Express Scripts Earnings Call Insights: Retention Outlook and Renewals Percentage
Express Scripts (NASDAQ:ESRX) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.
Thomas Gallucci – Lazard Capital Markets: Two questions. Just first on the selling season, George, you mentioned strong retention thus far. Are you able to sort of quantify in any way for us what you’ve renewed versus what’s up for renewal this year in your buck?
George Paz – Chairman and CEO: We are ahead of plan for where we’re usually at this time of the year, but it’s still early. Like I said, most health plans are staying put, but they’re still in the middle of the employer side, but we’re feeling very good about where we stand. We’re ahead of where we usually are at this time with retention, and all signs are pointing to a very strong retention year.
Thomas Gallucci – Lazard Capital Markets: Okay. Maybe a second question, also customer related. Lot of thoughts out there in the marketplace around the impact of reform, both on your retiree base as well as maybe what your smaller and midsized customers might do regarding their insurance benefits. Could you give us any color on either of those two topics as you’re sort of seeing it today and hearing from customers?
George Paz – Chairman and CEO: Sure. Let’s make sure we level set first in understanding of the business areas in which we sell. So we have large employers, Fortune 1000 companies; then we have midsized employers, many companies that are anywhere from 500 to up, typically 1,000 to 2,000 employees or covering 2,000 members; and then there’s also the small employer group, the very small companies, 100, 250 to 10 employees. To break those apart, we operate in the top two of those segments, the large employers and the middle market. The small employers, we operate there, but we do that through our health plans. And what we try to do is position ourselves, and I think we are uniquely positioned with an incredible group of health plan clients that pretty much give us a presence in every major geographic area for which new lives are entering the market or lives currently exist. So if a small employer happens to drop coverage and they would be that 50 or less group, those aren’t direct clients of Express Scripts. Those clients would normally be part of our health plan. But obviously, we want our health plans to grow. Our health plans are very important and vital to our long-term growth. Therefore, we work closely hand in glove with our health plans to help design products to meet those individual market needs. It’s very early on. And if you think about it, we’ve got 30 million people come into the market. On October 1, is when these programs are supposed to be rolled out? And there’s an awful lot of uncertainty that exists in the marketplace today. I doubt if you’ll see a lot of big shifts and swings in ’14. I don’t have a crystal ball to know that, but it just feels that way. Certainly, with larger employers and the cost of individual policies as they try to – as we remove caps on coverage, as we require immediate coverage for individuals, to be an ASR client, which is the bulk of our direct book – it’s all of our direct book, those clients aren’t all that interested necessarily of going back to carve in if it’s going to mean an insured product, which is going to be very expensive. That’s just not what we’re hearing or seeing. So I think it’s still going to be cheaper for clients to stay carved out. And to the extent that smaller companies need to have insured coverage or a client does want insured coverage, we can assist our health plans in delivering that. And there’s been a lot of talk, I think, out in the Wall Street about that more and more of these companies are carving back in. It’s actually gone the other way. If you look at data over the last couple of years where we have seen is that we have grown by about 8 to 10 percentage points and carved out as more companies are carving out then carving in. And I think that trend will continue and will help benefit Express Scripts. One last thing I will hit on because I, I know I’m making this a long answer to you, but I’m trying to get rid of some of the confusion that’s out there, as there’s some concern about EGWP, and when clients go to EGWP programs, so they just drop mail. Mail is a very important element for a lot of reasons; one, it’s very cost effective. Two, the clinical studies have shown that people are more adherent and they have better health outcomes by going through the mail, even better than 90-day retail. And so when we move our clients from a carved-in plan to an EGWP program, we’ve had a lot of experience, the several years of experience. We’ve seen no deterioration in mail order rates during that period. So mail order stays strong, and in fact, it can actually grow provided we continue to work the right incentives for our clients and their members. So we are very, very excited about our space and believe we’ve got a lot of headroom ahead of us.
George Hill – Citigroup: I guess, George or Jeff, you talked about the high level of renewals. I guess can you talk about what percentage of the business you’ve renewed this year and maybe any comments on net new?
George Paz – Chairman and CEO: Well, like I’ve just said, we are pretty early in the season, so but keep in mind, a health plan, we are already into April now – May, on a day. And so, for a health plan to move and gear up and take on healthcare reform, that’s tough. It’s not impossible, but boy, that would be really tough. And if you’ve got to put your best foot forward and you are going to be monitored on service levels, giving yourself six, seven months and only a couple of months to open enrollment, that’s a tough thing to incur – to take on. So, I’m not saying it’s impossible, but I don’t expect to see many more health plans change for 1-1-14. As far as employers, they can change up through the summer. We are in that process. We are working our sales side. I was just down at our Outcomes Conference. We had 800 clients at our conference. I think the level, everything I heard; the levels of satisfaction were very high. Many of them have gone through our integration. The majority of those said that it was seamless. We’re not hearing things in the marketplace. So, we feel very good about where we sit and where we’re positioned. And I think to the extent that we can show, we can integrate while we continue to keep up with Medicare Part D, we are the right selection to go to as companies are thinking about all of the perils and tribulations that they look at in healthcare reform. We are uniquely positioned to continue to deliver high-quality products on a more than timely basis.
George Hill – Citigroup: Jeff, maybe a quick follow-up on the Q2 earnings impact from that large client. I know you guys don’t like to talk about specific clients. I guess can you just talk about structurally what’s driving with the contractor or the way it’s structured just what’s structurally different about this customer or this contract that’s driving the earnings change and the earnings impact?
Jeff Hall – EVP and CFO: I think as you anticipated, we just don’t talk about clients or really contract details for obvious reasons. I think the important points are the ones we made is that as a result of how we structured this contract and we structured it, the client and us are both happy with it. But as a result of how we structured it, we’ve realized a higher percentage of the earnings in the second quarter every year. We expect this pattern to recur in the foreseeable future, and it’s not new.