Transcript Home Delivery - Corporate-ir

Merrill Lynch
Health Services Investor Conference
November 29, 2005
Forward-Looking Statements
Statements included in this presentation or in the oral
comments made as part of this presentation may contain
forward-looking statements, including but not limited to
statements of the Company’s plans, objectives, expectations or
intentions, that involve risk and uncertainties.
The Company’s actual results may differ significantly 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 filings with the Securities and Exchange
Commission.
2
Today’s Challenging Environment:
Keeping the Prescription Drug Benefit
Off the Endangered List
3
Unmanaged Prescription Drug Trend
% Increase in Unmanaged PMPY Cost
20
18.5
Percent
16
15.5
12
10.6
11.8
12.0
11.6
11.2
11.3
2005
2006
2007
2008
2009
8
4
0
2002
2003
Source: 2004 Drug Trend Report
2004
Rx's
Cost
Plan sponsors will likely increase the use of PBM tools to manage drug spend
Our Value Proposition:
Complete Alignment
To reduce pharmacy costs,
without compromise to health outcomes,
while maximizing patient satisfaction
5
Alignment –Formulary Management
Therapy Class
More Number of Drugs
1. Select number of drugs in therapy class
2. Determine formulary control
3. Drive towards lowest overall cost
Impact on Client
Impact on Patient
Impact on ESI
Lower drug cost
More choice
Lower co payment
More choice
Higher Profit/Rx
More Flexibility
Benefit Options
We Provide Flexible
Formulary Management
# of
drugs
Fewer
# of
drugs
# of
drugs
Open
Differential
Co-pay
Closed
Lowest
Overall
Cost
6
Alignment - Retail Network Management
Greater Management
States
Available
Pharmacies
Most
Inclusive
Network
Most
Restrictive
Network
TRICARE
Access
Minimum
CA
5,644
5,071
3,881
283
NY
4,444
4,224
1,829
300
TX
4,236
3,821
1,827
579
FL
4,020
3,670
1,966
469
PA
2,970
2,825
1,687
432
•Impacton
Impact
onClient
Client
•Impacton
Impact
onPatient
Patient
•Impacton
Impact
onESI
ESI
Lower drug
•Lower
drugcost
cost
•More choice
Lower co
•Lower
copayment
payment •Higher
Higher Profit/Rx
Profit/Rx
•More choice
•More Flexibility
7
Alignment – Clinical Programs
Members in Step Therapy Programs
14
12
10
Millions
Plan Designs Encourage Greater Use of
Generics and Preferred Low-cost Brands
13.0
8
6
4
Impact on Client
Lower drug cost
Impact on Patient
Lower co payment
Impact on ESI
Higher Profit/Rx
2
4.5
0
Q1 2003
Q4 2004
Clients using step therapy realize on average a
2 percentage point increase in generic utilization
8
Alignment – Home Delivery
We Offer Highly Efficient, Cost-effective
Home Delivery
Impact on Client
Impact on Patient
Impact on ESI
Lower drug cost
Choice
Lower co payment
Choice
Higher profit/Rx
9
Adjusted Claims* (millions)
600
Increased home delivery penetration
500
20.2%
400
300
18.5%
17.2%
200
16.4%
15.8%
100
13.8%
DIVERSIFIED
®
13.1%
0
24.0%
22.6% 23.0%
22.0%
21.0%
20.0%
19.0%
18.0%
17.0%
16.0%
15.0%
14.0%
13.0%
% mail penetration
Alignment – Growing Demand for Home Delivery
1996 1997 1998 1999 2000 2001 2002 2003 2004
Total Adjusted Claims
Home Delivery Penetration
* Represents network claims plus 3 times home delivery claims –home delivery claims are 90 days vs. 30 days in the network.
