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Express Scripts (ESRX) Q3 2017 Earnings Conference Call Transcript

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Express Scripts (NASDAQ: ESRX)
Q3 2017 Earnings Conference Call
Oct. 25, 2017, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Express Scripts Third Quarter 2017 Conference Call. All lines have been placed in a listen-only mode until the question and answer session. Today's call is being recorded. If anyone has any objections you may disconnect. I would now like to turn the call over to your host for today, Mr. Ben Bier, Vice President of Investor Relations. Sir, you may begin.

Ben Bier -- Vice President, Investor Relations

Good morning. With me today is Tim Wentworth, CEO and President. Before we begin, I need to read the following safe harbor statement. Statements or comments made on this conference call may be forward-looking statements and may include financial projections or other statements of the company's plans, objectives, expectations or intentions.

These matters involve certain risk and uncertainties. The company's actual results may differ materially from those projected or suggested in any forward-looking statement due to a variety of factors, which are discussed in detail in the company's most recent Form 10-K and Form 10-Q filed with the Securities and Exchange Commission. We do not undertake any obligation to update or otherwise release publicly any revisions to our forward-looking statements. For clarity purposes, all financial numbers, except where indicated, that we talk about today will be on an adjusted basis and are attributable to Express Scripts excluding non-controlling interest representing the share allocated to members of our consolidated affiliates. Furthermore, we are providing underlying performance of the company's core business, excluding the contributions from Coventry and Catamaran, both of which were acquired and are rolling off the company's book of business as well as Anthem, to which we refer together as the Transitioning Clients. This presentation will be posted on our website and includes an appendix with footnotes and the reconciliations of non-GAAP measures to the most directly comparable GAAP measures. The press release is posted on the investor relations section of our website.

At this point, I will turn the call over to Tim.

Tim Wentworth -- Chief Executive Officer and Director

Thanks, Ben, and good morning everyone. I want to start by saying that we are very pleased to have Jim Havel coming back Express Scripts to join my leadership team is our Chief Financial Officer. Jim's understanding of our business, both financially and operationally, will enable seamless transition and the execution of our initiatives.

In addition, I want to thank Eric Slusser for his over two years of experience and service to us. He's been a strong steward of our shareholders' financial resources and built a strong financing that is critical to our long-term success.

Now to highlight our third quarter, we reported 9% adjusted earnings-per-share growth. We grew cash flow by 28% and announce our pending acquisition eviCore Healthcare. I also want to say that last week's announcement by Anthem, while disappointing and perplexing, was not surprising to us and reaffirmed the actions that we have already begun to take to focus on our strong core and transform our business as we look into the next decade.

We have a terrific team who services Anthem and will continue to do so through the transition. From the work we do to lower costs and improve care to the novel solutions we create with and for our clients, to the investments we are making in our business to drive long-term growth, we are rapidly evolving to stay ahead of healthcare trends. In the midst of so much change, our focus on patients has never been more resolute. By the way, while today is about financial results, it is also a moment to show appreciation for our people who do extraordinary work every day to ensure patients get the medicine they need.

In challenging times, that work is never been more important. And since August, we've seen what it means to be a hero for those in need as demonstrated by many of our 26,000 employees who put themselves in harm's way to deliver to those we serve. Natural disasters have devastated areas across our country, but we have rallied to meet our commitment to every patient. I thank all of our employees and all the first responders and others helping communities recover for their tremendous effort. Millions of people are still in dire situations, and we are here to serve for the long haul.

The constellation on this slide broadly illustrates the complex work we do every day for 3,000 clients and more than 80 million people. For our clients, we consult with them on how to get the most value from the pharmacy benefit they provide their members or employees. That means developing and implementing formularies, creating and managing pharmacy networks aimed at keeping cost and clinical outcomes, providing best-in-class care to members, and providing access to specialist pharmacists who deeply understand patients' needs.

Additionally, for our health plan clients, that means standing shoulder to shoulder with them to help them grow their business. With our size, focused scale, deep expertise, and independent model of client alignment, we are uniquely positioned to take all actions to deliver specialized care and create innovative solutions that our country needs to maintain affordable access to medicine. Cost and care are not mutually exclusive, we enable players to achieve both.

Whether you've invested in Express Scripts for a few months or a few decades, it is critical to understand two things. A comprehensive set of unique capabilities we have assembled and built and the benefit payers and patients realize when we deploy our scale and expertise on their behalf. I want to spend a moment talking about those specific benefits. As you can see, we deliver savings to our clients in a number of ways. With our National Preferred Formulary covering over 25 million lives, we are able to leverage competition to drive greater value with over $7 billion in value created over the last five years.

Our clinically based utilization management programs help people make better decisions and eliminate wasteful spending. Creating a 90-day option through home delivery and retail pharmacies, we optimized choices for patients while delivering the best care and savings. Most importantly, our specialized patient care improves adherence and health outcomes, while our data analytics prevent or close gaps in care that we identify through the integration of our members' medical and pharmacy data. When you look at delivering bottom line numbers, you can see that without us, payers will have an additional 30% or more added to their annual pharmacy bill, and that's just the financial thought.

Through our specialized model of patient care, people stay on their therapy and get to better health. That is the power of Express Scripts. And clients recognize our leadership. We already have 8 million covered lives in our multiple sclerosis care value program, our most recent launch program within our SafeGuardRx set solutions.

Health plan clients increasing count on us using our expertise to establish formularies, negotiate their rebates, and strategically involve their pharmacy integrated offering. In the same way, health plans are focusing their specialty network, increasingly choosing to rely exclusively on the outstanding patient care we provide at Accredo. Bottom line, as an independent PBM, we are 100% focused on executing our strategy to drive down costs, improve care, and continually innovate. While I will not address recent speculation and rumors concerning potential disruption in our space, I will simply say that we are confident in our model, always interested in new ways to create value, and have built a company that surrounds patients with specialized care in a way that nobody else does.

