Express Scripts Margins Could Face Downward Pressure From Less Prescription Growth

The analyst acknowledged the company's hike on 2016 EPS guidance, but noted the increase was mainly driven by a lower share count rather than a stronger earnings outlet. Despite Toung raising his FY17 EPS estimate from $6.32 to $6.38, the analyst expects heightened competition from other large prescriptions under management.

In addition to competition, Express Scripts' legal dispute with Anthem Inc ANTM has created a "cloud over the stock" according to Toung.

Mixed Retention Rate

"The company raised its guidance for client retention slightly when it announced 2Q16 results on July 26. It now expects to retain 96–98 percent of the business up for renewal at the end of 2016, up from a prior view of 95–97 percent," stated Toung. The updated forecast, however didn't include Express Scripts' "rolloff of a contract" with Coventry, ending this year.

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"To be sure, as Express's retention rate has improved, so have trends in prescription volume. ESRX management now projects 1.260—1.290 million adjusted prescription claims this year, down 1.8 percent at the midpoint of the range from 2015. This is a shallower decline than the 11.4 percent drop in prescription volume sustained in 2014, as Express lost accounts due to the departure of account managers during the integration of Medco and Express Scripts and the merger of certain insurance plans."

Overall, the analyst forecast slower-than-usual prescription growth for the company based on management's estimates.

According to TipRanks, David Toung has a 70 percent success rating and a +11.5 percent average return per recommendation.

At time of writing, Express Scripts was flat on the day.

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