Can PBM Unit Boost Express Scripts' (ESRX) Q2 Earnings?

Express Scripts Holding Company ESRX is scheduled to report second-quarter 2018 results on Aug 1, after the market closes . Solid performance by the Pharmacy Benefit Management segment ("PBM") is likely to drive the company's top line. However, the company is getting acquired by Cigna Corporation by the end of 2018.

Express Scripts delivered an average positive earnings surprise of almost 1.3% in the trailing four quarters. In the last reported quarter, Express Scripts posted adjusted earnings of $1.77 per share, which beat the Zacks Consensus Estimate by a penny. Further, adjusted earnings improved 33% year over year. Revenues of $24.78 billion beat the Zacks Consensus Estimate of $24.76 billion and inched up 0.5% year over year.

For the quarter to be reported, the Zacks Consensus Estimate for revenues is pegged at $25.34 billion, reflecting a nominal fall of 0.01%. The Zacks Consensus Estimate for earnings is pegged at $2.20, indicating an increase of 27.2%.

Let's delve into the factors that are likely to have an impact on second-quarter 2018 results.

Express Scripts Holding Company Price and EPS Surprise

Express Scripts Holding Company Price and EPS Surprise | Express Scripts Holding Company Quote

PBM in Focus

Express Scripts is the largest PBM in North America. The company has been consistently trying to expand the core PBM business. The Zacks Consensus Estimate for PBM revenues is pegged at $23.63 billion, indicating a rise of2% sequentially.

We believe that the company's unique offerings of home-delivery pharmacy care, specialty pharmacy care, specialty benefit management and medical as well as drug data analysis services buoy optimism. The Zacks Consensus Estimate for PBM Product-Home Delivery is pegged at $11.26 billion, showing a rise of6.3% sequentially.

Express Scripts also distributes a full range of biopharmaceutical products and provides extensive cost-management and patient-care services. The Zacks Consensus Estimate for these PBM Services is pegged at $342 million, indicating a rise of11.4% on a sequential basis.

Coming to the suite of developments in the PBM unite, on Apr 12, Express Scripts announced the launch of a new, innovative 12-month pilot for a performance-based retail pharmacy network for commercial plans designed to optimize medication therapy.

In 2018, Accredo specialty pharmacy, a subsidiary of Express Scripts, has earned URAC's accreditation at its primary dispensing locations like, Warrendale, New Castle and Indianapolis. This is likely to enhance the company's customer base.

Other Factors at Play

Long-term View

Buoyed by strong results in the last reported quarter, Express Scripts' enterprise value initiative is estimated to cost $600-$650 million as of now.

Notably, management expects cumulative savings of nearly $1.2 billion by 2021. Further, the company's targeted compounded annual adjusted EBITDA growth rate for the core business from 2017-2020 of 2-4% is a tailwind. Thus, Express Scripts is confident about improving growth trajectory, which is likely to drive second-quarter results.

Recently, the company launched the most innovative approach to value-based contracting in the industry, a system that made hepatitis C treatments cheaper and ensured patient access and superior clinical outcomes. Also, in the case of inflammatory conditions and multiple sclerosis the system will ensure that payers can get their money back when drugs are ineffective.

In this regard, Express Scripts and Walgreens Boots Alliance, Inc. announced that they are expanding group purchasing efforts to include the procurement of specialty brand drugs in February. This collaboration is a strategic one and the yield will be reflected in the quarter to be reported,owing to the massive savings potential by biosimilars.

Express Scripts Getting Acquired

After declaring that Express Scripts is losing its biggest customer - the leading health insurer Anthem Inc - the company recently announced that it is getting acquired by Cigna, a global health insurance company.The acquisition is expected to be completed by Dec 31, 2018.

Per the definitive agreement, Cigna will take over Express Scripts in a cash and stock transaction worth $67 billion. Notably, this includes Cigna's assumption of approximately $15 billion debt of Express Scripts.

In fact, Moody's Investors Service, the rating services arm of Moody's Corporation, is worried about the company's high customer concentration and pricing pressure. Per Moody's, Express Scripts is likely to experience declining script volume and higher-than-typical customer losses in the days to come. Other challenges include fewer generic drug introductions, softening mail order growth trends, client focus on cost savings and transparency.

What Does Our Model Predict?

Per our proven model, a stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to deliver a positive earnings surprise in the quarter. This is not the case here as you will see below.

Earnings ESP: Express Scripts has an Earnings ESP of -0.04%. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks Rank: Express Scripts carries a Zacks Rank #3.

Please note that we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revision.

Stocks Worth a Look

Here are a few medical stocks worth considering as they have the right combination of elements to post an earnings beat this quarter.

Bio-Rad Laboratories BIO has an Earnings ESP of +7.41% and a Zacks Rank of 2.

Baxter International Inc BAX has an Earnings ESP of +0.90% and a Zacks Rank of 2.

DexCom, Inc DXCM has an Earnings ESP of +12.84% and a Zacks Rank of 3.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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