Express Scripts Holding Co. (NASDAQ:ESRX)

Q1 2017 Earnings Call

April 25, 2017 8:30 am ET

Executives

Benjamin Bier – Express Scripts Holding Co.

Timothy C. Wentworth – Express Scripts Holding Co.

Eric R. Slusser – Express Scripts Holding Co.

Steven B. Miller – Express Scripts Holding Co.

Analysts

Lisa Gill – JPMorgan

Robert Willoughby – Credit Suisse Securities (NYSE:USA) LLC

Eric Percher – Barclays Capital, Inc.

David S. MacDonald – SunTrust Robinson Humphrey, Inc.

Garen Sarafian – Citigroup Global Markets, Inc.

John C. Kreger – William Blair & Co. LLC

Charles Rhyee – Cowen & Co. LLC

Ricky R. Goldwasser – Morgan Stanley & Co. LLC

Robert Patrick Jones – Goldman Sachs & Co.

Brian Gil Tanquilut – Jefferies LLC

Anthony V. Vendetti – Maxim Group LLC

Operator

Welcome to Express Scripts’ First Quarter 2017 Conference Call. All lines have been placed in listen-only mode until the question-and-answer session. Today’s call is being recorded. If anyone has any objections, you may disconnect.

I would now like to turn the call over to Ben Bier, Vice President of Investor Relations. Sir, you may begin.

Benjamin Bier – Express Scripts Holding Co.

Thank you, and good morning. With me today are Tim Wentworth, CEO and President, and Eric Slusser, EVP and CFO.

Before we begin, I need to read the following safe harbor statement. Statements or comments made on this conference call may be forward-looking statements and may include financial projections or other statements of the company’s plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties. The company’s actual results may differ materially from those projected or suggested in any forward-looking statement due to a variety of factors which are discussed in detail in the company’s most-recent form 10K and form 10Q, filed with the Securities and Exchange Commission. We do not undertake any obligation to update or otherwise release publically any revisions to our forward-looking statements. For clarity purposes, all financial numbers, except where indicated, that we talk about today will be on an adjusted basis and are attributable to Express Scripts excluding non-controlling interest representing the share allocated to members of our consolidated affiliates.

This presentation will be posted on our website and includes an appendix with the footnotes and the reconciliations of non-GAAP measures to the most directly comparable GAAP measures. The press release is posted on the Investor Relations section of our website at www.express-scripts.com. At this point, I will turn the call over to Tim.

Timothy C. Wentworth – Express Scripts Holding Co.

Thank you, Ben and good morning everyone. This morning, I want to address our recent disclosure related to Anthem. We will discuss the contribution that Anthem along with our transitioning clients, namely Coventry and Catamaran, have on our business and how the core PBM is performing excluding them.

We’ll also discuss why we are excited about the outlook for our core PBM and how we are well-positioned to achieve strong results as a focused, independent PBM in 2017 and well beyond. Our discussion will also include an update on 2017 selling season. Then Eric will review our financial results for the first quarter and updated 2017 full-year outlook.

As you saw in our release yesterday, Anthem recently told us that they intended to move their business when our contract with them expires at the end of 2019. Although we are under no obligation to do so, we disclosed the financial contribution of the Anthem business to Express Scripts. We did so voluntarily to bring greater visibility to our core business and remove uncertainty that has existed about Anthem’s business.

As we have stated and is now clearly evidence, we do not have $3 billion in savings to give Anthem from pricing concessions alone. This is the point we’ve made since the figure was first stated by Anthem in January of 2016, at a time when we actually had earned less than $2 billion on Anthem’s business the prior year.

Though Anthem has made continuous demands for price concessions, they ignore completely the $4.7 billion of value they received in 2009 when Express Scripts purchased Anthem’s then government-sanctioned PBM, NextRX. They also ignore the unique which accompanied it

Despite Express Scripts recommendation in 2009 to enter into a more traditional pricing arrangement with less up front dollars, Anthem’s management at the time elected to take and use these funds to buy back shares instead of accepting more competitive pricing and contract terms. The decision to accept the pricing and contract terms they currently have, and the $4.7 billion up-front payment was their choice, and we believe it is worth mentioning that at the time, Anthem publically stated that their pharmacy costs were going down as a result of entering into the 10-year agreement with Express Scripts.

Now, with each passing day, Anthem is foregoing additional price concessions of as much as $1 billion annually that we are willing to provide. And as it should be clear today the annual rate relief of $3 billion which they have been so adamant to receive simply isn’t something we can offer.

That said, we are the only PBM that can provide Anthem with pharmacy savings between now and 2020. We are also the only solution that avoids the need to transition Anthem’s clients and members to an in-house PBM or another PBM, a significant undertaking, requiring hundreds of millions of dollars in investment and creating unnecessary risk and some level of disruption for patients and clients.

As some of you may know, it took three years to bring Anthem’s business on to Express Scripts platform starting in 2009.

With or without Anthem, our strategy, independent business model, and unique solutions collectively position us for a strong future. Our national preferred formulary, the nation’s largest with 25 million members, none of whom are from Anthem, give us unrivalled supply chain leverage. Excluding Anthem, our diverse client base represents over 65 million members, and we will have a volume of more than 1 billion prescriptions annually.

Over the next two and a half years or longer, while we continue to serve Anthem and its members, we will focus on using the value that we are willing to give them to thoughtfully position our core business for the future.

As you saw in our earnings press release, we’ve elected to provide information as to the financial performance of our business with and without Anthem and the other transitioning clients in order to demonstrate that the company’s core PBM business excluding Anthem is well-positioned for future growth.

In 2016, the core PBM business processed nearly 1.2 billion adjusted claims, representing growth of 2.2% excluding Anthem and our transitioning clients, and earned $4.8 billion in adjusted EBITDA representing growth of 6.2% over 2015 adjusted EBITDA.