The value we create for clients and patients goes far beyond simply dispensing Medicaid. We are updating our full year retention rate to be between 95% and 96%. As we said last quarter, we have had an exceptional year with renewals in our health plan, federal and commercial businesses, which continued through the third quarter. In addition, while we did not secure a new cornerstone case in a year which only saw a few come to market, overall sales results have been encouraging.

For example, we have achieved a 60% increase in middle-market sales over our strong 2016 performance. We are very optimistic about how we are positioned for the next two selling seasons while we know there is significant opportunity to win new business. We have also seen very strong response to our solutions in the third quarter. Introducing our new comprehensive opioid approach, along with our updated SafeGuardRx offering, has led to increased sales this year, but will also provide a strong base of growth from next year as these programs create better outcomes for numbers and deliver savings to clients.

We are also excited about our strong partnership with over 75 regional health plans. They recognize the value we bring and increasingly are engaged with us to collaborate more comprehensively. For example, we are delivering strong star ratings to the regulated business. Additionally, we are mapping out joint sale strategies and are collaborating to increase care to patients through a comprehensive approach which keeps healthcare costs in check.

We have been and continue to be the trusted PBM partner of choice for health plans as we integrate with them to drive better care management and member experience initiatives. Looking forward, the opportunity to extend our role with health plans is meaningfully enhanced through our recently announced agreements with Evercore, a leading medical benefit management company. As I mentioned at the outset this morning, we are accelerating our evolution of the company. Looking forward to the future, more clients, health plans, in particular, are looking for a comprehensive approach to benefits management.

By taking our size, strength, and expertise in the pharmacy side of the benefit and adding eviCore's outstanding offerings on the medical side, we will be the nation's leading patient benefit management company, a new kind of PBM, if you will. EviCore has access to over 100 million patients. While there is some overlap with the 80 million members we serve, we know that together, we have the opportunity to improve care and drive out wasteful spend for 1/3 of our country's population. It is an outstanding opportunity for us to better get at the $1 trillion our country wastes annually on nonadherence to medicine and overutilization of healthcare.

As in pharmacy management, when we drive out waste and improve cost and care, we are rewarded. EviCore has far-reaching capabilities across many therapeutic areas, today managing areas that have more than $300 billion in annual spend and many opportunities for us together to drive further growth. We are optimistic we will close this acquisition by the end of the year, setting the stage to add an important driver of future growth. We are impressed with the eviCore management team and plan to have the company operate as a stand-alone business, leveraging the great relationships they have built over the past 25 years.

Those relationships have, in turn, led to a thriving business, which we expect to grow by double-digits over the next two years. Upon closing, eviCore will be accretive to earnings in the first full year of operation, and we will provide more specific objections beyond 2017 on our 2018 guidance call later this year, assuming we close the transaction.

I want to make a few points very clear. Our work is comprehensive. We are well positioned for future growth, and we are not standing still. We are providing benefit to payers and patients that they do not get from other PBMs. We are partnering with help plans in new and innovative ways. We are broadening our capabilities in new areas of healthcare for us, which will allow us to do more to improve affordability and access while also delivering growth.

And finally, as we evolve what we do and how we do it, Express Scripts continues to build upon a strong legacy of innovation, patient care, financial discipline, and performance that rewards shareholders. In addition to making external investments, as you know, we have committed to internal investments to change the way we engage with our patients, providers, and clients, a multiyear effort we have called our enterprise value initiative and launched last quarter. Over the last 12 weeks, we have been hard at work mapping and sizing opportunities and examining our end-to-end process. We are beginning to reimagine and redesign our patient and physician experience.

Also, we have a line of sight to automating routine processes and making it far easier for our clients to do business with them. In the coming weeks, we will finalize a plan that is fully integrated across our organization and continue to expect value of approximately $600 million annually by 2021. This investment, along with the pending acquisition of eviCore, debt reduction of $650 million, and share repurchases of $2.8 billion year-to-date, are all being executed in a very disciplined fashion. We are committed to being very thoughtful about how we deploy our shareholders' capital.

Turning to financials. We reported third-quarter adjusted earnings per share of $1.90, which represents an increase of 9% over last year and is consistent with the midpoint of our guidance range. Our adjusted claims for the quarter were $343.6 million, slightly below the midpoint of our guidance range. This shortfall is primarily attributable to the exchange volumes being down year-over-year as well as natural disasters devastating regions across our country impacting both retail and mail clients.

Adjusted SG&A decreased 5% over last year.

Within the context of our enterprise value initiative plan, we slowed some spending in the third quarter, allowing our teams to analyze projects across the organization to ensure they are fully aligned and coordinated to officially meet our organization's 2021 goal. We generated $1.9 billion of adjusted EBITDA. Our core adjusted EBITDA grew 1% to $1.3 billion, resulting in core adjusted EBITDA per adjusted claim of $4.68, up 2%.

Our year-to-date core adjusted EBITDA increase is up 2.5% over the prior period, driven by generic acquisition cost of mail, Accredo growth, increased rebate value, and new solutions sale. From a cash flow perspective, we generated $1.9 billion of net cash flow from operations, up 28% over last year. We also repurchased 11.5 million shares for $712.8 million during the quarter and completed our second 10b5-1 plan on October 9, 2017. Year-to-date, we have repurchased 43.3 million shares for $2.8 billion.

With that, I will now turn to our 2017 updated guidance. We continue to expect 2017 adjusted claims to come in at a midpoint of $1.4 billion, generating an expected adjusted EBITDA of $7.4 billion at the midpoint of our range, 2% over 2016 adjusted EBITDA. We are increasing our adjusted earnings per diluted share guidance for the year from a range of $6.95 to $7.05 to a new range of $6.97 to $7.05. This represents growth of 9% to 10% over the prior year.

