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Express Scripts acquires Medco Health Solutions

Julia Kawa, site visit coordinator, works Monday afternoon April 2, 2012, in the technology and innovation center of Express Scripts. Photo by J.B. Forbes, jforbes@post-dispatch.com

Express Scripts Holding Co. beat Wall Street’s expectations in earnings released today in the wake of its $29 billion merger with rival Medco Health Solutions.

The north St. Louis County-based pharmacy benefit manager reported net income of $171 million, compared to $334 million for the same period last year. But the earnings decline owed largely to transaction and integration costs of the merger, analysts said. Excluding such one-time costs, the company would have earned 88 cents per share – or six cents more than Wall Street analysts had projected.

“Clearly, the quarter was a tremendous success,” said Judson Clark, an analyst at Edward Jones & Co. in Des Peres

Express Scripts has indicated that combining the two pharmacy benefit managers will save about $1 billion, and now reports that those savings are being realized.

“It was much better than expected,” said Jeff Jonas, an analyst at Gabelli & Co., an investment brokerage firm in Rye, NY. “They’ve been saying ever since the deal closed that the integration is going better than expected, and that they're realizing the synergies sooner than expected.”

Jonas cited the company’s reported 95 percent retention of contracts coming up for renewal in 2013 as particularly strong, especially given the antitrust review the merger faced and the work required to combine the two huge companies.

He also said that the company has benefitted from lower-than-expected interest expenses on the debt required to buy Medco.

The company raised its guidance on earnings for the remainder of 2012 by about 5 percent. Express Scripts closed Tuesday on the New York Stock Exchange at $56.02 per share. Within hours of the market close, its shares were trading for upwards of $60.

Still, the company’s stock price does not fully reflect the gains realized since the Medco merger announcement last year, said Art Henderson, an analyst at Jefferies & Co. Inc. in Nashville, Tenn.

Express Scripts’ second quarter performance was bolstered by the resolution of the company’s long-running contract dispute with Walgreen Co., Henderson said. Increased usage of generic drugs -- rather than higher cost branded medications – also boosted the benefit manager’s bottom line.

Henderson praised Express Scripts handling of the merger.

“They were aggressive in preparing for closing, sending in integration teams. Getting everything organized and ready to go,” Henderson said. “And the benefit of doing that is starting to play out.”

Read more from Jim Doyle, who covers the business of health care for the Post-Dispatch. On Twitter, follow the Business section @postdispatchbiz.