Our core PBM growth in 2016 was largely attributable to the rapid adoption of our SafeGuardRX suite of solutions, patent expirations on several drugs with significant branded revenue, a renegotiated agreement with Walgreens and lower SG&A spending.

As you may recall, in 2016, we reduced our clients’ drug trend from 5.2% to 3.8%, or 27%, saving clients billions of dollars. Our 2016 core results clearly demonstrate that in years when we have the opportunity to create competition to drive down costs and ensure patient access, we also benefit, highlighting the power of our model of alignment.

In addition to the growth in our core PBM, a large portion of the reduction in EBITDA from our transitioning clients was offset by growth in EBITDA attributable to Anthem business. Anthem’s EBITDA growth in 2016 was largely driven by the addition of Amerigroup lives onto the ESI platform and incremental volume from their healthcare exchange business. Notably, the $1.9 billion in EBITDA attributable to Anthem is obviously quite a bit lower than the $3 billion figure they publically claimed in January 2016 that they should be paid.

Eric will provide more detail on the company’s consolidated results in a few moments, but I want to highlight that based on our prior guidance, we’re targeting consolidated Express Scripts EBITDA growth of 1% to 3% in 2017.

Turning to the longer-term, our independent model uniquely positions us to grow our core business over the long-term. Our flexibility, agility and laser focus on pharmacy makes us the only PBM fully aligned with our clients’ best interests as we protect them against the impact of skyrocketing drug prices. When you look at the dynamics in the health care market, over the next five to 10 years, our role will be more important than ever. Our market-leading assets, relentless innovation, and unique alignment with clients make us an attractive option for payers who truly want to change the dynamics of medicine affordability and access.

Our unmatched expertise and focus on supply chain management, specialty pharmacy and member experience, particularly in the 90-day retail and mail channels, will drive to lower unit cost at a time when payers need solutions more than ever.

In specialty in particular, we not only rein in costs, but greatly improve care, making sure that every patient gets the most out of their medicine. Our Accredo specialized care model sets us apart and puts us well ahead of our competition.

And beyond specialty, for those patients who may be challenged because they are uninsured, underinsured or in high deductible health plans, we have new solutions coming soon to address those specific needs and will generate value beyond what is already available.

The future holds significant new opportunities for all of our levers to drive solid growth. For example, we believe there will be a more active FDA which will approve more medicines and generate greater competition in the marketplace and no one leverages competition better than we do.

Beyond unit cost management, our focused clinical tools, including our TRC powered SafeGuardRx suite of solutions, position us to create value-based opportunities to deliver great value to patients and clients. We can generate additional value as new drugs are approved, as biosimilars come to market, and as manufacturers increasingly step-up to deliver value beyond purchase price reduction.

As I have said before, we are bringing value-based care to life and we will continue to drive this trend. In fact, just last week on CNBC, the head of PhRMA pointed to working with PBMs as the way his members were looking to bring value-based arrangements to the marketplace. I couldn’t agree more.

Finally, a strong core is built not just on creating and making the most of external opportunities but also by managing internal costs and investments to ensure a highly efficient lean approach. We have proven over the years that we can do this. It is a hallmark of Express Scripts. We have several significant initiatives underway to increase efficiency, further reduce our cost base and generate more opportunities to invest in further automation and technology solutions. Areas which will transform our company and what we offer to patients and our clients.

As I noted earlier, our SafeGuardRx solutions, along with our broader TRC-powered clinical toolset, help patients and clients manage pharmacy with a focus on optimal health outcomes at the lowest possible cost. While 2016 was a banner year for launching these programs and enrolling our clients in these powerful solutions, we continue to evolve them and add additional approaches this year and going forward. These solutions not only drive outcomes – look no further, frankly, than our drug trend results for that – but create significant reason for clients to stay with us and prospects to consider us.

As I look out at the landscape, it is clear our patients, clients and prospects need a partner who is relentlessly focused on health outcomes and cost containment. Our innovation will serve to protect them against tomorrow’s health care challenges and create opportunities for them to benefit as the market evolves.

In that context, we are very pleased with our client retention thus far during the selling and renewal season. While it is still somewhat early, we anticipate another strong year, with a 2018 retention rate of 95% to 98% of Coventry scripts that are rolling off due to acquisition. Our renewals are balanced across both our health plan and commercial books.

Now from a selling perspective, this is a somewhat lighter than average year due to a number of meaningful opportunities being pushed into 2019, given the uncertainty of health care reform. However, we are actively engaged with prospects who are interested in the strength of our innovative aligned model.

I will now turn it over to Eric to discuss our first quarter 2017 results.

Eric R. Slusser – Express Scripts Holding Co.

Thank you, Tim, and good morning. Yesterday, we reported first quarter adjusted earnings per share of $1.33, which represents an increase of 9% over last year. Our adjusted claims for the quarter were $351.7 million, above the midpoint of our guidance range. We also generated $1.5 billion of EBITDA, resulting in EBITDA per adjusted claim of $4.25, up 4% from the prior year.

In the first quarter, there were also approximately $24 million of one-time items that impacted our adjusted SG&A expense, primarily attributable to severance and legal fees.

Excluding the impact from Anthem and our transitioning clients, our core PBM EBITDA grew 50 basis points in the first quarter. We expect growth in our core PBM to ramp up in the remainder of the year as we realize higher utilization of our SafeGuardRx programs throughout the year, and increased penetration of generics in our book of business, as well as the timing of supply chain initiatives and higher Medicare Part D revenue, driven by the benefit design and reinsurance payments from the government.

From a cash flow perspective, we generated $1 billion of net cash flow from operations. We also repurchased 13.3 million shares for approximately $900 million during the quarter. Share repurchases were made through a combination of open market purchases and a 10b5-1 plan.