We now expect diluted weighted average shares outstanding to be in the range of 580 million to 585 million. In the fourth quarter of 2017, our diluted share range balances additional share repurchases with closing on the Evercore acquisition. With respect to the fourth quarter of 2017, we expect adjusted EPS to be in the range of $2.03 to $2.11, up 8% to 12% year-over-year. I have covered a lot of material this morning.

So to sum up our quarter and year-to-date, we delivered $1.90 in adjusted earnings per diluted share in the third quarter, an increase of 9% over the third quarter of 2016. Year-to-date core adjusted EBITDA growth is 2.5%. We had another strong year of sales with retention above 97% or sorry, 95%, a 60% increase versus 2016 of new named accounts in our employee segment, and a record year for new solution sales within our existing client base. We are executing on our growth strategy by investing in ourselves and through acquisitions to change the way we engage with members, clients, and providers as well as to expand our set of capabilities to drive waste out of healthcare both in the medical and pharmacy spend.

We look forward to speaking with you again when we have our 2018 guidance call before the market opens on Thursday, December 14. At this point, I will be happy to answer any questions. Operator.

Questions and Answers:

Operator

Thank you. At this time we'd like to be any question and answer session. If you would like to ask the question at this time, please press star then one. To withdraw your question, you may press star then two.

Once again, if you would like to ask the question at this time, please press star then one. The first question comes from Lisa Gill with JP Morgan. You may ask your question.

Lisa Gill -- J.P. Morgan Chase -- Analyst

Great. Thanks very much. Thanks, Tim, for all the comments first. First, let me start with the selling season for '18.

You talked about a 60% increase in wins and the middle-market. But can you maybe talk about what your expectations are for plan design because I think that's what will drive EBITDA as we think about '18? Did you see more people taking up your formulary? Did you see more people coming into your safe grad programs? That would be my first question, is how do I think about what people are signing up for in '18?

Tim Wentworth -- Chief Executive Officer and Director

Sure, I'll start. I have Dave Queller here, who can add any additional color. The short answer is, particularly in the middle-market of employer space. But even more broadly, our National Preferred Formulary are tightly managed Nero specialty solutions and the majority of our -- many of our SafeGuard programs, almost every one of these new clients has adopted.

Dave, I think that's probably the quick and safe answer here.

David Queller -- Senior Vice President, Sales

Yes, that's the great part about the middle-market, Lisa, is that they're looking for comprehensive solutions to have manage their spend, to manage their plan. And by doing that, they're actually engaging us on all the SafeGuard programs. Typically, 90-day programs as well, whether it be mandatory home delivery or a retail program. And they're really looking for cost management over the long term.

And I think we're well positioned to offset to them as we think about the marketplace now and the future of how to help them save money and have a sustainable benefit program.

Lisa Gill -- J.P. Morgan Chase -- Analyst

And so what -- thinking about these programs and Dave, being in that sales position, can you maybe just talk about what you want the business from? And are they buying into all of these programs right from the beginning as we think about 2018? Or are these things that are going to build out over the next couple of years? I'm just trying to think about the business that you're winning versus the business that you've lost this year for 2018.

David Queller -- Senior Vice President, Sales

So yes, Lisa, I would tell you that it is a broad group of folks that to have with the business from across of the market. We're obviously focused on penetrating in areas where we may not have health spend partners. Those areas that we think we can we and bring a new solution to the marketplace, certain states, as an example. We don't have a health plan partners.

So we've done that. The other piece is that most of these will be buying programs either initially in the initial sale or as we implement them into Express Scripts. And then there will be, obviously, some that will be buy over time. But I would say more than middle-market by the -- in the front end of the selling season.

Tim Wentworth -- Chief Executive Officer and Director

What you finally say is with particularly in the middle-market they don't have gigantic a chart department that wants to sort obligation. A lot of that acquisition made. They really look to us to be the currency manager of their spend. So they tend to be [indiscernible] for most of that program because of the said, either at the sales process or as we do installations where it's so easy for us to fill them the incremental value we can bring.

Lisa Gill -- J.P. Morgan Chase -- Analyst

And then my second question, Tim, I noticed you made the comment of I'm not going to talk about disruption in the space or disruptor in the space. But historically, I have heard you talk about Amazon and potential ways to serve the uninsured population. I think there's always this concern of can Amazon be a disruptor to the PBM industry? And if you were to do something, are you, in essence, letting the fox and the head house by giving them access to your great operations? Can you maybe just talk about what -- how you view the market and where you would potentially do this opportunity for those that are uninsured? And correct me if I number several, but I think you talked about roughly 30 million prescriptions in the U. S.

today are filled by people that are uninsured.

Tim Wentworth -- Chief Executive Officer and Director

So it's actually 30 million people who we view as the sort of cash market of that we've historically not participated in very aggressively. It's probably 5x that in terms of prescription. The -- and so the opportunity, first of all, is to help those folks get access to care that they can afford. I remember before doing on CVS' show literally showing on the green room how the price of a very heavily used drug in the cash paying publishing have dropped by 40% overnight based on our launch of Inside Rx.

I mean, it was really a striking sort of number. And that's what we've seen as we look at this population, is they have not have someone like us in their corner. So we love the idea of being able to add that operation to those we serve. That being said, certainly, if you look at the growth fox in the had a house, first of all, people foxes and henhouses.

And what I'd say is I think our henhouse is pretty good. And I remember back in them into any hundred, you probably do as well, those are real thought that when Walmart launched the $4 generic list of that is was the end of the PBM model is with node. And of course, what it was inside was another opportunity for PBM to create opportunities drive down costs and drove the generic especially for their clients. Similarly right now, say look at the possibly of disruptors such as you mention Amazon in the cash space, I think they're absolutely is a population there that preserves good service.

We think we're doing a great job through our Inside Rx initiative but we certainly see that as something where if they wanted to move into a space, we could be a very natural collaborator.

