In a Securities and Exchange Commission filing Monday, Anthem Inc. (ANTM, Financial) is filing suit against Express Scripts (ESRX, Financial), the U.S.’s largest pharmacy benefit manager. Some of the highlights in the filing were (source):
- To recover damages for pharmacy pricing that is higher than competitive benchmark pricing.
- To recover damages related to operational issues.
- A declaration of Anthem’s right to terminate its contract with Express Scripts.
Further included in the suit filed was the statement, “Anthem has worked hard for more than a year to try to get Express Scripts to engage in such good faith negotiations, but Express Scripts has refused to do so.” One can only assume how much Anthem is frustrated with Express Scripts.
Other newsfeeds have stated that Anthem is seeking $15 billion worth of damages from Express Scripts. That value is roughly 15% of Express Scripts' 2015 total sales; with an ongoing operating margin of just 4.3%, that amount would indicate that Express Scripts would have a hard time paying it off, if the case goes in favor to Anthem (source).
According to Shots, “Anthem used to run its own PBM but sold it to Express Scripts in 2009. As part of the deal, Anthem agreed to use Express Scripts for 10 years. The contract, however, called for the companies to renegotiate prices last December.” (source)
The $15 billion value was derived from “ESI’s (Express Scripts) current pricing to Anthem exceeded competitive benchmark pricing by more than $3 billion annually, and $13 billion over the remaining term of the agreement plus approximately $1.8 billion during the post-termination transition period.” (source)
In a statement provided to the Wall Street Journal, “Express Scripts values its relationship with Anthem and will continue to honor its commitments under the contract, as we would do with any client,” an Express Scripts spokesman said. “Express Scripts has consistently acted in good faith and in accordance with the terms of its agreement with Anthem.”
Further Express Scripts' 10-K digging revealed that Anthem contributed 14% of total sales in 2014 (page 91 of Express Scripts' 2014 annual report).
My speculation instincts tell me that seeking possible value in Express Scripts may be too late now. Nevertheless, running some historical financial numbers on Express Scripts is worthwhile.
Sales and profits
Express Scripts demonstrated good growth in both profits and sales for the past decade with 21% and 24% in a 10-year average.
Operating and retained earnings
The $15 billion demand from Anthem mentioned above is alarming. Nevertheless, Express Scripts has been able to improve its retained and operating earnings over recent years.
Dividends and buybacks
Express Scripts never issued dividends in the past decade and has been inconsistent with share repurchases. For retail investors, it is worthwhile to observe whether management was able to repurchase shares at a discount or low valuations.
Basing it on the price-to-earnings ratio, Express Scripts was able to make a good repurchase of its shares in 2011 but has been purchasing its shares at quite a premium in the recent three years (2013-2015).
Debt to equity and shares outstanding
It seems that Express Scripts is quite conservative in issuing debt with 0.90 in 2015. Despite the occasional share buybacks, Express Scripts has increased its shares outstanding since 2006.
Valuations
Express Scripts is currently trading almost at par with its peers in terms of P/E and P/B valuations. Further, its shares are at a much more premium than the Standard & Poor's 500 as a whole.
Express Scripts price action
To answer my question above, I guess Express Scripts is indeed in some trouble as of the moment.
Happy Investing!