Now let’s turn to 2017. We continue to expect 2017 adjusted claims to come in at the midpoint of $1.4 billion, generating an expected EBITDA in the range of $7.3 billion to $7.5 billion, up 2% at the midpoint over 2016 adjusted EBITDA.

We are raising our adjusted earnings per diluted share range of $6.82 to $7.02, to $6.90 to $7.04, representing growth of 8% to 10% at the midpoint of the range. The increase in guidance is attributed to our focus on tax planning strategies and the management of our capital structure. We now expect diluted weighted average shares outstanding to be in the range of 575 million to 595 million. Our diluted share range reflects that our 10b-5 plan will end in July.

With respect to the second quarter of 2017, we expect adjusted earnings per share to be in the range of $1.70 to $1.74, up 8% to 11% year-over-year. Consistent with recent years, we expect to receive certain revenues related to the structure of our Anthem contract to be realized in the second quarter. We expect this amount to be approximately 50% less than the 2016 payment of approximately $107 million.

Finally, I want to touch on how we’re focusing on our long-term financial framework. Although we’re not prepared to provide specific long-term adjusted earnings per diluted share guidance, based on internal assumptions regarding healthcare trends, industry positioning, and the overall environment, we are excited about the future of our core PBM. For the period from 2017 through 2020, we’re targeting a compounded annual EBITDA growth rate of 2% to 4% for the core PBM.

In addition, this earnings growth should continue to generate significant cash flows from operations. Aside from gradually paying down debt, our capital deployment strategies remain the same, funding internal growth, making strategic acquisitions, and returning cash to our shareholders.

To achieve our targeted leverage targets, we anticipate we will use approximately 30% of our annual cash flow from operations between now and 2020 for debt reduction. We remain committed to maintaining our strong investment-grade rating.

Finally, the healthcare landscape is fraught with inefficiencies, and we continue to search for strategic acquisitions that will enhance our core, as well as provide additional services to payers, patients, and our clients.

I’ll now turn the call back over to Tim.

Timothy C. Wentworth – Express Scripts Holding Co.

Thanks, Eric. Briefly, before we begin Q&A, I simply want to reinforce four important things.

First, in 2009, we offered Anthem lower rates, but instead they chose more value upfront. The Anthem truly represents a one-of-a-kind client and contract. Second, Anthem has demanded $3 billion per year in price concessions, and as you have seen today, that type of savings is simply not available. Third, we are the only PBM that can provide rate relief to Anthem before 2020, and then give them market-leading rates post 2020, and we are frankly surprised they are uninterested in capturing that value.

Finally, and most importantly, our solutions are in demand, and our work has never been more important. With or without Anthem, we remain well-positioned for future growth and to lead the way to more affordable access to medicine.

Thank you. And, operator, we’ll now open it up for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. The first question comes from Lisa Gill of JPMorgan. Your line is open.

Lisa Gill – JPMorgan

Thanks very much, and good morning. Tim, let me start with my first question which would be around client flight risk. In talking to investors last night and this morning, it appears that people are thinking back to when Medco lost some clients, and then you obviously announced you were going to merge with Express Scripts. I viewed that as more of the merger versus the loss of clients, but can you maybe just spend a couple of minutes talking about how you’re thinking about potential loss of any client, or any changes in the negotiation with your current client base?

Timothy C. Wentworth – Express Scripts Holding Co.

Sure, Lisa, and good morning. Thanks for the question. So let me start with, our clients understand that the contract we have with Anthem, as I just said, is dramatically different. The up-front money that they demanded in 2009 and the contract that also followed it, specifically the market check language in that contract, which is very different, or the periodic market review language, as it’s called in the contract. So our clients understand that.

As you can imagine, we haven’t just started talking to them about this this year. Anthem has been out for quite a period of time. They filed a lawsuit a year ago now. And we have a strong playbook in terms of how we talk with clients. And I can tell you very quickly, the conversation pivots to, okay, let’s talk about what you can do for me in terms of drug trend, in terms of programs, and so forth.

I think the Medco situation was very different due to a few things that I won’t detail now, but suffice it to say we have a strong relationship with our clients. The feedback I’ve had, and I’ve obviously spoken with a few already, has been extraordinarily supportive. And you know, quite frankly, if Anthem isn’t interested in receiving $3 billion over the next three years that would be tremendously valuable to them, we’re going to invest that as well into the core of this business and drive our solutions even further and faster. And I think our clients are going to benefit directly from that, and that’s what I’m sharing with them.

Lisa Gill – JPMorgan

And then if I can just, maybe just a couple points of clarification here. When we talk about the EBITDA attributable to Anthem, I just want to make sure that we understand that EBITDA is all-inclusive of all the benefit that you’re getting around – for example, I know they’re not on your national formulary, but you’re probably purchasing on their behalf or negotiating on their behalf, right? And so there’s probably some benefit within the EBITDA there. And so as we think about that, number one, I’d want to confirm that.

And then secondly, how do we think about the run-rate over the next couple of years? There was a nice jump from 2015 to 2016, and I think that was, again, due to the incremental contracting of what you’re doing out in the marketplace around pharmaceutical costs. But I just want to understand those two factors; all-inclusive on the EBITDA line, and then secondly, as we think about the run-rate over the next couple of years, should we see an incremental step-up in 2017, 2018, 2019?

Timothy C. Wentworth – Express Scripts Holding Co.

So let me start, and I’ll let Eric add any color. First of all, let me say this as simply as I know how to. If Anthem were to leave today, the EBITDA that we’ve showed you – we would have work to do, first of all, obviously, which is the work we’re doing, as I talked about, costs. But we would not see the EBITDA attributable to the core decrease because of some lost leverage that we would be gaining by virtue today, by virtue of having Anthem.

Let me say it a different way, and you kind of said it. They don’t participate in our national preferred formulary. We will have 25 million members who we take to the table when we negotiate with pharma. Not one of those is an Anthem member. That will continue.