Lisa Gill -- J.P. Morgan Chase -- Analyst

Great, I'll stop there and jump back into the queue. Thank you.

Tim Wentworth -- Chief Executive Officer and Director

Thanks.

Operator

The next question comes from John Kreger with William Blair. You may ask your question.

John Kreger -- William Blair -- Analyst

Hi, thanks very much. Tim, I think you mentioned in terms of eviCore some overlap between your 80 million members and their 100 million. Can you just be a little bit more specific what sort of incremental step up and lives do you think assuming this deal closes?

Tim Wentworth -- Chief Executive Officer and Director

You know when we to close it, we'll give you a lot more color. What I would say is that the overlap is probably -- I can tell you the client level that it's probably -- is roughly 50-50 in terms of who their clients are versus who our clients are. Maybe pull be filtered a little bit more because of a have a couple of very large health plan that we don't work with. So we see it as a material expansion of our ability to serve patient.

John Kreger -- William Blair -- Analyst

Great, thank you. And then a follow-up. Now that you've got more clarity on how the selling season has ended up, what are your updated thoughts on the ability to have claims growth in '18? And any update there?

Tim Wentworth -- Chief Executive Officer and Director

Yes, of course. Now understand the 14th, we'll give you the best sense of that. I think I'm going to reiterate what I said last quarter, which is as it relates to claims growth for '18, given that we're very pleased that we're going to come in north of 95% retention. Obviously, we would love to come in at the higher end of our initial range.

I think basin coming in at 95%, we're likely to be flat to slightly down next year. That's probably, at this point, that's the best I could give you.

John Kreger -- William Blair -- Analyst

Great, thank you. And then one last one, what -- what sort of inflation are you observing currently in, in the sort of traditional brand specialty landscape and is that kind of tracking with your expectations? Thanks.

Tim Wentworth -- Chief Executive Officer and Director

Yes, thanks for that question. In the sort of traditional specialty, we're seeing somewhere around 70%, if you look at full year what we're thinking about. Obviously, there's still time for price increases that we have not anticipated to materialize. But right now -- that's largely in line with what our expectations where read we built our original plan.

That's why you haven't seen a change our guidance range at all.

John Kreger -- William Blair -- Analyst

Okay, thanks.

Operator

The next question comes from Charles Rhyee with Cowen and Company. You may ask your question.

Charles Rhyee -- Cowen & Co. -- Analyst

Great, thanks. Tim, you mentioned earlier that you think you're well positioned for the selling seasons next year in 2018 and '19. But obviously, we had some unexpected losses this year in the state business. Can you let us know what you might have learned and any sort of kind of postmortem and what kind of changes have been made to give you confidence about the upcoming selling season?

Tim Wentworth -- Chief Executive Officer and Director

Well, Charles, thanks for that question. The first thing I'd say we definitely there these things apart if we were able to fair them, we do. We have folks even outside the company that help us analyze and understand sort of what we might have done to compete more effectively. I won't give you the playbook in terms of what we'll be doing going forward other than to say that there is no one big thing that we point to that say, oh, man, we just totally missed it here.

Each one of them has a story. To a couple of cases, I think that we probably were more conservative than in hindsight we should have been. But just to suffice it to say, we look at them. We learn from them.

We made some leadership changes and some other things, which I think position us very well for the future. And it's a market we continue to serve very well. I would point that out. And so I think moving forward, we expect to compete very well in that space.

Charles Rhyee -- Cowen & Co. -- Analyst

Thank you. And as a follow-up, you earlier just said you expect kind of claims to be maybe flat to down based on the and 95% retention rate. Can you maybe give us directionally a sense what that means for top line? And obviously, should we be thinking more flat to down top line but better margins because it's more middle market business?

Tim Wentworth -- Chief Executive Officer and Director

You know, I'd love to answer the question. I'm going to wait 'til December 14 and give you a full picture.

Operator

The next question comes from Erin Wright with Crédit Suisse. You may ask your question.

Erin Wright -- Credit Suisee -- Analyst

Thanks. You mentioned some of the overlap with eviCore. But can you describe some of the cross-selling opportunity associated with that transaction? And is there -- is that more over time or is there some closing effort there?

Tim Wentworth -- Chief Executive Officer and Director

I'll start, and I have Dr. Glen Stettin here, who heads up innovation for me and has been part of the team as we evaluated and got in eviCore. But certainly, I can tell you, by the way, the number of CEOs of our clients that I heard from after this transaction was announced was really exciting to me. The value that they place in eviCore, to believe that they believe that we with eviCore in our family of companies, can take them to the next level and at the same time, enhance their offerings, is really powerful.

Obviously, there's a lot that we do with machine learning and integrated data that we believe can add to what they do operationally, first of all, to be even easier to do business with for the physicians they work with and the clients they serve. But as we look as well, again, clients are looking for a turnkey solution, and we do have clients who, today, may not be managing those spaces or may not be happy with the current vendors that they're using that are different than eviCore, where we're able to introduce them into the relationship. Likewise, I can tell you that the leadership team at eviCore has a tremendous set of relationships. So we did the channel checks, just a tremendous set of relationships with their clients, some of whom a than we had some relationship with, but some of whom we don't and we have real opportunity to affect introductions that way.

As it relates to the sort of the products and service and some of the cross thing, I'm going to let Glenn just give you a little color, recognizing it in the real opportunity for us we get this closed is to put out teams together and management teams that neither of us are doing today that our combined capabilities will enable. But Glenn, if want to talk a little bit about that.

Glen Stettin -- Head of Clinical Products

Great, Tim. So together, with the drug spend that we have under management and the medical spend that eviCore has under management, it totals more than 40% of our client's total healthcare spending. And that creates some pretty exciting opportunities for us to better serve the health plans in their pursuit of lowering total healthcare stare costs for their customers. And I'd point out that some of the categories that EviCore is in, whether it's musculoskeletal, so think about it as hips and knees and back pain and oncology, cardiovascular disease, many of these categories involve pathways that have prescription drugs and other procedures, other use of medical resources.

