Express Script, Inc.
Express Script, Inc. is the largest pharmacy benefit management (PBM) company in the US. In the fiscal year 2013, the company generated revenue of $104.62 billion (Express Scripts, Inc., 2014). It offers a diverse range of services under PBM, including pharmacy delivery services, health decision science, drug data analysis, and drug plan management services among others.
Express Scripts, Inc. provides PBM services for compensation under insurance programs. The accrediting body in pharmacy recognizes the company. The company handles claims for its clients through an affiliated network of pharmacies in the US and Canada.
It is imperative for healthcare managers to understand the fundamental aspects of financial aspects of healthcare management. Consequently, managers without financial backgrounds can understand financial issues at various departments (Baker & Baker, 2014). For instance, it is necessary for healthcare decision-makers to understand different financial ratios and cost variables that influence revenue and profit margins. Such knowledge helps in understanding costs and ensures effective decision-making and aligning resources where they are most needed.
This paper focuses on healthcare finance by evaluating the financial statements of Express Scripts, Inc. for the past five fiscal years. Selected ratios will be used to determine the financial health of the company and then make appropriate recommendations based on the outcomes. It also covers SWOT analysis and significant variables of the company.
Financial story and selective ratio analyses
Financial ratios analysis for Express Script, Inc. is based on annual statements from the year 2009 to 2013.
Profitability Ratios
Gross Profit Margin = Gross Profit / Revenue (Net Sales) = ____
- 2009: 2,424.0 / 24,722.3= 0.098
- 2010: 2,958.2 /44,973.2= 0.0658
- 2011: 3,209.9 /46,128.3= 0.0696
- 2012: 7,311.9 /93,714.3 = 0.078
- 2013: 8,132.4 / 104,098.8 = 0.078
The gross profit margins for Express Scripts, Inc. show that the company has an effective way of managing its costs of inventory. Hence, it can pass low costs to customers.
Net Profit Margin = Net Income/Net Sales = _____
- 2009: 826.6/ 24,722.3= 0.033
- 2010: 1,181.2 /44,973.2= 0.027
- 2011: 1,278.5 /46,128.3= 0.0277
- 2012: 1,330.1 / 93,714.3 = 0.0144
- 2013: 1,898.2 / 104,098.8 = 0.01823
Express Scripts, Inc. generates profits from every dollar after paying all its expenses. The margin ranges from one percent to three percent. This shows profits, which the company generates from a dollar in terms of cents. However, its profitability has started to decline.
The Cash Flow Margin ratio = Cash flow from operating cash flows/Net sales = _____
- 2009: 1,752 / 24,722.3= 0.071
- 2010: 2,105 /44,973.2= 0.0468
- 2011: 2,192.0 /46,128.3= 0.0475
- 2012: 4,751.1 / 93,714.3 = 0.051
- 2013: 4,768.9 / 104,098.8 = 0.046
From the results, one can identify how Express Scripts, Inc. has managed to generate cash from its customers through sales and other services. These are significantly high ratios, which prove that Express Scripts, Inc. has good cash flows. Hence, the company does not face any risks from its suppliers and investors or any solvency problems.
The Return on Assets ratio
Net Income/Total Assets = _____
- 2009: 826.6/ 11,931.2 = 0.069
- 2010: 1,204.6 /10,557.8 = 0.1141
- 2011: 1,275.8 / 15,607.0 = 0.0817
- 2012: 1,345.2 / 58,111.2 = 0.0231
- 2013: 1,898.2 / 53,548.2 = 0.035
The ROA shows the profitability of Express Scripts, Inc. in comparison to its assets. From the ratios, one can conclude that the company can effectively use its assets to generate revenues and profits.
At the same time, Express Scripts, Inc. can leverage its assets to control debts in order to maximize returns for its shareholders. In the last two years, the company has embarked on aggressive asset maximization.
The Return on Equity ratio = Net Income/Stockholder’s Equity = _____
- 2009: 826.6 / 3,551.8 = 0.2327
- 2010: 1,204.6 /3,606.6 = 0.3339
- 2011: 1,275.8 / 2,473.7 = 0.516
- 2012: 1,345.2 / 23,395.7 = 0.057
- 2013: 1,898.2 / 21,844.8 = 0.087
Between the years 2009 and 2011, Express Scripts, Inc. had a good REO of up to 51% thus, good returns for shareholders, but this has changed. Between the 2012 and 2013 financial period, the company’s REO declined to below 10% because of the increase in equity. This situation has affected shareholders’ returns.
It is advisable to invest in companies with good REO over time, but the current state of Express Scripts, Inc. could be detrimental for potential investors. This indicates that the company has not managed to maintain its profitability. It shows that Express Scripts, Inc. relies on shareholders’ equity for its growth.
Cash Return on Assets = Cash flow from operating activities/Total Assets = _____
- 2009: 1,752.0 / 11,931.2 = 0.147
- 2010: 2,105.1 /10,557.8 = 0.199
- 2011: 2,193.1 / 15,607.0 = 0.1405
- 2012: 4,751.1 / 58,111.2 = 0.0817
- 2013: 4,768.9 / 53,548.2 = 0.089
Cash Return on Assets Ratio is significant in evaluating how the company has maximized its investments to generate income from its assets (Kieso, Weygandt, & Warfield, 2013). From the recent figures for the last two years, one can conclude that the company’s performance has started to decline.