So they’ve gone, you know, we’ve supported them, they’ve gained our scale and our ability to contract at scale. They’ve gained from that, but I can tell you from the broad book of business, that’s not the case. And so our EBITDA on the core is very much what you would expect going forward.

As it relates to – and by the way, the other piece is obviously in our mail service and GPO leverage, Anthem is not particularly high mail, and our ability to negotiate with generic manufacturers, remember, we’re still at over 1.2 billion prescriptions overall, we still have a strong mail service franchise and 90-day franchise generally, our ability to negotiate there will not be diminished by virtue of Anthem’s 200 million claims.

As it relates to the run-rate, what I would just say is, listen, Anthem, as you saw, and I assume you mean the run-rate for Anthem, Anthem has grown. And I would expect over the next three years as they put in programs that we’ve – they’ve been working with us to put in programs to drive down pharmacy costs, we benefit when those programs are put in and so do they. So I would expect to and I frankly hope to grow Anthem’s profitability and EBITDA over the next three years as we put solutions in and as we continue to use our their behalf, separately from our book of business.

Lisa Gill – JPMorgan

Quickly, do you expect that that’s going to grow materially? You’re talking about 1% to 3% this year, kind of 2% to 4% on a core run rate basis. When we think about the Anthem business and the 14% growth you saw last year, would you think that that’s kind of growth or would you say it’s probably going to be more in line with the Express overall growth? I think that from an investment perspective, people are just trying to get an idea of where this will be when you exit the relationship in 2019?

Timothy C. Wentworth – Express Scripts Holding Co.

Sure. I would expect that what you should see is kind of what you’ve seen with our core, which is it will be more in line with – you know, the EBITDA any given year is a function of, even in this contract, a function of how much opportunity does the supply chain sort of have in terms of creating competition? Whether that’s going and renegotiated rebates because new products come out, whether that’s putting in programs, whether that’s new generics, et cetera. And so, I would anticipate, while we aren’t going to give forward-looking guidance on just Anthem, it’s probably going to perform similar to what we’ve said for the core.

Lisa Gill – JPMorgan

Okay, I’ll stop there, thank you.

Operator

Thank you, the next question comes from Robert Willoughby of Credit Suisse. Your line is open.

Robert Willoughby – Credit Suisse Securities (USA) LLC

Hey, Tim and Eric, can you speak to the 2% to 4% EBITDA CAGR that you’re throwing out there? What are assumptions around new business in terms of a driver of that?

And then just secondarily, I think the story is more predicated on you getting the capital deployed productively over the next few years on deals. Can you help us, Tim, I know you’ve had some kind of high level guidelines for kinds of things that are interesting, but isn’t it more critical now to offer a bit more granularity on the kinds of capabilities that might help you fill any Anthem hole that does materialize.

Timothy C. Wentworth – Express Scripts Holding Co.

Sure, so I’ll take first – the contribution of new business is, is a component, but I would not say it’s the driving component, Robert. As you know, when we win new business, it’s typically, you know, less-penetrated than the things that are valuable to us and over a series of years we penetrate it better. Now I will tell you, retention continues to be a key goal of ours, and in making sure we invest in solutions that maintain the value we create for clients. And so – but we also do target winning new business. And we think over the next three years we anticipate that we will add materially to our client base, but I would also tell you that winning at all costs is not only not required, it’s not the strategy. And so we intend to compete well in the new sales space. We think our solutions differentiate us meaningfully. We get that feedback from the marketplace. In this selling season we continue to see good response to that, but it’s not the core driver.

As it relates to deals, you know, listen, I, we’re not going to tell you what we’re looking at. I can tell you, we’re extraordinarily engaged in things. We’re going to deploy our cash really carefully though. It’s not to say that we will or won’t do a deal, it’s to say we are going to be really thoughtful about how we invest in ourselves, how we, both through technology, investments and other internal investments, deploy it back to shareholders, and then we do look at M&A. We do like cost containment and payer services sorts of opportunities. We like niche opportunities in areas like worker’s compensation and specialty, we are interested in healthcare analytics or medical management. Those are some of the areas that we’re looking at out across the broader market as things that will potentially diversify and help our EBIT beyond the core grow. And so we are very, very intentional in those areas. And I think if you were to talk to, you know, pick your fiddler, talk to – pick your favorite three investment bankers, they would tell you that we’re – we read everything, but we’re engaging very, very meaningfully.

Robert Willoughby – Credit Suisse Securities (USA) LLC

And just a clarification, Tim, just the magnitude of the pipeline of opportunities. Would it be realist to assume something could get done this year that would be noteworthy, or is it just impossible to predict and it could be year three before we see anything additive?

Timothy C. Wentworth – Express Scripts Holding Co.

You know, I don’t want to predict. I don’t think you should expect – I’m not going to give you any timelines. As much as we’re holding ourselves to doing the right deal. And that timing will then ripen however it manifests itself. I would love to see us make sure that we take good care of our cash. And I’ll tell you, depending on where things are at right now, buying our stock back is not going to be a bad use until such time as we find something that’s also terribly strategically interesting, not just from a cash perspective.

The other thing I’d say, Bob is you know, beyond just deals, I think this core business is built to engage differently with the healthcare supply chain and the – and the health, and the broadly-defined healthcare services piece. And whether you look at what we’ve done with blank and Lilly, with Mango, with value-based manufacture agreements, with the diabetes program with Walgreens, with what we did for a major health plan in California as it relates to performance-based retail network, etc. etc. We actually see a pipeline of very interesting opportunities there that don’t require us to invest billions of dollars, but actually can leverage innovation and our natural core in very unique ways, and you should expect to hear more about that over the next six months to eighteen months as much as anything else around a more traditional deal flow.

Robert Willoughby – Credit Suisse Securities (USA) LLC

Thank you.