And so together, we believe that there's going to be a great ability for us to improve the value that we bring to the health plans and as well as to patients in managing their benefits more holistically through the health plan and protecting them from potential harm, from an unnecessary and inappropriate procedures and care and medication experience as well a saving see good amount of money for us the system to make medical care more affordable for both patients and the plans that [inaudible] got here.

Erin Wright -- Credit Suisee -- Analyst

Great, that's excellent. And what sort of flexibility or clarity I guess you have now on the cost-cutting initiatives at a broader EVI initiatives and now that you have more for more clarity on Anthem? How involved, I guess, will the new CFO be in the sort of cost structure initiative that you're still finalizing? And do you anticipate any sort of changes to your initial plans or even other changes to management team members? Thanks.

Tim Wentworth -- Chief Executive Officer and Director

Sure. So I am really proud of the leadership of our enterprise value initiative and our broader leadership teams that have engaged on what I described as sort of looking at our different processes across of the business. They have been amazingly creative and thoughtful about sort of looking at the future of our business, looking at the things we do well that we want to do better, looking at the things that we could be doing better, leveraging new technologies, leveraging different ways of doing business. And what I would say is as I sit here today, while we don't have a completely cast, we remain very confident in the numbers that we gave you originally as it relates to the spending of $550 million to $600 million of incremental capital over three years to deliver at the end, $1.2 billion of cumulative value and a $600 million run rate in terms of reduction in costs.

So I think we have not seen anything that has caused us to feel less bullish about the value we're going to create with that investment and as well, they're excited we've created in our organization. With Anthem's decision, obviously, it gives us a bit of a clear line of sight to some of the work we have to do. And as I said, we have a great team working on that and I'm very confident it will be exceptionally strong there. And as it relates of the new CFO, it's going to be the same as the role of the old CFO, which is integral.

It is no question that the CFO is a key member of my team. Eric was, Jim will be. And the enterprise value initiative is not a silent event. It is something that my entire team is committed to and that the CFO will help to drive.

Erin Wright -- Credit Suisee -- Analyst

Great. Thanks.

Operator

The next question comes from Robert Jones with Goldman Sachs. You may ask your question.

Jason Jacoby -- Goldman Sachs -- Analyst

This is Jason Jacoby on for Bob. So circling back to Amazon for a second. The -- I know in the past you said a bunch of times that you're open at working with them, partnering with them, maybe collaborating with them. But just so we think of like what role Amazon might play here.

How do you weigh the risk that Amazon might pose to your mail business? Your mail pharmacy, especially given how profitable that is for you guys?

Tim Wentworth -- Chief Executive Officer and Director

Sure, appreciate the question. I mean, first of all, the most important thing to understand is what we do for our pain clients who contract with us to take care of their members is deliver great care across channels, including mail. As it relates to those patients that are at mail, we have been investing for 30 years to create unparalleled capability to serve those members, and we continue to improve it both in terms of the cost of delivery and the service that's provided. In many cases, we've 1.5 days of a turnaround time in the last 12 months by virtue of how we contracted with other parts of the supply chain and so forth, and we've done at that by lowering the cost by tens of millions of dollars.

And so from my perspective, I feel very confident in our ability to deliver best-in-class, both cost and service mail. That being said, the only members that can achieve that today are members that are inside of our paying clients. So as a think about what Amazon could play, either whether that be as I spoke earlier as it relates to cash payers, who we believe -- I believe -- we conjointly serve through many relationships, not just Amazon, let me say that. But also, as I think about sort of them deciding to move into a retailer sort of a male view to the extent that they can do that in a competitively, that meets the critical and service sort of standards that the markets continued to evolve.

We've loved to great in that competition by introducing them into the mix. And so from my perspective, I see that as a net positive. If they just have a PBM, now we have a competitor in our hands and we had to deal with it. But again our independent focused model on the value we have shown clients, I feel very confident we'll stand well against an entry in the PBM space would be at Amazon or anybody.

Jason Jacoby -- Goldman Sachs -- Analyst

Okay. So if like let's say, not looking at the cash market, but looking at that say to actually maybe joined one of your networks, would that not and offer them as part of your retail network, would that not potentially pose a threat to what your mail pharmacy does because [indiscernible] Amazon, but also go after a lot of chronic drugs and a lot of drugs that could also be ordered over over express mail, right?

Tim Wentworth -- Chief Executive Officer and Director

Sure. Listen, our mail has to deal with competing with everything today. And so as I think we've mentioned in the past, we have contracted with retailers in such a way as to put our certain Retail90 programs for us not at parity, but much, much closer to parity with our mail in terms of the value that we create for clients and for ourselves. And so from that standpoint, our mail has to continue to stand on its own.

It has to continue to compete or else we should reevaluate that, and I believe we'll intend to do those things. But also, the terms under which an Amazon entry, for example, would have to compete will be very strict. Because I can tell you they saw announcement yesterday, the retail is a continuing to do everything they can to get volume of that produces a great opportunity for us to create that competition and drive value for our clients and keep them small pieces that for themselves.

Jason Jacoby -- Goldman Sachs -- Analyst

Okay, that's helpful. Thanks.

Operator

The next question comes from Ricky Goldwasser with Morgan Stanley. May ask your question.

Ricky Goldwasser -- Morgan Stanley -- Analyst

Hi there, this is Roche's March on behalf of Ricky today. Now that Anthem has made its decision not to renew the contract, as to the price check for the existing contract still on the table? And how should we think about potential impact of forward earnings?

Tim Wentworth -- Chief Executive Officer and Director

Sure. So I'm actually not going to speak to the existing contract or interpret it for you on this call. What it says is we always believe we have little contract. With the one thing, I'll say is I would remind you that the fundamental dispute that exist here is over what they're entitled to.

