merrill lynch health services investor conference november 29, 2005
TRANSCRIPT
Merrill LynchHealth Services Investor
Conference November 29, 2005
2
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.
Forward-Looking Statements
3
Today’s Challenging Environment:
Keeping the Prescription Drug Benefit Off the
Endangered List
% Increase in Unmanaged PMPY Cost
11.311.211.612.011.810.6
15.5
18.5
0
4
8
12
16
20
2002 2003 2004 2005 2006 2007 2008 2009
Perc
ent
Rx's Cost
Unmanaged Prescription Drug Trend
Plan sponsors will likely increase the use of PBM tools to manage drug spend
Source: 2004 Drug Trend Report
5
Our Value Proposition: Complete Alignment
To reduce pharmacy costs, without compromise to health
outcomes, while maximizing patient satisfaction
6
More Number of Drugs Fewer
Ben
efi
t O
pti
on
s
Impact on Client
Impact on Patient
Impact on ESI
Lower drug cost
More choice
Lower co payment
More choice
Higher Profit/Rx
More Flexibility
Alignment –Formulary Management
Therapy Class
We Provide Flexible Formulary Management
1. Select number of drugs in therapy class 2. Determine formulary control 3. Drive towards lowest overall cost
# ofdrugs
# ofdrugs
# ofdrugs
Open
DifferentialCo-pay
ClosedLowestOverall
Cost
7
Alignment - Retail Network Management
States
Available Pharmaci
es
Most Inclusive Network
Most Restrictiv
e Network
TRICARE Access
Minimum
CA 5,644 5,071 3,881 283NY 4,444 4,224 1,829 300TX 4,236 3,821 1,827 579FL 4,020 3,670 1,966 469PA 2,970 2,825 1,687 432
Greater Management
•Higher Profit/Rx•More Flexibility
•Lower co payment•More choice
•Lower drug cost•More choice
•Impact on ESI•Impact on Patient•Impact on Client
Higher Profit/RxLower co paymentLower drug cost
Impact on ESIImpact on PatientImpact on Client
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Impact on Client
Impact on Patient
Impact on ESI
Lower drug cost
Lower co payment
Higher Profit/Rx
Alignment – Clinical Programs
4.5
13.0
0
2
4
6
8
10
12
14
Mil
lio
ns
Q1 2003 Q4 2004
Members in Step Therapy Programs
Clients using step therapy realize on average a
2 percentage point increase in generic utilization
Plan Designs Encourage Greater Use of
Generics and Preferred Low-cost Brands
9
Alignment – Home Delivery
Impact on Client
Impact on Patient
Impact on ESI
Lower drug cost
Choice
Lower co paymentChoice
Higher profit/Rx
We Offer Highly Efficient, Cost-effective
Home Delivery
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16.4%
18.5%
22.6%
20.2%
17.2%
13.8%
15.8%
13.1%0
100
200
300
400
500
600
1996 1997 1998 1999 2000 2001 2002 2003 2004
Ad
just
ed C
laim
s* (
mill
ion
s)
13.0%14.0%15.0%16.0%17.0%18.0%19.0%20.0%21.0%22.0%23.0%24.0%
% m
ail p
enet
ratio
n
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
D IVERSIFIED®
Increased home delivery penetration
Home Delivery Helps Manage the Cost of Maintenance Drugs
Alignment – Growing Demand for Home Delivery
11
Alignment – Generic Utilization
Generic Utilization Rate
38%40%42%44%46%48%50%52%54%56%
Q102
Q202
Q302
Q402
Q103
Q203
Q303
Q403
Q104
Q204
Q304
Q404
Q105
Q205
Q305
ESI PBM B PBM C
Impact on Client
Impact on Patient
Impact on ESI
Lowest drug cost
Lowest co payment
Highest profit/Rx
Source: From public filings
Express Scripts Leads in Generic Utilization
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$10.3
$11.3
$10.4 $10.4
$9.8
$7
$8
$9
$10
$11
$12
$ -
bil
lio
ns
2005 2006 2007 2008 2009
U.S. Sales for Brand Products with Patent Expirations From 2005-2009
ESI Analysis
Represents
over 20%
of 2004
branded
drug sales
Our Clients and Members Will Benefit From a Growing Generic Opportunity
Alignment – Growing Generic Opportunity
Alingnment – Specialty Pharmacy
Sources:IMS Data through November 2004Wall Street Equity Research, 2004CMS National Healthcare Expenditure Projection: 2003 – 2013Data on file: CuraScript.