Operator

Thank you. Next question comes from Eric Percher of Barclays. Your line is open.

Eric Percher – Barclays Capital, Inc.

Thank you. Could you speak to your methodology with allocation of fixed and corporate expense relative to the three, I guess three segmentations, but really what I’m interested also is how you arrived at, or whether any intention to drive down the total EBITDA associated with Anthem, and what we will be left with at core Express Scripts?

Eric R. Slusser – Express Scripts Holding Co.

Yes, Eric. So as to our allocation methodology, as we presented in the press release, we’re showing adjusted EBITDA from the pieces of the business. So included in there below the margin is a portion of the variable costs. And as it relates to Anthem, if and when it goes, we’d expect those costs to ratably come out as the business goes out. We also allocate a portion of fixed costs. I will tell you that’s at a level that’s less than their revenue. But on a fixed cost basis, we look department by department, person by person. We’ve had a very, very refined methodology that we’ve used over time that looks across the organization, and anything that can be specifically identified to a client is done that way. And then from there, we look at various factors including prescriptions, lives and revenue to allocate remaining costs.

Now to that basis, as Tim talked about in his prepared remarks, we have always been and will continue to be very, very cost-focused. We have three more years before this contract is up, and we have a mind and an eye to cost reduction between now and then. We know what those fixed costs are that have been allocated, and we know what has to be taken out as we approach 2020. So hopefully, that addresses your question.

Eric Percher – Barclays Capital, Inc.

And history would suggest that these type of contracts tend to roll off over multiple years. How do you think about, or what have you seen, in terms of your ability to reduce costs and how that rolls over the one, two, three years that takes to ramp down?

Eric R. Slusser – Express Scripts Holding Co.

Yes. So we are – obviously have been planning for this and are very laser-focused on that. As to that roll-off, what we do know is the contract goes through the end of 2019. So the roll-off couldn’t begin until after that date. And then that’s entirely up to them. But as we have seen, whether it be through our united contracts, through the Coventry, Catamaran, these things typically take years, not a year. So – but we can’t predict that, but we will be lined up to take the costs out accordingly, with whatever timing the roll-off is.

Eric Percher – Barclays Capital, Inc.

And, Tim, you’ve always stated a commitment to serving the customer. If they – if Anthem comes to you and says, we want three years as we build it out ourselves. Is there a point at which you turn off the key?

Timothy C. Wentworth – Express Scripts Holding Co.

Well – so, I’d start by reminding you that we have a one-year obligation. And after that, quite frankly, it’s a negotiable item. And what I would tell you is listen, we’re never going to put patients in the middle. We’re never going to be in a situation where there’s a member who is an Anthem member who can’t get what they need. But I can also tell you that, from our perspective, we’ve got – we’re moving on. That’s the message you should get today is, we have a strong core. We’ve been trying for a year to find a way forward here. We still – the door is always open here. I’d be much more open for an extension of this contract that we’ve been trying to get done at market rates in exchange for some up-front money that nobody else can give them.

So, the conversations that we will have as it relates to what happens after 2020 haven’t started, and we, quite frankly, will be in a situation where, what we’ll have to do is make sure we’re taking care of all the rest of our long-term clients, while at the same time not putting their patients in the middle.

Eric Percher – Barclays Capital, Inc.

Thank you for that.

Operator

Thank you. The next question comes from Dave MacDonald of SunTrust. Your line is open.

David S. MacDonald – SunTrust Robinson Humphrey, Inc.

Guys, look, I just have one question left. I was wondering, Tim, can you provide just a bit more detail? You talk a little bit about exception pricing, how often this happens, how key you think that is to helping them win. And when you guys have these – have had these conversations about trying to renew the contract, how often does a topic like that come up?

Timothy C. Wentworth – Express Scripts Holding Co.

It’s – over the years, it’s come up a lot. I mean, and it’s come up in different ways. As you would recall in the beginning of this contract, you may recall, Anthem underperformed wickedly the script volume that was initially built into the business. It was one of the risks, frankly, that George and the team at the time were taking, was on volume.

And so, from our standpoint, we’ve worked hard over the years to help them grow by giving them exception pricing on something like 400 individual accounts, mostly on larger national accounts, as you can appreciate, which was not contractually obligated, but we felt it was the right thing to do. We would clearly benefit, and they would clearly benefit from being able to win and grow their national account business.

In addition, when they bought Amerigroup, we constantly updated their pricing on the Medicaid business, and that’s why they moved Amerigroup’s lives to us early. That was not contractually required, but we thought it was important to do. We’ve helped them on Medicare Part D, not only operationally, getting them off sanctions, but also actually in continuing to improve their rates there.

And so – and it’s all been just, you know, listen, we are aligned to grow Anthem. We’re aligned to grow them, you know, we’ve been aligned to grow them since 2009. And so, we have been very strategic about working with them to help them win in various marketplaces. And so, as we look forward obviously, you know, the exception pricing process is not contractually required, and it’s something that will probably be less critical in the future, but it has been something that we’ve worked very well with them on, leading up to now.

David S. MacDonald – SunTrust Robinson Humphrey, Inc.

Okay. Thank you.

Operator

Thank you. The next question comes from Garen Sarafian of Citi Research. Your line is open.

Garen Sarafian – Citigroup Global Markets, Inc.

Good morning, Tim and Eric. So first, a follow-up on a prior question regarding the long-term EBITDA growth, 2% to 4%. So you mentioned there’s a little bit of a contribution from new client wins, but not much. So, could you just break it down a little bit more? If volume is growing, the data that we’re seeing is maybe 1% to 2%, and there’s a little bit of new client wins baked into that 2% to 4%. So wondering, just how you guys are thinking about it? If you can give a little bit more clarity. And sort of what the margin is on a per-script basis with no additions? Are you assuming it to be flat? Even down? Up? If you can offer more?

