Anthem Non-Renewal Still A Huge Risk For Express Scripts

Express Scripts Holding Company (NASDAQ: ESRX) reported robust fourth-quarter 2016 results. There are concerns, however, regarding Express Scripts’ customers wanting to lower prices at the time of contract renewal and the risk that the company’s largest customer Anthem Inc (NYSE: ANTM) may not renew its contract, Argus’ David Toung said in a report.

While reiterating a Hold rating on Express Scripts, Toung noted that the company’s relationship with Anthem is “rocky,” with the two firms in litigation over drug pricing and the right to terminate the contract.

4Q Results

Express Scripts reported adjusted EPS growth of 16 percent, despite a 5-percent decline in revenue and prescription volume. Moreover, the company generated 60 basis points of adjusted gross margin expansion and 13.5 percent growth in EBITDA per script.

Heightened Concerns

Express Scripts’ shares have underperformed over the past year, down 4.1 percent, versus a 15 percent gain by the S&P 500 index. The company’s stock also underperformed managed care peers.

Although Express Scripts generated increased profitability through cost-cutting efforts, prescription volume has continued to decline. Toung expressed concern regarding whether there was more room to achieve margin expansion in the absence of real volume growth.

Moreover, the contract with Anthem, which contributed 17 percent of Express Scripts’ revenue in 2016, is due to expire at the end of 2019. In light of the ongoing litigation, there is significant risk of Anthem not renewing the contract.

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