MHS Medcohealth Solutions Common Stock

We continue to have a Neutral recommendation on Express Scripts Inc. (ESRX) with a target price of $46.00. The company functions under two segments: Pharmacy Benefit Management (PBM) and Emerging Markets (EM).

With the intention of growing its PBM business, Express Scripts completed two acquisitions over the past few years. In July 2008, the company acquired the Pharmacy Services Division of Medical Services Company. Medical Services Company was a leader in providing PBM services to clients providing workers compensation benefits.

In December 2009, Express Scripts acquired NextRx, WellPoint Inc.’s (WLP) PBM segment. The deal, which significantly expanded Express Scripts PBM business, also includes a 10-year contract under which Express Scripts will provide PBM services to WellPoint and its designated affiliates.

Moreover, in July 2011, Express Scripts announced its intention to acquire healthcare company Medco Health Solutions, Inc. (MHS) for $29.1 billion in cash and stock. We believe that this acquisition, which is expected in the first half of 2012, will generate more synergies for the two PBMs and help lower the cost of prescription drugs.

Express Scripts stands to benefit from increased generic utilization, shift toward mail orders, strong specialty growth and an aging population. The use of generic drugs should increase significantly over the next few years as several branded prescription drugs are scheduled to lose patent protection, including Pfizer’s (PFE) Lipitor (November 2011). Increased generic uptake and higher use of mail orders should help the company improve its margins and profitability.

Additionally, we believe Express Scripts is well positioned to benefit from healthcare reform initiatives like broader insurance coverage, the potential approval of a pathway for bio-similars and incentives supporting the utilization of information technology systems. The implementation of these initiatives should help drive growth at Express Scripts.

We are concerned about the company’s dependence on a small number of customers for a significant part of its revenues. The top five clients of Express Scripts collectively represented 55.2%, 23.7%, and 18.2% of revenues during 2010, 2009 and 2008, respectively. Considering that this percentage has been increasing each year, the loss of a significant customer would have an adverse impact on the company s revenues and operations.

Moreover, we believe that the implementation of proposals to control health care costs in response to increases in prescription drug utilization rates and drug prices would have an adverse impact on the company s operations. These proposals include single-payer government funded health care programs and price controls on prescription drugs.

We expect investor focus to remain on the acquisition of Medco Health, which is expected to generate $4 billion annually in cash from operations, once completely integrated with Express Scripts.

 
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