Timothy C. Wentworth – Express Scripts Holding Co.

So I’ll give you a – my first crack at it. If we didn’t grow volume at all, to us, and if I look at the – let’s take the 2% to 4% range that we gave you, and just dissect that sort of at a macro level.

If we get a headwind on volume, whether that’s new wins or utilization, we see that as plus or minus a half a basis point in that overall – 50 basis points, rather – in that sort of total 2% to 4% equation. You probably have a couple of percent of growth that sits in our product programs, our management of pricing effectively, so that can be a negative, but that’s factored in there.

When we look at supply chain management and the opportunities when we look out, and as you can imagine, we aren’t just projecting sort of blindly here. We underwrite every day and take risk three years out. And so, we looked at that as we looked at the contribution existing clients over the next three years would have. We look at inflation, both brand and generic inflation, and factor that in.

Again, when you take all of that, the product program, supply chain management, inflation, that has the potential to contribute, I would say, at least 1% to 2% EBITDA growth a year, on average, CAGR.

From a standpoint of then, you’ve got specialty which, independent from that, we see specialty being a significant growth driver for us. We’re having very great success on the pharma side getting access to limited medications. And then obviously, we’ve won several of the larger independent freestanding specialty bids that were out there over the last year or so. So we’re competing well in specialty. And then finally expenses, which again, can be half a point to a point for us in terms of this.

So, when you break it all down, and I’m not going to get more discrete than that, because obviously the world gives us opportunities that we can’t even envision sitting here, and our job is to take advantage of them and drive client savings and keep a little bit for ourselves. But that’s generally broadly the way to think about it.

Garen Sarafian – Citigroup Global Markets, Inc.

Okay. No, fair enough. And then, you mentioned here in this response now, as well as Eric in, I think, the prepared responses, regarding supply chain initiatives in the back-half of the year. So sort of piggybacking on that, last year, you used up your last extension of the contract you have with your current distributor. So maybe last year could have been due to uncertainty with where you were going to be with Anthem.

So, given yesterday and today’s news, how does your current assumption of Anthem influence your procurement strategy, both near term for this year, the back half of the year what’s going on other than just the renewal and also just longer term?

Timothy C. Wentworth – Express Scripts Holding Co.

It really doesn’t change it materially. I mean our job is to make sure that we have a relationship with our distributor that is both from a unit cost standpoint and a strategy standpoint well aligned with our growth of our core in the future. Anthem, quite frankly, again, they’re – they obviously are a significant part of our EBITDA, as we’ve shown you. As a percentage of our claims that we manage though, and as a percentage of mail specifically, they’re actually much lower percentage than they are of the EBITDA.

And so I believe if you were to ask our current distributor, they would say they very much want to retain our business and be a strategic partner to us. And we will end the process this year with a strategic partner that is delivering real value to us. And I can tell you, ABC has done a great job for us, and my preference is to make sure that what we do for the next three years works as well as the last three years, whether that’s with ABC or anybody else. And I can tell you that again, that’s a process we’re going through. And we’ll – probably we or they will have more to report out to you shortly.

Garen Sarafian – Citigroup Global Markets, Inc.

Thank you.

Operator

Thank you. Next question comes from John Kreger of William Blair. Your line is open.

John C. Kreger – William Blair & Co. LLC

Hi. Thanks very much. Tim, looking beyond Anthem, can you remind us what your rough client mix would be across the book of business? And how do you feel about that? Do you view it as balanced or you think there’s work to do there?

Timothy C. Wentworth – Express Scripts Holding Co.

If you take Anthem out, we have a really nicely-balanced book. I would tell you that taking care of our – particularly – if you look at health plans, because obviously Anthem’s a large health plan – and they’re in multiple lines of business, we’re really, really pleased with the relationship we have with major regional players who need what we do at scale. And so our health plan book to business, both the big national or the big blues names that you would recognize as well as other regional players or niche players that play in just one particular line, whether that’s Medicaid or Medicare, is a very strong book of business that are trying to compete with the big national players and need a partner like us.

From an employer standpoint, that’s sort of a legacy book for us and we’re pleased with it. We think some of the dynamics in the United States today lend themselves to tighter labor markets, and therefore employers looking to continue to have terrific employment conditions, including benefits for their folks, but do it affordably. And so we think that, that strong book is good. And then the middle market continues to be – what defines the middle market anymore for us, and what it would be self-insured in that market continues to grow as the costs have grown. And we have a unique set of solutions for that marketplace as well that again, that book is a strong book that we continue to grow very nicely.

So I really – if I look across the piece, I think that we have a terrific blended book of business. Obviously, the – if you look at the DoD and the federal part, we’re very proud of not only our footprint with the DoD but a number of other federal clients. And we see opportunities to grow that book fairly significantly over the next two to three years.

John C. Kreger – William Blair & Co. LLC

Great. Thanks. And one last thing. You mentioned value-based pricing a few times. Can you just expand a bit on what your strategy is? How broadly is that being adopted by your clients? And do you see it continuing to be sort of indication-specific, or do you see maybe an opportunity to broaden it out across, perhaps, a full population utilization? Thanks.

Timothy C. Wentworth – Express Scripts Holding Co.

So I’ll start, and I’m actually going to – I’ve got Dr. Steve Miller here who can expand a little bit more on the – sort of how what we’re thinking about it in the future. What I would say is this: our enrollment in these programs is amazing. Steve stood up at our Outcomes conference just a couple of years ago and basically asked the crowd, is there anybody that’s going to stand with us if we approach some manufacturers in oncology for some value-based arrangements in a couple of places?

And hundreds of clients immediately texted their support because they didn’t have any partner that was able to do this for them. Their health plans were struggling with this. And we stepped forward. And now when you look at these programs, we have enrollment and inflation protection, for example, of almost 30 million lives. But if you get into the cardiovascular and others, there are over 20 million lives. The newer ones are anywhere from 6 million to 15 million lives. And so – and we’ve got several more in the chamber as well. So we see this as a long-term chassis to continue to not only innovate but also to optimize over time.

