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Morningstar | Express Scripts Reports Improving Results as Cigna Merger Remains on Track

Express Scripts reported another solid quarter, and we are maintaining our $92 fair value estimate and wide moat rating. Our valuation represents Cigna’s offer price, which also matches our discounted cash flow-driven valuation for the pharmacy benefit manager. There were no major updates related to the Cigna merger, as this deal recently received Department of Justice approval with no pushback. We expect the transaction to close within the next few months. From an operational standpoint, we believe the new entity will be a formidable force in healthcare and will be able to wield significant pricing power and leverage top-tier scale advantages. Based on the need of payers to control their health benefit plan costs, the efficient management of pharmaceutical expenses will be just as critical as managing medical expenses, such as doctor’s visits and surgeries. As the largest PBM, Express has the scale and expertise to manage drug benefit plans more efficiently than most health plan sponsors. Thus, we believe Cigna will acquire a strong wide-moat asset at a fair price. This dynamic should add significantly to the managed-care organization's competitive advantages over the coming years without any major dilution to its valuation.

For the third quarter, revenue increased a solid 3.6% and adjusted EBITDA as a percentage of revenue increased 8 basis points to 7.97%. Management said it expects its client retention rate to reach 98%, an all-time high. We believe this dynamic highlights the value and critical nature of Express Scripts' services. The firm also reported impressive results on a per-claim basis as revenue, gross profit, and operating profit per claim increased 6.4%, 7.9%, and 3.4%, respectively. From our perspective, this points to a healthy operating environment for Express Scripts and falls in line with our outlook for the PBM. The firm has suspended its share-repurchase program and will not provide guidance, given the upcoming merger.