And so I'm not going to characterize it now. But what else he's of this, we will continue to live up to the contract. We're disappointed obviously, the decision they made and frankly, as I said, perplex. But I'm just going to leave it at that at this point.

Ricky Goldwasser -- Morgan Stanley -- Analyst

Okay. Just a quick follow-up there. I mean, last year it was disclosed that Express offered Anthem $250 million in annual repricing. Is that a figure we should think about as we evaluate the different scenarios?

Tim Wentworth -- Chief Executive Officer and Director

Actually, the number we talked about was a quite a bit higher than that. And what I would say is this, we'll you should talk to Anthem about how they get to the numbers of a think its worth in 2020. Certainly, if they continue to modernize their benefits as we've long told them there is an opportunity if they get pricing that I suspect highly competitive for 2020, I hope they did. If I were their shareholders, then there' s a significant amount of savings for them in 2021 when they move it off.

It savings they could have achieved by staying with us but chose not to.

Ricky Goldwasser -- Morgan Stanley -- Analyst

Great. Thank you.

Operator

The next question comes from Anthony Vendetti with Maxim Group. You may ask your question. Please check your mute button

Anthony Vendetti -- Maxim Group -- Analyst

Okay, thank you. Yes, I just wanted to ask quick question on the CFO transition. So I had met Jim back in 2015 and he had come in as the interim CFO at the time. And then Eric was named the CFO.

Can you talk about Jim's role at the company between now and then? And then what precipitated the change, if anything, if you can elaborate on.

Tim Wentworth -- Chief Executive Officer and Director

No, sure. Jim was with us. As I recall, if you go back to history, Jim came in at a time we had been making a CFO transition. We are predisposed to bring in a public company CFO with industry experience.

So Eric came in and did an amazing job for us, earning the respect of our Board -- his employees and my leadership team in the process. And obviously, through the process of the search that was underway, we hired Eric. But we have earned a modest amount of and also has actually been a very attractive candidate to a couple of healthcare companies recently that I'm aware of. But as we sit here today, therefore, Eric, the mutual decision that Eric and I reached where he will ultimately be pursuing other opportunities, recognizing he is still part of our management teams who marched as Jim comes in and he leaves behind a very strong team in finance.

Jim coming in is a known quantity, as I said, respected by everybody and I think gives us the chance to not skip a beat. He learned our business well, both operationally and financially, when he was here. He's a strong leader. He's a strong manager control and a good control environment and the business were a lot of cash comes to our hands.

So I and my team, our board in my finance team are all very, very confident that Eric is going to do the OK job.

Anthony Vendetti -- Maxim Group -- Analyst

That's very hopeful. Just lastly, on the cash side. Obviously, you guys produce a significant amount of free cash flow. Some of those will go to pay the of the core acquisition.

Anything else on the acquisition front that would move you a little bit away or a little further away from the PBM business that you can talk about in terms of the strategy going forward?

Tim Wentworth -- Chief Executive Officer and Director

Sure. So actually, let me reframe the question because I want to keep in toward the PBM question but we defining the PN so from that standpoint because we really like the core PBM. We think it's a great enabler and a great chassis for some of these other things to complement. We're always looking at things in the space.

Obviously, we're very pleased when we were successful at the eviCore management team and are getting to get and getting this transaction announced. They have ideas. We had ideas. When we complete this transaction, we're going to be able to get down together and really evaluate the payer services space more broadly and look at basis of that our natural for us.

I'm not going to name any names no but we have probably a half-dozen things that we would be looking at and tracking as we look over the next 12 to 18 months.

Anthony Vendetti -- Maxim Group -- Analyst

Okay, great. Thanks a lot.

Operator

The next question comes from David Larsen with Leerink Swann. You may ask your question.

David Larson -- Leerink Swann -- Analyst

Hi, thank you. Can you please talk about the cost-reduction program? Exactly what sort of cost are going to be taking out? And then any comments on any updates like the formulary and your use of biosimilars will be very helpful.

Tim Wentworth -- Chief Executive Officer and Director

Sure, I'll start because. As it relates to the cost reduction piece, obviously, there are -- we're still working on the work. Some of it is going to be as simple to severance and footprint as it relates to things that are directly attributable to Anthem. And I say that we're going work to minimize that.

We actually think natural attrition and other things can give us a pretty good glide path, given that they tell people, this isn't a tornado dropping out of the sky. This is a hurricane that we can see coming. And so we can plan for it and be thoughtful about it. But a lot of it is going to be investment in technology to reduce sort of friction in our processes, both in terms of how we work with physicians and how we work with members as well as clients.

I would give you the example of prior authorizations, which today still over half done by faxes or other primitive methods, I'll call it. So what we move the needle a long way, we think that's that requires investments in technology and people to execute it. This old series of things have that I would just point to that ultimately least be color bit our give you a little bit of a head to on it with a slight that we put up. When we talk about some of the measures of success.

And so again, we still have 1/3 of our members who are calling us who frankly don't want to tube and who we even try to self-serve, understanding them, driving their MBS core up, making the changes in our website and our digital expenses that will lower our costs and improve our experience and give our ability to better manage the risk that our clients take as it relates to those patient's behavior. Those are the kind of things that I think are going to be very powerful. Now as it relates to formulary and biosimilars and so forth, I'll start and then I'll ask Everett Neville, who is my Senior Vice President over our supply chain and strategy, to speak. We -- it's a longer-term opportunity for us that we are preparing for and we believe we are perfectly positioned to do what this industry did for the last 20 years with sort of small molecule generics, which is drive biosimilars adoption when they become available.

And we've been advocating very strongly in Washington. And we've been working at the state level to put laws in place that will facilitate the discussion of the biosimilars when they become available. So we see it as a significant opportunity. I would also tell you that probably, as we begin evolving our investor conversations over the next 12 months, we're going to begin dimensionalizing it more because we can begin to see sort of the horizon on this.