And so if you look at cardiovascular, which started with the PCSK9 launch, we’ve now been able to evolve that program as the PCSK9s have expanded their indications to make sure that we provide patient access where it appropriate but also make sure that we do the management of those patients, and then the cost management in the class. But looking forward, we think that is a tremendous chassis. And, Steve, I’ll let you provide any additional color to the question.

Steven B. Miller – Express Scripts Holding Co.

Only briefly add a couple comments, and that is this has been incredibly popular. When we introduced it to the marketplace, very few people could do it. To this day, very few companies can actually do it. They talk about doing value-based contracting. We’ve actually been in the business for several years. As Tim already mentioned, we have over 20 million patients participating every day in our SafeGuardRx programs. Those programs continue to expand.

Glen Stettin in the product area and others continue to add new modules to it. In the coming year, you’re going to see additional modules in multiple sclerosis, in respiratory diseases, two huge categories. And so we think the popularity of this will continue to grow. And when you look at our Drug Trend Report, you can actually see the real impact it’s having on employers’ expenses. So we’re very excited about this area.

John C. Kreger – William Blair & Co. LLC

Thanks very much.

Operator

Thank you. Next question comes from Charles Rhyee of Cowen & Company. Your line is open.

Charles Rhyee – Cowen & Co. LLC

Yes. Hey. Thanks for taking the question. Tim, just want to go back to some of your comments around Anthem here. The way you kind of make it sound is that you’re still open to dialogue here. Can you give a sense – but from what you’re hearing from Anthem, would you say that this is sort of a closed-and-done decision? Or do you think there’s still room for further discussion? And secondly, how often is it that a client doesn’t give an incumbent a look at the RFP? Thanks.

Timothy C. Wentworth – Express Scripts Holding Co.

Sure. When you’re servicing a client as well – I’ll answer the second part of your question – when you’re servicing a client as well as we’re servicing Anthem, it’s unheard of to not have the chance to renew the client, quite frankly. Even when they go out and look at the market, which they’re – which they do. So from that standpoint, to me it’s very unusual. But this is an unusual contract, so I started my remarks with that.

What I would say is – I don’t want to be glib and say go ask Anthem, because I have to take their statements at face value. I mean, obviously, this decision to disclose not only what we make on Anthem but gives you visibility to the core, was not taken lightly. It was taken in the context of a number of conversations that have occurred over the last 90 days, and the last conversation being one where it was very clear that – the last conversation where they reached out to us where it was very clear that they said they were moving on. So let me be clear about that. So I have to take that at face value.

Do I hope – are we going to continue to service their members? Yes. Do I hope that we are – ultimately that they rethink their – at least what they told us? Absolutely. I mean we represent the best choice for them. I frankly cannot imagine how their shareholders can withstand not looking at $3 billion worth of value that nobody else can give them. And I just don’t understand it, and so we remain absolutely committed to serving them, serving their patients. And my door is always going to be open and my phone will always be in my pocket, hoping that I get that call. But you know what? As of this day, it was our responsibility to provide this visibility.

Charles Rhyee – Cowen & Co. LLC

That’s helpful and thanks. And then you talked about – you’ve talked earlier here about the long-term growth, and you talked about 2% to 4% on EBITDA here. When we think down then to EPS, can you give us any sense on where you think sort of the long-term earnings power is here, obviously, with deploying capital, et cetera? Do you think we can maintain sort of a – at least a double-digit earnings growth trajectory? Thanks.

Timothy C. Wentworth – Express Scripts Holding Co.

Yes. Obviously, we aren’t giving you EPS guidance today. But I can – anyone that knows me or knows our board knows that we’re very aligned on setting and achieving high targets. And we – listen, it’s obvious. You can model it out. Over the next three years, we’re going to produce a tremendous amount of cash which we will deploy very thoughtfully. And from where I’m sitting, I’ll leave it to you to model. But we would be targeting something that is in the double digits.

Charles Rhyee – Cowen & Co. LLC

Great. Thanks a lot.

Operator

Thank you. Next question comes from Ricky Goldwasser of Morgan Stanley. Your line is open.

Ricky R. Goldwasser – Morgan Stanley & Co. LLC

Yes. Hi. Good morning and thank you for taking my question. On the first one, can you help us frame the opportunity to achieve cost savings into context of the Anthem contract? So how should we think about SG&A cost associated with it? What percent of total company SG&A are you allocating? I mean should we assume SG&A’s allocated equally across all your customers, or is the SG&A spend towards the Anthem contract is lower because they don’t use mail, or they don’t use your national formulary as much?

Timothy C. Wentworth – Express Scripts Holding Co.

So, Ricky, I’m going to let Eric answer, but I want to actually remind everyone, because I recognize cost allocation is pretty important to us. We’ve got the DoD as a client, and they have a very detailed requirement around cost accounting that we have implemented a number of years ago. It was right when I joined here that we actually kind of took that to the next level. So I’ll let Eric actually answer your question, but I think it’s important to note that we have a great team in our finance group here and our legal group that’s spent untold hours making sure that we’ve thoughtfully allocated our cost as best as possible so that what we gave you was a reliable set of numbers that we could then begin quarter-to-quarter to share with you.

But in terms of your specific question, I’ll turn it over to Eric to talk about the specific kind of proportionality.

Eric R. Slusser – Express Scripts Holding Co.

Yes, and so we’re not going to get into the exact percentage. As Tim mentioned, and I mentioned before, this is a very sophisticated process we go through. Nothing was changed. It’s been reviewed, and again, as Tim mentioned, when you have government clients, anybody that has ever contracted with them, you know what you have to go through in cost allocation. So all of that has been reviewed in the past. I will tell you that their allocation per RX is slightly under our core allocation.