2004 Total Outpatient Pharmacy Spend $190 Billion
2008 Projected Outpatient Pharmacy Spend $283 Billion
26%26%18%18%
Traditional SpendTraditional Spend$210 Billion$210 Billion
Specialty SpendSpecialty Spend$73 Billion$73 Billion
Specialty SpendSpecialty Spend$35 Billion$35 Billion
Traditional SpendTraditional Spend$155 Billion$155 Billion
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
Clients are Seeking Solutions for High-cost
Specialty Drugs
Express Scripts’ specialty penetration has increased from 2% to 30%
in the first 5.5 quarters of our CuraScript acquisition.
Per
cent
age
of P
lan
Cos
ts
Source: Express Scripts Analysis.
82%
73%70% 69%
66%63%
60%
2%
17%20%
25%30%
34%
16%
6%
14%
7%9%11%13%13%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Q1 2004 Q2 2004 Q3 2004 Q4 2004 Q1 2005 Q2 2005 Q3 2005
RetailCuraScriptHome Delivery
CuraScript Penetration intoExpress Scripts
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)
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What Are the Savings?
Availability of Proven PBM Cost Management Tools Will Produce 20%–25% Savings (CBO)
Paid byCash Customer
at Pharmacy
Retail, Clinical.Formulary
And RebateSavings 24%
Home Delivery
Savings 6%
Paid byExpress ScriptsClients
Total Savings 30%
COST
Retail Pharmacy Cash Price
Express Scripts Client Savings
Express Scripts Client Costs
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Alignment – A Win-Win-Win Proposition
Retail Non-pref. Brand
Retail Pref.
BrandGenerics
Mail Pharma
cy
Increased Savings
Opportunities:
Client
Member
Increased
Profit
Opportunities:
Express Scripts
Moving to preferred brands, home delivery and generics
We make money by saving clients and members money
Moving to preferred brands, home delivery and generics
Moving to preferred brands, home delivery and generics
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We Deliver Against Client and Patient Expectations:
To make the use of prescription drugs safer and
more affordable
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Client/Patient Focus
Commercial26%
Canada10%
Managed Care39%
Public Sector25%
By membership
Health Plan Sponsors Recognize Express Scripts Single
Focus on Making Prescription Drugs More Affordable
Why Express Scripts?• Alignment With
Clients• Generics• Specialty
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2006 Upsell Pipeline is Strong
• 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
('000
Liv
es)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
Hom
e Del
iver
y
Gener
ic E
nfor
cem
ent
Nar
rowin
g Fo
rmul
arie
s
New
Clin
ical
Pro
duct
s
Spec
ialty
/Cur
aScr
ipt
Thre
e Ti
er
Sold Weighted Pipeline
21
Client Satisfaction Steadily Improving
• Service and satisfaction metrics have increased consistently quarter over quarter since 2003 with an early spike in 2005
Exceed60%
65%
70%
75%
80%
85%
90%
95%
100%
ESI PerformanceExpectations
Likelihood toRecommend
Likelihood toRenew
2003
2004
1q05
22
Our Financial Results
Express Scripts has demonstrated a proven track
record
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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
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Quality of Earnings
