Express Scripts shares jump as forecast reassures

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(Global Markets) - Shares of Express Scripts Inc (ESRX.O) jumped 10.5 percent as the U.S. pharmacy benefit manager's profit outlook for 2011 was less dire than some investors had feared and the company offered positive financial forecasts through 2014.

Wall Street had been bracing for a lower profit outlook from the company, so the forecast removed some uncertainty hanging over the stock. The long-term projections helped reassure investors about growth prospects.

Express Scripts cut its projected 2011 profit range by about 6 percent, citing higher spending and fewer prescriptions being filled because of consumer worry about the weak economy.

It said spending would be higher due to a contract dispute with drugstore chain Walgreen Co (WAG.N) and in anticipation of integrating its $29 billion purchase of rival Medco Health Solutions Inc (MHS.N).

Express Scripts last month warned investors of potentially weak prescription volume, causing some analysts to lower their profit forecasts and investors to send the stock down.

"A lot of people had been expecting it was going to happen and a lot of them were saying, 'I don't want to own it ahead of that because it could pull back,'" Jefferies & Co analyst Brian Tanquilut said. "But now we're seeing that it's not as bad ... This sets the bottom for the stock."

Separately on Thursday, Express Scripts revealed fiscal forecasts through 2014 in a securities filing on the Medco merger.

The projections, which the company said were prepared a month before the Medco deal was announced and pertained to it as a stand-alone company, offered earnings-per-share estimates that eclipse the average estimates of analysts, according to Thomson Global Markets I/B/E/S.

"Even with a more moderated script view suggested since then, we see this disclosure as providing comforting clarification around future growth," Barclays Capital analyst Lawrence Marsh said in a research note.

Marsh said the annual growth in EBITDA (earnings before interest, taxes, depreciation and amortization) for 2012 to 2014 amounted to about 12 percent, above his expectations of average growth of 8 percent.

The merger filing also revealed that Medco approached Express Scripts about a transaction in early June, more than a month before they announced the deal, and that the companies talked as early as 2006 about a potential combination.

Express Scripts shares were up $3.77 to $39.71 in afternoon trading on Nasdaq. Medco shares were up 6.9 percent to $48.79 on the New York Stock Exchange.

STAGNANT ECONOMY

Express Scripts' lower 2011 profit forecast is the latest sign that Americans are cutting back on healthcare spending to save money because of uncertainty in the economy.

Chief Financial Officer Jeff Hall told an investor conference last month that Express Scripts generally sees prescriptions increase 3 percent to 5 percent in an average year, but there has been virtually no growth over the past three years.

Hall also said the economy had worsened over June and July and the company did not see it improving.

Since Hall's comments, Express Scripts shares had fallen about 16 percent through Wednesday, compared with a 4 percent drop for the S&P 500 index .SPX.

Express Scripts said in a statement on Thursday, "The company now believes that it is more likely than not that the continuing stagnant economic conditions will negatively impact claims volumes to a greater extent than it had anticipated."

It expects prescription claims will fall short of its previous forecast for 750 million to 780 million this year.

Overall, Express Scripts forecast 2011 earnings of $2.95 to $3.05 per share, down from its prior view of $3.15 to $3.25.

The company noted that its revised range still amounts to annual earnings per share growth of between 18 percent and 22 percent.

Since June, Express Scripts has been locked in a contract dispute with Walgreen, which plans to stop filling prescriptions for Express Scripts members starting in January. Express Scripts said it was spending to help clients as they transfer away from Walgreen pharmacies.

The company said it was speeding up spending on some projects to create more capacity in advance of the Medco deal.

"A lot of those costs are one-time," said Gabelli & Co analyst Jeff Jonas. "To the extent that you are pulling forward spending from 2012 into 2011, that means 2012 will be even better."

In cutting its forecast, Express Scripts also pointed to greater competition in the marketplace "resulting in increased client demands and expectations."

5 YEARS IN THE MAKING

The filing revealed that a deal that has been simmering for five years came to a boil in June when Medco Chief Executive David Snow telephoned his counterpart at Express Scripts, George Paz.

Representatives from the two companies held preliminary discussions in 2006 and went as far as to enter into a confidentiality agreement in November of that year, although the agreement expired in 2009, the filing said.

The two sides stayed in touch over the ensuing years, according to the filing, but the preliminary talks did not proceed further.

Last February, Medco's board decided to review alternatives to being a stand-alone company, the filing said.

During 2011, Medco suffered significant contracts losses that raised concerns about its prospects. After reviewing an array of options, the filing said, a committee of the Medco board called the "Medco M&A committee" concluded the best alternative was a merger with Express Scripts and recommended contacting its rival.

Two days later, Snow made the initial call to Paz. The deal was announced on July 21.

(Reporting by Lewis Krauskopf in New York; Editing by Derek Caney and John Wallace)