And then as it comes to cost reduction, we have various programs that we have begun to look at our costs over the next three years with a mind of reducing SG&A. We will keep you updated as we progress throughout the year. We’re not yet ready to roll-out exactly what our commitments are going to be, but as we progress, it is our intent to do that.

So again, very, very cost-focused. Focused on theirs, and again, with the mind-set when we get out to 2020 and 2021, subject to what happens, we know we have some fixed cost absorption that we have to be prepared to absorb.

Ricky R. Goldwasser – Morgan Stanley & Co. LLC

Okay. And then, Tim, the health plan business obviously is an important strategic business for you. Recently you highlighted also that Part D is an important growth area for Express. If you do end up losing Anthem, how do you rebuild your managed care presence and your commitment to growing that Part D business?

Timothy C. Wentworth – Express Scripts Holding Co.

Sure. Well we start with the fact that, again, as I said, we’ve got a terrific group of clients beyond Anthem, and we’ve been focused on helping the m grow in their markets. And they would expect to continue to see us do that, and we will double-down on helping those clients grow in their markets. That’s the most important thing.

But secondly, listen, there are a number of large and fairly large health plans that need first-class PBM services. Not going to speculate how things are going to shake out over the next couple of years, but we see a number of opportunities to be a valued partner for national or regional health plans, either as a full-service PBM or again, we have seen great success in being able to sell to the marketplace key aspects of our overall scale to help them then achieve their objectives.

And so I think what you would expect is that over time we’re going to be looking at all of those opportunities. I mean, our Blues plans, we’ve got decades of experience with some of our Blues plans and we have built an entire organization around understanding their brand, enhancing their brand, helping them build their brand. And I think there is more opportunity there as, again, we look at helping them grow in their marketplaces, particularly as health care reform evolves.

I can’t imagine the challenge today of running a health plan, and having a partner like us that can at least take the evolving pharmacy component to providing care to the folks that are today in the marketplace, but as that marketplace changes, positions us really, really well. Our technology, our single platform, all those things we think makes us a very attractive partner.

Ricky R. Goldwasser – Morgan Stanley & Co. LLC

And then, just a last clarification on the retention rates. I think you talked about 95% to 98%. So if you can just remind us of the methodology? Is it retention rates as a percent of revenue? If so, does that also include Anthem, or is it a percent of scripts?

Timothy C. Wentworth – Express Scripts Holding Co.

It’s a percent of scripts. And it’s a – we’ve had the same methodology for years. Yes, it is a percent of scripts.

Ricky R. Goldwasser – Morgan Stanley & Co. LLC

And it includes Anthem in it?

Timothy C. Wentworth – Express Scripts Holding Co.

That’s correct.

Ricky R. Goldwasser – Morgan Stanley & Co. LLC

Okay. Thank you.

Operator

Thank you. The next question comes from Robert Jones of Goldman Sachs. Your line is open.

Robert Patrick Jones – Goldman Sachs & Co.

Thanks for the question. I guess, just to get kind of back to thinking about the core business, Tim, in a world beyond Anthem. It looks like core profitability ex-Anthem still screens a bit higher than your closest peers. So I guess, as we try to think about the absorption of these fixed costs that won’t be able to be eliminated, if and when Anthem does roll off, could you maybe just give us some context around – looks like the core business, ex-Anthem, what you’re providing today, looks like it’s around $4.10 EBITDA per claim. Is there anything directionally you can help us think through as far as what that number would look like once you’re fully exited from Anthem?

Timothy C. Wentworth – Express Scripts Holding Co.

Well, I mean, we’ve shown you what the core is without Anthem. And what I would say about our – let me say this about our core EBITDA per script. First of all, we have a long history that predates me as a CEO here of managing costs extraordinarily well. And so, one component of being better than the other guys at EBITDA per script is managing costs really, really well. I said that, when we had a competitor that no longer exists, that was out there talking about how they could do it for – they were making $2 a script to our, at the time, I think $3.50. And the answer then, which proved out to be correct was, they’re making $2 a script not because they’re selling themselves cheaper, but because their cost structure is more. And that we could beat their price points and actually have better EBITDA because of our efficiency. That continues, and that will continue to be a hallmark of our company.

But I think the other thing that’s important – and you saw it in the 2015 to 2016 jump in profitability of the core – is that in 2016, we had a great number of levers in our hands that we told you, in 2017, some of those are not in our hands. But when we look forward the next three to four years, they come back into our hands. Retail, big negotiations. We had a Walgreens negotiations last year. Our SafeGuardRx programs, last year was a banner year for launching those.

We don’t have quite as many we’re launching this year, and we pulled a lot of enrollment into last year by virtue of client interest. And so what you saw in 2016 was that the EBIT grew over 6% in the core. To me – and by the way, clients’ drug spends – or drug trends, surprisingly to some, but not to us, dropped 27%. And we saved our clients billions and added a couple hundred million to incremental EBITDA, particularly if you factor out cost savings that also contributed to our EBIT growth in 2016.

So, when I look at that, that says, wow, your core model performs particularly well when you align with clients, you drive down their costs, you launch the kind of programs that get the kind of enrollments we saw. And when we look forward, we see tremendous opportunities to do that. And so I fully expect that you will see moderate growth in EBITDA per script in the core as a result of us continuing to innovate, do the things Steve and Glen are doing, and that clients need.

Robert Patrick Jones – Goldman Sachs & Co.

That’s fair. And then I guess, just, Tim, I know you’re not giving EPS guidance, but obviously having the goal of double-digit. Just to be clear, that would be reflective of the company in its entirety over the next three years, including any residual profit you’ll be getting from Anthem. Is that right?

Timothy C. Wentworth – Express Scripts Holding Co.

I would say that’s right.

Robert Patrick Jones – Goldman Sachs & