PBM industry's "Holy Grail" is generic drugs sold via mail order.

Their prices are lower than those charged for brand-name drugs. But generics are more profitable, and eliminating the retail pharmacy from the transaction places all of that profit into the PBM's pocket.

Express Scripts' mail-order pharmacy now handles roughly one-quarter of the prescriptions processed by the company. And last year, about 56% of mail-order prescriptions were generics, says Randall Stanicky, an analyst with Goldman Sachs.

By 2010, mail order will account for 125 million of the prescriptions that Express Scripts processes. And more than 60% will be written for generic drugs, up from 56.5% in 2008, Stanicky adds.

So far, the strategy seems to be working.

In 2009, Express Scripts expects earnings before interest, taxes, depreciation and amortization per adjusted claim (a metric used to measure profitability) could climb 12% to 20% to between $3.15 and $3.25.

Meanwhile, the Street expects the company to earn $3.68 a share in 2009, which lands in the middle of the company's guidance of $3.63 a share to $3.73 a share.

Certainly, there are bigger bargains out there these days.

At 15.6 times projected profits over the next four quarters, Express Scripts trades at a 30% premium to the Standard & Poor's 500, according to Thomson Reuters.

Still, that premium seems well deserved, in light of the falling financial performance of many stocks in the index.

And given Express Scripts' projected profits, the stock looks cheap to some investors.

Glenmede's Axelrod says Express Scripts could hit $74 a share in 12 months, or 20 times projected profits in 2009.

Of course, there are no guarantees.

Investors don't deal well with disappointment. So if profits fail to impress, the stock will get hit hard. [That’s insightful!]

The PBM industry faces intense competition not only from each other, but from health insurers, retail drugstores, and Wal-Mart Stores (WMT) and other retailers.

But with employers and individuals looking to reduce health-care costs, Express Scripts stands to generate potent returns for investors.

And that's a good prescription for ailing portfolios.‹