$0.00
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
Q1'01
Q2'01
Q3'01
Q4'01
Q1'02
Q2'02
Q3'02
Q4'02
Q1'03
Q2'03
Q3'03
Q4'03
Q1'04
Q2'04
Q3'04
Q4'04
Q1'05
Q2'05
Q3'05
Pe
r s
ha
re
EPS Free cash flow per share*
(1) Reflects a $70-$75 million reduction in Q2 2003 due to one-time impact of implementing a new wholesale purchase agreement
(2) Excludes a $0.04 per share charge for the early retirement of debt(3) Excludes a $0.10 charge to increase legal reserves for the cost of defense.(4) Excludes an $0.08 and $0.01 prior year tax benefit in Q2 and Q3, respectively
(1)(1)
(2)(2)
* Reflects a 12-month moving average of free cash flow (cash from operations less CapX)
(3)(3)(4)(4)
(4)(4)
25
Components of EPS Growth — 2004
0%
5%
10%
15%
20%
25%
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
6%6%
7%7%
8%8%
2004
-5%
0%
5%
10%
15%
20%
1999 2000 2001 2002 2003 2004 2005*
Adju
sted C
laim
s G
row
th
Express Scripts Caremark Medco
Major PBM Prescription Growth
Note: Rx growth for Medco, Caremark reflect as configured today* YTD 9-30-05
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Claims Volume Vs. EPS Growth
0%
5%
10%
15%
20%
25%
30%
35%
40%
Q3 '04 Q4 '04 Q1 '05 Q2 '05 Q3 '05
EPS growth Adj. claim growth
(1) Excludes a $0.10 charge to increase legal reserves (4) Reflects the June 1st anniversary of the DoD retail contract
(2) Excludes an $0.08 prior year tax benefit(3) Excludes a $0.01 prior year tax benefit
(2)(2)(3)(3)
(1)(1)
Expanding Margins Supports Strong EPS Growth on More Modest Claims Growth
(4)(4)
Profits Per Claim Growth
$1.32
$1.19
$0.81
$0.88
$1.03 $1.05
$1.11$1.12
$0.60
$0.80
$1.00
$1.20
$1.40
2000 2001 2002 2003 2004** Q1 '05 Q2 '05 Q3 '05
EBITDA* per adjusted claim
* 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.
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.
11% CAGR
Gross Profit* / SG&A* / EBITDA per Adj. Rx
Future EBITDA per Adj. Rx Must Come From Gross Profit per Adj. Rx
* 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.
$1.32
$2.20
$0.78 $0.83$0.90
$0.80 $0.74$0.82 $0.83 $0.88
$1.12 $1.11$1.05$1.03
$0.88$0.81
$1.19
$1.59$1.71
$1.93$1.85
$1.86 $1.93$2.02
$0.50
$0.70
$0.90
$1.10
$1.30
$1.50
$1.70
$1.90
$2.10
2000 2001 2002 2003 2004** Q1 2005 Q2 2005 Q3 2005
30
Focus on Return on Invested Capital (ROIC)
Express Scripts ROIC*
0%2%
4%6%
8%10%
12%14%
16%18%
20%
2000
2001
2002
2003
2004
**
ROIC is our Preferred Performance Metric
* 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
31
Why Express Scripts? Industry-Leading ROIC
Comparison of Peer Group ROIC - 2004
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Expr
ess
Scri
pts
Cig
na
Wal
gree
ns
Car
emar
k
Aet
na
CVS
Med
co
Wel
lpoi
nt
We Lead Our Peer Group in ROIC Performance
Source: Express Scripts Analysis
32
Peer Group Total Return YTD 11-18-05
ESI’s 108% YTD return is more than 3.5 times our peer group
52.0%
39.8% 38.5%
3.0%
20.1%
26.6% 23.5%34.1% 27.3%
107.9%
0%
20%
40%
60%
80%
100%
Peer group avg.
30.2%
33
S&P Total Return – YTD 11-18-05
46
140
186
89
29
5 2 30
25
50
75
100
125
150
175
200
Total Return
# of
Com
pani
es
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
34
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