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Express Scripts Rides High on Increased Generic Utilization

On Jul 10, we issued an updated research report on St. Louis, MO-based pharmacy benefit manager Express Scripts Holding Company ESRX. The company currently has a Zacks Rank #3 (Hold).

Express Scripts rides high on increased generic utilization, a shift toward mail orders, strong specialty growth and an aging population. Due to the economic volatility in the U.S., caused by a turbulent political scenario, people are shifting to high-margin generic drugs and are adopting cost-saving initiatives like mail orders.

The company is striving to improve its high-touch service model through the Accredo product line, while leveraging on scale and expertise to control costs. The company’s SafeGuardRx product line is a key catalyst for long-term growth. The product line is a collection of novel solutions in the pharmacy benefit space that provides health care at pocket friendly rates and emphasizes on cost efficiency for customers.

On the flipside, Express Scripts recently announced that one of its biggest customers, Anthem, a leading health insurer, is not likely to extend its pharmacy-benefits management agreement. The agreement is slated for expiration by 2019 end.

In Mar 2016, Anthem sued Express Scripts for overcharging its drugs and operational failures. Per management, Anthem refused to participate in further talks on pricing concessions and probable adjustments for the agreement. In fact, the health insurer is likely to terminate its long-term PBM contract with Express Scripts by next year.

In the first quarter, Anthem accounted for about 18.3% of net revenues for Express Scripts.

Share Price Performance

Express Scripts’ performance lacked luster over the last three months. The company lost 7.39%, comparing unfavorably with the Zacks categorized Medical Services sub-industry’s addition of almost 6.02%. The current level lags the S&P 500’s return of 5.20%.

However, a long-term expected earnings growth rate of 12.5% instills confidence in investors. In fact, the current year estimate revision for the stock has been stable at $6.97 over the last two months.

Key Picks

A few better-ranked stocks in the broader medical sector are Mesa Laboratories, Inc. MLAB, Edwards Lifesciences Corporation EW and Align Technology, Inc. ALGN. Notably, Mesa Laboratories and Edwards Lifesciences sport a Zacks Rank #1 (Strong Buy), while Align Technology carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Mesa Laboratories has a positive earnings surprise of 2.84% over the last four quarters. The stock has added roughly 11.6% over the last three months.

Edwards Lifesciences has a long-term expected earnings growth rate of 15.2%. The stock has gained around 25.4% over the last three months.

Align Technology has an expected long-term adjusted earnings growth of almost 24.1%. The stock has added roughly 32.8% over the last three months.

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