On Friday, Express Scripts (NASDAQ:ESRX) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared with analysts and investors.
Glen Santangelo – Credit Suisse: George, I just wanted to kind of get some of your preliminary comments on the selling season this year. It seems based on your 1Q results, given your revenues and your claims growth, that it doesn’t really – it doesn’t seem that the Walgreens (NYSE:WAG) issue is really having a big impact on your business. Maybe if you could comment on that, and kind of give us some of your early perspectives on the selling season, and how some of the conversations with some of the Medco renewals is going to be helpful?
George Paz – Chairman and CEO: Why don’t we take a step backwards first, and ask ourselves, what is the job of a PBM, what do we get what are we hired to do at the end of the day. Our job is to take the waste out of this system. As I said in my prepared comments, there is billions and billions of dollars that are being wasted in the healthcare benefit. To the extent those dollars can be captured, we reduced the cost of healthcare, we improve health outcomes and therefore we deliver a better product, that is our job. So what are our clients are looking for? They’re looking to spend money where it matters and not spend money where it doesn’t matter. So again if a cutting-edge new cancer agent comes to market, very expensive, we put it on the formulary. We have to put it on the formulary, we want to put on the formulary, because it’s going to help our patients’ health outcomes improve. But at the same token, those components of the healthcare system that only drive up costs and don’t improve health outcomes, there is no place for that. Companies today are struggling in this economy with the uncertainty of our global economy, all the things that are going on throughout our country and the rest of the world, companies can’t afford to spend money on things that don’t matter. Pharmacists are a very important element of the healthcare delivery system, to the extent that they are helping to improve individual’s health outcomes by focusing on adherence, the right drug at the right time, with proper directions, that’s all very important things and that’s what we want to pay for. Merely dispensing the drug itself is not a value-added endeavor. So again, to the extent somebody wants to charge more money for that activity, there is no room in the equation for that, quite frankly. Those clients that want it, that want to pay for it, that want to have – that are willing to pay for that convenience factor, they may want to do it, they may go somewhere else. But quite frankly we’re very content on doing what our clients are asking us to do, and that is to take out those unnecessary costs out of the equation, and that’s our focus. That message is very well received. We believe we are well positioned as you see our script counts grew last year, unlike some people thought they would decline. We’re very well positioned. I think at the end of the day, the question’s going to be on our ability to continue to innovate and deliver quality products that take out waste, and that’s our mission, so we’re pretty excited about that Glen.
A Closer Look: Express Scripts Earnings Cheat Sheet>>
Glen Santangelo – Credit Suisse: Maybe if I could ask, Jeff, a follow-up, Jeff I just wanted to talk quickly about the expenses. If I look at the expenses recorded by Express Scripts on the SG&A side, probably a little bit higher than what we’ve modeled and you said you’re continuing to pull some projects forward to free up some capacity for the integration, and secondly I look at the expenses on the Medco side, what they reported the gross margins and op margins were both below what we had expected, so SG&A was well above kind of where we had it modeled and so I am wondering if you could just elaborate on the expenses a little bit in the first quarter because it seems like on both Express Scripts and Medco, both the expenses were higher than what we had modeled, so if you just give us some comments on that would be helpful.
Jeff Hall – EVP and CFO: Sure. I think and what you said is accurate. Both companies continued to spend on projects in anticipation of the acquisition closing, so we did see expenses up and in addition, we kept people around – I will be always (indiscernible) for 1.1, we kept those people around because now they are going to be working on integration related activity, so that’s extra cost in the quarter. I think what you’ll see now as we add the two companies together when we come out with Q2, obviously now you’re going to see combined Express Scripts Medco numbers rolled up into Express, you’ll see those numbers come up in Q2 and then you’ll see the numbers start to decline over time as we begin to realize the synergies from this transaction.
George Paz – Chairman and CEO: Let me just add onto that as we look out to the future, we don’t know how the Supreme Court decisions ultimately going to come through, but we’ve got to be nimble and I think one of the qualities of Express Scripts is that we’ve been able to move quickly and do things efficiently, but there’s a lot that’s going to take place in ’13 and ’14 as we prepare for healthcare reform as the Supreme Court either upholds the current healthcare law of even if they keep most of it may be in an individual mandate, that gets turned down and the rest of it stays, which is still going to have to be prepared for the exchanges. So I think what Jeff is saying is right, we have to – we certainly had a lot of ramp cost, Medco didn’t know until towards the end of the quarter that the deal was – when the deal was actually going to close. They had to be prepared, they continue to operate and compete on a standalone basis. So there was a lot of cost being incurred on their side as we also tried to get ready for integration and the combination of the companies, so we still had to spend money in order to make sure that we have the premier offerings in 2014. So that’s also included in our guidance, but it’s something we have to be prepared for.