Excludes UHC claims
Home Delivery Helps Manage the Cost of Maintenance Drugs
10
Alignment – Generic Utilization
Generic Utilization Rate
Express Scripts Leads in
Generic Utilization
Impact on Client
Impact on Patient
Impact on ESI
Lowest drug cost
Lowest co payment
Highest profit/Rx
56%
54%
52%
50%
48%
46%
44%
42%
40%
38%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
02 02 02 02 03 03 03 03 04 04 04 04 05 05 05
Source: From public filings
ESI
PBM B
PBM C
11
Alignment – Growing Generic Opportunity
U.S. Sales for Brand Products with Patent Expirations From 2005-2009
$12
Represents
$11.3
over 20%
$ - billions
$11
$10.4
$10.3
$10.4
$10
of 2004
$9.8
branded
drug sales
$9
$8
ESI
Analysis
$7
2005
2006
2007
2008
2009
Our Clients and Members Will Benefit From a Growing Generic Opportunity
12
Alingnment – Specialty Pharmacy
Traditional Spend
$210 Billion
Specialty Spend
2004 Total
$35 Billion
Outpatient
Pharmacy
18%
Spend $190
Billion
Specialty Spend
$73 Billion
26%
2008 Projected
Outpatient
Pharmacy Spend
$283 Billion
Traditional Spend
$155 Billion
Sources:
IMS Data through November 2004
Wall Street Equity Research, 2004
CMS National Healthcare Expenditure
Projection: 2003 – 2013
Data on file: CuraScript.
Clients are Seeking Solutions
for High-cost Specialty Drugs
Impact on
Client
Impact on
Patient
Impact on
ESI
Lower drug
cost
Lower co
payment
Higher
profit/Rx
Improved
reporting
Improved quality
of care
Higher client
satisfaction
CuraScript Penetration into
Express Scripts
Percentage of Plan Costs
90%
82%
80%
73%
70%
69%
70%
66%
63%
60%
60%
50%
40%
30%
25%
30%
20%
10%
34%
Retail
CuraScript
Home Delivery
16%
2%
14%
13%
17%
13%
20%
6%
11%
9%
7%
0%
Q1 2004 Q2 2004 Q3 2004 Q4 2004 Q1 2005 Q2 2005 Q3 2005
Source: Express Scripts Analysis.
Express Scripts’ specialty penetration has increased from 2% to 30%
in the first 5.5 quarters of our CuraScript acquisition.
Priority Acquisition - Strategic Rationale
 Creates one of the largest specialty franchises in the U.S.
– $3+ billion annual specialty revenues
– One of the fastest growing sectors in healthcare
– Sector remains fragmented and market structure continues to emerge (greenfield
opportunities)
 Fills key therapy classes within CuraScript portfolio – “one-stop shopping for clients”
– Infertility (number one fertility franchise)
– Pulmonary Fibrosis
– Pulmonary Hypertension
– Home Infusion
 Offers additional capabilities
– Specialty distribution capabilities
– Supply chain services
 Leverages PBM core competencies (payor and manufacturer relationships, mail order pharmacies,
clinical and trend management expertise)
– Synergy potential
– Increased value proposition for clients (single vendor, integrated reporting)
What Are the Savings?
Retail, Clinical.
Paid by
Formulary
Cash Customer And Rebate Home Delivery
at Pharmacy Savings 24%
Savings 6%
Retail Pharmacy Cash Price
Express Scripts Client Savings
Express Scripts Client Costs
C
O
S
T
Paid by
Express Scripts
Clients
Total Savings 30%
Availability of Proven PBM Cost Management Tools
Will Produce 20%–25% Savings (CBO)
16
Alignment – A Win-Win-Win Proposition
Increased Savings
Opportunities:
Client
Moving to preferred brands, home delivery and generics
Member
Moving to preferred brands, home delivery and generics
Increased
Profit
Opportunities:
Express Scripts
Moving to preferred brands, home delivery and generics
Retail Non-pref. Retail Pref.
Brand
Brand
Mail
Pharmacy
Generics
We make money by saving clients and members money
17
We Deliver Against Client and
Patient Expectations:
To make the use of prescription drugs
safer and more affordable
18
Client/Patient Focus
Canada
10%
Public Sector
25%
Commercial
26%
By membership
Why Express Scripts?