It's not necessarily a big 2018 opportunity. It is definitely a meaningful 5 to 10-year opportunity. Everett, any color beyond that at all?

Everett Neville -- Senior Vice President of Supply Chain

Yes, we just comment that we continue to see increasing leverage [indiscernible], and that leverage is spreading and growing more in the specialty space particularly in the coming year, in the MS space with the generic co-packs in product. We recently released. From biosimilar perspective, we remain convinced in fact, more convinced than ever that they will have an impact. The timing is where the biggest question is.

Now have a broken. We know that will see biosimilar product by January 23, there's a possibility of that earlier. We've got the lecture product, the other products coming in that space as well. And we already have continued to have impact and cost in this space.

David Larson -- Leerink Swann -- Analyst

Thanks so much.

Operator

The next question comes from Glen Santangelo with Deutsche Bank. You may ask your question.

Glenn Santangelo -- Deutsche Bank

Tim, in your prepared remarks, you provide a lot of details about the services you provide. And I think investors would say they've heard that from other PBM's pretty similar pitches. And so my question is really twofold. When you meet with your clients, you have data that suggest that your programs of more effective at controlling spend and are able to compare and contrast sort of your results versus the competitors? Because I think the second part of the question what we hear from investors, they seem to be very focused on the fact that Express Scripts is earning an above average returns relative to the competition.

So I guess the question is, what really gives you the confidence that that trend is sustainable?

Tim Wentworth -- Chief Executive Officer and Director

Well, let me start with above average return, you need to mix adjust that to start with. I'm not going to be able to get it done to the decimal point for you. But there's a lot in there when you actually take a look at the different mix. You look -- you back at our Anthem business, for example.

You then look at the other competitors. Also, our mail piece obviously has to compete against retail. But we've got our cost situation there where it's very attractive. So I don't have clients coming to me saying we're over-earning on things at all.

At the end of the day, we've got a price to compete. And our clients, I can promise you, they force us to compare and contrast pretty much almost every large, sophisticated client. And the retention results we had with health plans and large employers, particularly in our federal business this year, those were all highly competitive where we had to show value. Some of that value comes from our scale and our ability to basically drive down unit costs, but a lot of it comes from being able to take and manage risk as it relates to whether that's -- what we did specialty and drug trend, what we do in terms of generic substitution or other things.

And I recognize that from a distance, all the PBM's look like they have this same capabilities, well, when I take a look at our ability to look at about base per will always be shipped and the only guys getting their money back in the inflammatory condition space right now, for example. That's a meaningful, tangible difference. We've got over half a dozen programs that we've launched that competitors may have imitated by name, but have not imitated substantively that our clients are absolutely seeing the benefits of. And so -- and I can tell you that the highest level.

I've talked to shut who talked to me about the business that was made to our level of this individual spent Saturday and saw specifically what their data what we were able to help them do and commit to future and we secured a renewal in that case as we have most of our health plans, as I've mentioned, already, that we're up a bit. So from that standpoint, I feel very, very comfortable that when it comes down to discerning clients, doing an objective analysis, we stand tall.

Glenn Santangelo -- Deutsche Bank

And maybe I'll just ask one follow-up question with respect to pricing. I mean, when you were commenting earlier in your remarks on the CVS Anthem situation, I think you described it as perplexing. Obviously, the savings that Anthem put forth were probably the bigger than what people appreciated. And I certainly appreciate the uniqueness of that situation.

But as you think about the potential ramifications that, that could have on pricing in the industry, is that too far the leap? Or is there -- or as you think about trying to sell the business in the wake of that announcement, that does have any impact at all or how should we think about that?

Tim Wentworth -- Chief Executive Officer and Director

I really don't think it does. I mean, I could tell you, I've spoken to or communicated with the CEOs of all of the major health plans that are in our book, for example, or many of them. And there's none of them that actually view it as a factor. That they are concerned about the leverage and scale.

They already know what we do working with them. If we were going to have a scale reduction that was meaningful, then I think we have some work to do. But because of the relationship we had with Anthem, they've already not down on their own or not participated in for a seminary to formulary, retail networks, mail, specialty, we are not left uncovered and being able to do our job really well and continue to innovate. And in fact, it's the opposite.

I think that's right. Our enterprise value initiative, we're going to be, to market with an even more interesting story over the next couple of years that will cause us to compete very well.

Glenn Santangelo -- Deutsche Bank

Okay, thank you.

Operator

Next question comes from Michael Baker with Raymond James. You may ask your question.

Michael Baker -- Raymond James -- Analyst

Yes, thanks. I was wondering how much you spend on the enterprise value initiative to date? And then as you think about your spending, how you make the determination or how you making the determination in terms of what you add back to GAAP earnings to come to adjust it?

Tim Wentworth -- Chief Executive Officer and Director

Sure. So year-to-date, it's been below $25 million that we spend. As we said, it was about $23 million. And largely that the kind of things you would expect on the front end of the process like this.

This professional fees to finalize our plan. There is some severance in the piece as well, but not a lot. So from that standpoint, it has not been a lot. Over the next three years, we think it will probably be spending it in a fairly ratable function.

But again, as we're just finalizing the work streams now, I don't want to declare that yet, Michael. And as it relates to -- and all these charts are nonrecurring, of course. So -- and the second part of your question, I'm sorry, was about closing it back to GAAP?

Yes. So in other words, the $23 million came a little bit sooner than what I was expecting. It was added back. So I was just trying to get a sense of, as all the enterprise value initiative can be added back to earnings? in other words, reflected in adjusted earnings?

Actually, I'm going to let our Chief Accounting Officer and Controller, Brad Phillips, give you a better answer, more specific answer rather than I can. So Brad, once I got.