Shareholder Equity Ratio = Total Shareholder Equity/Total Assets
- 2009: 3,551.8 / 11,931.2 = 0.297
- 2010: 3,606.6 /10,557.8 = 0.199
- 2011: 2,475.3 / 15,607.0 = 0.342
- 2012: 23,395.7 / 58,111.2 = 0.403
- 2013: 21,844.8 / 53,548.2 = 0.408
Over the years, shareholders’ equity has continued to rise steadily as the company borrows to fund its operations. Therefore, in the case of a company-wide liquidation, investors would get good returns from their investments. These are high ratios, which suggest that the company operates with investments from shareholders.
Liquidity = current assets/current liabilities
- 2009: 11,931.2 / 8,379.4 = 1.424
- 2010: 10,557.8 / 6,951.2 = 1.519
- 2011: 15,607.0 / 13,133.3 = 1.188
- 2012: 58,111.2 / 34,715.5 = 1.674
- 2013: 53,548.2 / 31,703.4 = 1.69
Low liquidity ratios (less than one) show that the company may not easily meet its short-term obligations. Express Scripts, Inc. has high liquidity ratios, and thus, it can meet its near-term obligations. The company can meet its obligations through its current assets (current ratio). This is important because Express Scripts, Inc. can change its short-term assets into cash in order to clear its debt easily. Hence, it may not face bankruptcy. The above ratios show that Express Scripts, Inc. will be able to operate into the future.
Strengths
- Strong financial performance
- Market dominance
- Knowledge of the pharmaceutical markets and industry
- Strong investment in research and analytics
- Innovative approaches to consumer interactions and disease management and outcomes (Reinke, 2009)
Weaknesses
- Failure to anticipate or adapt to rapid changes in the healthcare industry
- Inability to maintain secure technology platforms
- Negative effects of debt service obligations on available funds, for instance, as of December 2013, the company had a debt obligation of $2,000, and any slight changes in the interest rates could affect it’s earning negatively
- Failure to negotiate flexible debt terms i.e., prone to default
- Most of the revenues emanate from operation segments (98.8%, 99%, and 99.4% for the fiscal years 2013, 2012, and 2011 respectively – note that revenues from these major segments have started to decline slightly over the years)
Opportunities
- The changing the traditional PBM model
- Acquisition of new companies
- Strategic partnership with retail pharmaceutical outlets
- Abilities to save costs from innovative strategies by using mail programs and eliminating copayment
- Massive expansion opportunities
Threats
- Strong competition from CVS/Caremark, Aetna, Catamaran, and other PBMs after the acquisition of Medco have impaired sales and profit margins
- Lawsuits because of failures to pay drug rebates and protect consumer data (the company paid hefty fines)
- Uncertainties involving the use of numerous laws and regulations or inability to predict new federal and state laws and regulations
- Claims not covered or in excess of insurance coverage affect financial performances
- Unexpected changes in the industry pricing benchmark
- Significant competition for talented employees
Conclusion
Express Scripts, Inc. is among the largest PBM after its acquisition of Medco. The company has performed well financially. However, its profit margins have started to decline because of several risk factors faced in the rapidly changing healthcare industry. The company has good returns on investments, but it has relied mainly on investors and debts to fund its acquisition and growth strategies. Debt obligations could negatively affect Express Scripts, Inc. if interest rates change in the market. Nevertheless, the company can still fulfill its commitment to creditors.
Express Scripts, Inc. must evaluate industry-specific risk factors, such as actions of the government, competition, rapid changes in the industry, and failures to identify potential opportunities. It must rely on its massive strengths to expand and find other sources of revenue.
Recommendations
Different financial statements of Express Scripts, Inc. were analyzed to determine the financial conditions of the company (Express Scripts, Inc., 2011, 2012, 2013). The liquidity ratio shows that Express Scripts, Inc. has adequate current assets to cover its commitments with creditors, and therefore, it is likely to continue operating into the future. It also has good cash flows. However, over the years, shareholders’ equity has continued to rise steadily as the company borrows to fund its operations. This indicates that the company has not managed to maintain its profitability. It shows that Express Scripts, Inc. relies on shareholders’ equity for its growth.
- The company should reduce dependency on shareholders or debts to fund its operations
- Express Script, Inc. must focus on other sources of revenues rather than operations segments, which generate over 98.8% of its revenues
- Express Scripts, Inc. should focus on revenue generation because of the decline in profitability in the last two years
- It should focus on asset and debt management
- Shareholders may continue to invest in the company because it is profitable and shows greater potential with the growing revenues
While Express Scripts, Inc. has performed well over the years, SWOT analysis shows that the company faces several threats and internal weaknesses, particularly from the industry and governments’ numerous laws and regulations. These weaknesses and threats could affect its revenue and profit margins if not evaluated and controlled.
It must continue to promote acceptable ethical and cultural practices in financial reporting
References
Baker, J., & Baker, R. (2014). Health care finance: Basic tools for nonfinancial managers (4th ed.). Burlington, MA: Jones & Bartlett Learning.
Express Scripts Inc. (2011). 2010 Annual Report. St. Louis, Missouri: Express Scripts, Inc.
Express Scripts Inc. (2012). 2011 Annual Report. St. Louis, Missouri: Express Scripts Holding Company.
Express Scripts, Inc. (2014). 2013 Annual Report. St. Louis, MO: Express Scripts Holding Company.
Reinke, T. (2009, October). Large PBMs Transform Old Business Models. Managed Care. Web.