• Alignment With Clients
• Generics
• Specialty
Managed Care
39%
Health Plan Sponsors Recognize Express Scripts Single
Focus on Making Prescription Drugs More Affordable
19
2006 Upsell Pipeline is Strong
('000 Lives)
• Significant potential to continue
to manage client trends in key
product categories
• New products continue
to be developed and
rolled out
• Strong track record of success
10,000
9,000
Sold
Weighted Pipeline
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
20
Client Satisfaction Steadily Improving
• Service and satisfaction metrics have increased consistently quarter over
quarter since 2003 with an early spike in 2005
100%
95%
90%
2003
85%
2004
80%
1q05
75%
70%
65%
60%
ESI Performance
Exceed
Expectations
Likelihood to
Recommend
Likelihood to
Renew
21
Our Financial Results
Express Scripts has demonstrated a
proven track record
22
Q3 2005 Highlights
– Adjusted EPS of $0.67*, up 34% from $0.50* last year
– Cash flow from operations of $214.6 M vs. $150.0 M last year
• Repurchased 4.0 million shares for $219.9 million
– Generic drugs were 55% of total prescriptions vs. 51% last year
– Gross profit of $293.2 M, up 25%
• Gross profit per adjusted claim was $2.13, up 20%
• EBITDA per adjusted claim was $1.32, up 19%
– Raised EPS guidance for 2005
– Provided 2006 EPS guidance of $3.10 to $3.22
*Excludes prior period tax benefit of $0.01 in Q3 2005 and non recurring charge
of $0.10 for legal defense costs in Q3 2004 – reconciliation of reported EPS to
adjusted EPS is included in Table 4 of the 3Q 2005 earnings release
23
Quality of Earnings
$1.20
$1.00
Per share
$0.80
(4)
$0.60
(1)
$0.40
(2)
(4)
(3)
$0.20
$0.00
Q1
'01
Q2
'01
Q3
'01
Q4
'01
Q1
'02
Q2
'02
Q3
'02
Q4
'02
EPS
(1)
(2)
(3)
(4)
Q1
'03
Q2
'03
Q3
'03
Q4
'03
Q1
'04
Q2
'04
Q3
'04
Q4
'04
Q1
'05
Q2
'05
Q3
'05
Free cash flow per share*
Reflects a $70-$75 million reduction in Q2 2003 due to one-time impact of implementing a new wholesale purchase agreement
Excludes a $0.04 per share charge for the early retirement of debt
Excludes a $0.10 charge to increase legal reserves for the cost of defense.
Excludes an $0.08 and $0.01 prior year tax benefit in Q2 and Q3, respectively
* Reflects a 12-month moving average of free cash flow (cash from operations less CapX)
24
Components of EPS Growth — 2004
25%
20%
2004
6%
15%
7%
10%
5%
8%
0%
Rx Growth
EBITDA/Rx Growth
Cap Structure/Other
* Excluding $25 million charge to increase legal reserves for the cost of defense and $5.5 million termination payment received
25
Major PBM Prescription Growth
Adjusted Claims Growth
20%
15%
10%
5%
0%
-5%
1999
2000
2001
Express Scripts
2002
2003
Caremark
2004
2005*
Medco
Note: Rx growth for Medco, Caremark reflect as configured today
* YTD 9-30-05
Claims Volume Vs. EPS Growth
Expanding Margins Supports Strong EPS Growth on More Modest Claims Growth
40%
35%
(3)
30%
(2)
25%
20%
(1)
15%
(4)
10%
5%
0%
Q3 '04
Q4 '04
Q1 '05
EPS growth
(1)
(2)
(3)
Excludes a $0.10 charge to increase legal reserves
Excludes an $0.08 prior year tax benefit
Excludes a $0.01 prior year tax benefit
Q2 '05
Q3 '05
Adj. claim growth
(4) Reflects the June 1st anniversary of the DoD retail contract
27
Profits Per Claim Growth
EBITDA* per adjusted claim
$1.40
$1.32
$1.20
$1.12
$1.03
$1.11
$1.19
$1.05
$1.00
$0.88
$0.81
$0.80
$0.60
2000
2001
2002
2003
2004**
Q1 '05
Q2 '05
Q3 '05
Pricing can be lowered as clients tighten formulary compliance, increase home delivery, utilize
generics and restrict retail networks. These changes result in lower prices to our clients and
greater profits to Express Scripts.