Lisa Gill – JPMorgan: George, just going back to the selling season for a minute, there have been some comments that this selling season is going to be two to three times what it’s been historically because of your combination. Can you maybe just frame for us what you are seeing as far as what customers are doing in the Medco book? Are they utilizing that change of control? Are you seeing this as more of a status quo year and that’s why we’re just going to see us going from a more of a normalized selling season for your book and the Medco book?
George Paz – Chairman and CEO: I think anytime you do an acquisition, if you remember back, good morning by the way, Lisa. But as we look out, we look in the past and see our previous acquisitions, remember when we were – after we closed the WellPoint transaction, our sales activity wasn’t as robust as historical, because again, people are little less likely to want to look at you when you are in the middle of a transitional issue. Our job is to make sure that they feel comfortable with that, and that’s what our salespeople are engaged to do. But with the SXC-Catalyst merger, there is a lot more activity taking place this year on multiple fronts. So, it’s still too early. Keep in mind, we have only been five weeks into this transaction. I know there has been a tremendous amount of misinformation given out there, some people seem to think – or seem to believe they know more about this business than we do, even though we own it. So there is very few contracts that actually have change of control provisions in them. But, we are going through our process, and I don’t want to get into specific client conversations, we usually aim to keep 95% of our business for good reason. We think we have to continue to grow profits, and at times, our model doesn’t necessarily always fit with the clients we have. We have never had 100% share. By definition, we will lose some clients over the course of the year, and we will gain others, and as the year unfolds, when we get our arms better around the Medco situation, we will be able to give much better guidance, we are just very early on into this process. Medco is big. We had our annual outcomes conference a couple of weeks ago. Medco is just next week, so we are headed down to that, and we will get a better read then, but we feel very good about what we have seen, we have done in front of – I have personally been in front of many-many of the Medco clients, and I think they are excited about what we have to offer.
Lisa Gill – JPMorgan: Going back to your (chain) reporting in your outcomes conference, I think you talked about this new narrow network that will be tiered, can you maybe just talk about how that works. Is that an incremental saving for the member or is it tiered based on the pay, what the plan sponsor will pay? Then secondly, what’s been the early reception to this kind of tiering program?
George Paz – Chairman and CEO: We just rolled it out. There’s a tremendous amount of interest. I think eliminating Walgreens from our network was better received quite frankly than even we expected and the clients had virtually no disruption. So this was a very big home run for us and I think that opened up with the floodgates and I think what we’re seeing is opportunities for employers to form specialty – special networks that are centered around their employee basis, so if you have 5,000 employees you really need a 60,000 store network and why not take advantage of concentrating all your employees into a given set of stores that are larger in newer area you can protect it with a (wrath) with the national network while people are travelling, so they can still get it, it is the savings to the member and it’s also savings to the plan sponsor. Keep in mind that we don’t – the plan sponsors are one that ultimately controls the cost, so we tell them what the cost differentials are and what the options are and so as we do that we can then evaluate the differences of cost versus access and then the plan sponsor can decide how much co-pay differential they want to allow the member to go to the premier stores and what that means for the plan sponsor.
Lisa Gill – JPMorgan: Then if I can just squeeze one more in with Jeff. When we went to the script volume in the quarter, Jeff, 3.6%, clearly better than that guidance that you gave of 0% to 2%. Should we still be thinking about this overall year being 0% to 2%. I think you gave a guidance number now right of 1.4 million claims, but what’s the underlying utilization expectations I guess for that book of business, when we think about what you did in the first quarter and what was the primary driver that coming in, obviously materially better than what you expected?
Jeff Hall – EVP and CFO: Utilization still remains very low, basically we aren’t seeing any of it functionally flat, so all of the increase we saw was the results of net new business that we want over the course to the – middle to end of last year and that’s what driving the increase. As we move through the year, we did have a new client that came on in the September timeframe. So we would expect to lab to compares on that towards the end of this year, but we remain very positive about the core or the legacy Express Scripts numbers, the volume is just there, we’re seeing nice net new growth and that’s without any kind of utilization.