Brad Phillips -- Chief Accounting Officer

Yes, the cost that we incurred in the third quarter, you'll continue to see that category spike out as we go. And as Tim mentioned, it will begin this quarter. You can expect to see it probably ramped as we go into '18, probably not too significant in the back half, but we will trap close as a project team. And you can anticipate seeing more disclosure on that in our 10-K.

Michael Baker -- Raymond James -- Analyst

Okay. And then just back to Tim, or whoever wants to answer the question. What you guys give guidance historically you've just given adjusted EPS guidance in light of the that you spend a lot of time understanding what your spend is going to be related to this. Do you plan to give a GAAP range as well?

Tim Wentworth -- Chief Executive Officer and Director

Probably not at this point. But we'll be giving you a lot of information because we'll be breaking out our core, of course, and so forth. So our goal in doing all of this back in April was primarily to give you better view of how the core itself is performing, and that's what we're going to spend a lot of time focusing.

Ben Bier -- Vice President, Investor Relations

And Michael, this is Ben Bier. With the intangible amortization and some of the details we break out, I think its possible for you to get the investments into an estimate of our GAAP that earnings. All right, thanks.

Operator

The next question comes from Lance Whelks with Sanford Bernstein. You may ask your question.

Lance Whelks -- Sanford Bernstein -- Analyst

Yeah, good morning. Just had a question on the kind of mail and potentially online business for you folks. And wanted to understand the investments you're making in the business as far as the front end of mail. How much of the business is actually conducted online today and what your strategy is for that going forward?

Tim Wentworth -- Chief Executive Officer and Director

Yes, I mean, email and online, we've had a long history of having a strong Web and digital relationship with our members. We continue to invest in that. We have our roadmap actually that we just review again this week at senior staff inside the company looking at the design language and how will building that out across our platform. So we have a good -- we have a great sort of strategy there.

It's been an area where the investments have very high return for us in terms of both gross margin in cost management. And so from our perspective, it's an important area to continue to invest in. We have NPS scores. When you look at -- we're very disciplined about that.

We look at NPS for new patients versus existing patients. We look at it across channels. And we look for those opportunities with investments will have the highest return, both in terms of member satisfaction and cost. And so from that perspective, it continues to be very important to us.

Lance Whelks -- Sanford Bernstein -- Analyst

Got you. And as you look at that going forward, do see your mail and do you see your online as an offering that is going to be more compelling to customers, especially thinking of potential disruptions in the space? I know right now you're relatively agnostic between the different channels.

Tim Wentworth -- Chief Executive Officer and Director

There's no question that we recognize that our consumers, our members, they compare our expense again speak the opioid expense of that they have across platforms outside of healthcare. There's not a lot of players in healthcare at all that are doing a great job of meeting those -- that level of standards. We believe that we are meeting it today and we're going to be able to exceed it as we move Ford. So there's no question, we have to continue to make it not only compelling and attractive, but future focused.

Lance Whelks -- Sanford Bernstein -- Analyst

Got you. And just one follow-up on the growth comment you made earlier on pricing and some of the leadership changes you made there. As you look forward, both '18, but beyond '18 and '19, and once your post Anthem, from a pricing strategy, are you going to be taking a different approach? And perhaps, valuing kind of a membership adds a little more than margin? And then the other question around of that is, once the Anthem contract still order in place, does that eliminate any restrictions that might exist when you are as far as how you get aggressive in the market or particular competitors?

Tim Wentworth -- Chief Executive Officer and Director

So first of all, we're going to remain disciplined about membership adds. We think there are real good opportunities for membership adds that don't require us to somehow change our underlying pricing velocity. I think the goal for us is to make sure we get a good line of sight to the volume we're going to be great because as you heard average say we are going at significant value creation that we just need to make sure we fully get credit for and taken to our underwriting. As it relates to the Anthem's contract going away, it really doesn't change at all from our perspective, the ability to compete for either large health plans or the employer space.

Lance Whelks -- Sanford Bernstein -- Analyst

Thank you.

Tim Wentworth -- Chief Executive Officer and Director

Operator, we'll take one more call.

Operator

Thank you. The last question comes from Ricky Goldwasser with Morgan Stanley. You may ask your question.

Ricky Goldwasser -- Morgan Stanley -- Analyst

Question's been answered. Thank you.

Tim Wentworth -- Chief Executive Officer and Director

Okay. Thanks, Ricky. Well, again, a lot of stuff with that we had to go through today. Appreciative everybody dialing in.

I think the real story is this model is absolutely performing. We're proud of our retention rate with wherever we're competing in the marketplace. It really importantly, the optical that our clients have with our core solution. We're probably we are deploying capital and you should continue to expect us to be very disciplined, but also very aggressive as it relates to returning cash to our shareholders, through both good investments as well as share buyback and paydown of them all those things that we know we are responsible for.

So we are very confident and we look forward to talking to all of you on December 14, when we give you our 2018 guidance. Thank you.

Operator

This concludes today's conference. Thank you for your participation. You may disconnect at this time.

Duration: 55 minutes

Call participants:

Ben Bier -- Vice President, Investor Relations

Tim Wentworth -- Chief Executive Officer and Director

Lisa Gill -- J.P. Morgan Chase -- Analyst

David Queller -- Senior Vice President, Sales

John Kreger -- William Blair -- Analyst

Charles Rhyee -- Cowen & Co. -- Analyst

Erin Wright -- Credit Suisee -- Analyst

Glen Stettin -- Head of Clinical Products

Jason Jacoby -- Goldman Sachs -- Analyst

Ricky Goldwasser -- Morgan Stanley -- Analyst

Anthony Vendetti -- Maxim Group -- Analyst

David Larson -- Leerink Swann -- Analyst

Everett Neville -- Senior Vice President of Supply Chain

Glenn Santangelo -- Deutsche Bank -- Analyst

Michael Baker -- Raymond James -- Analyst

Brad Phillips -- Chief Accounting Officer

Lance Whelks -- Sanford Bernstein -- Analyst

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