* A reconciliation of EBITDA to net income and to net cash provided by operating activities can be found in the Investor Relations
section of Express Scripts’ Web site, www.express-scripts.com under Presentations.
** Excluding $25 million charge to increase legal reserves for the cost of defense and $5.5 million termination payment received.
Gross Profit* / SG&A* / EBITDA per Adj. Rx
$2.10
$1.93
$1.90
$1.70
$1.59
$1.85
$1.86
$2.02
$2.20
$1.19
$1.32
$1.93
$1.71
$1.50
$1.30
$1.10
$0.90
$0.70
$0.81
$0.88
$0.78
$0.83
2000
2001
$1.03
$0.90
$1.05
$0.80
$0.50
2002
2003
$1.12
$0.74
2004**
$1.11
$0.82
$0.83
$0.88
Q1 2005
Q2 2005
Q3 2005
* Before depreciation and amortization
** Excluding $25 million charge to increase legal reserves for the cost of defense and $5.5 million termination payment
received. Source: Express Scripts Analysis.
Future EBITDA per Adj. Rx Must Come From Gross Profit per Adj. Rx
Focus on Return on Invested
Capital (ROIC)
2004**
2003
2002
2000
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2001
Express Scripts ROIC*
* Reflects operating income less tax divided by average invested capital, which consists of stockholder’s equity, plus interest
bearing liabilities plus long-term deferred income taxes, net.
** Excludes $25 million charge to increase legal reserves for the cost of defense and 5.5 million termination payment received
ROIC is our Preferred Performance Metric
30
Why Express Scripts?
Industry-Leading ROIC
Comparison of Peer Group ROIC - 2004
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
Wellpoint
Medco
CVS
Aetna
Caremark
Walgreens
Cigna
Express
Scripts
0%
We Lead Our Peer Group in ROIC Performance
Source: Express Scripts Analysis
31
Peer Group Total Return YTD 11-18-05
107.9%
100%
80%
60%
52.0%
Peer group avg.
39.8%
40%
38.5%
34.1%
27.3%
26.6%
23.5%
30.2%
20.1%
20%
3.0%
S&P
CVS
Walg
reen
ark
Care
m
co
Med
t
Well
poin
th
Heal
Unit
ed
Cign
a
Aetn
a
ESI
0%
ESI’s 108% YTD return is more than 3.5 times our peer group
32
S&P Total Return – YTD 11-18-05
200
186
140
150
125
89
100
75
50
46
29
25
5
2
3
>1
00
%
00
%
80
%
-1
0%
60
%
-8
0%
40
%
-6
0%
-4
20
%
to
0%
-20
%
-0
%
20
%
0
<20
%
# of Companies
175
Total Return
Only 1 company in the S&P 500 exceeded ESI’s
total return to stockholders of 107.9% YTD thru 11-18-05
Note: Returns reflect stock price increase plus dividend yield
33
Our Value Proposition Will Continue to Drive Growth
• Making the use of drugs safer and more affordable is more
important than ever
•
Plan sponsors will increasingly deploy our tools
• Express Scripts is well-positioned for sustainable growth
•
•
•
•
Strong market fundamentals/new business opportunities
Increased use of home delivery and generic drugs
Growth in management of specialty pharmacy
Productivity and capital structure improvements
• We have taken a different approach
•
Alignment -- we make money by saving our clients money
• Strategic acquisitions have enhanced our value proposition
34