Express Scripts Raises Forecast as Medco Merger Starts

Express Scripts Holding Co., the largest U.S. processor of drug prescriptions, raised its annual profit forecast as gross margins improved following its April acquisition of Medco Health Solutions Inc.

Earnings excluding some items will be $3.60 to $3.75 a share in 2012, compared with a forecast in May of $3.36 to $3.66, the St. Louis-based company said yesterday in a statement. Second-quarter profit, excluding the costs of the Medco purchase, was 88 cents, more than the average estimate of 82 cents from 22 analysts compiled by Bloomberg.

The increased size of Express Scripts, which completed its $29 billion acquisition at the beginning of the quarter, gives the pharmacy benefits manager greater purchasing power and leverage to win clients, said Anthony Vendetti, an analyst with Maxim Group in New York. Vendetti, who rates the stock a buy with a $76 target, said in an interview that the combination with Medco made Express Scripts the industry’s dominant player.

“We’re just starting to scratch the surface of that potential,” said Vendetti, who doesn’t own the shares.

Express Scripts rose 5.8 percent to $59.24 at 9:38 a.m. New York time. The shares gained 25 percent this year through yesterday.

Generic Drugs

Express Scripts said its gross profit margin widened to 7.8 percent in the second quarter from 7.1 percent a year earlier, partly because customers used more generic medicines. Pharmacy- benefits managers act as middlemen for drugmakers, pharmacies and health-plan sponsors, negotiating prices and managing the use of drugs by patients. Profits are tied to clients’ drug costs.

Express Scripts said it processed 404 million prescription claims in the quarter, up from 186 million a year earlier before the Medco acquisition. About 79 percent of those claims were generic medicines.

Including costs incurred for the purchase of Medco, second- quarter net income fell to $171 million, or 21 cents a share, from $334 million, or 66 cents, a year earlier, Express Scripts said. Sales more than doubled to $27.7 billion because of the acquisition.

Express Scripts said July 19 it had settled a contract dispute over reimbursement rates with drugstore chain Walgreen Co. (WAG) that will let clients include the retailer’s pharmacies in their networks beginning Sept. 15.

To contact the reporter on this story: Alex Wayne in Washington at awayne3@bloomberg.net

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net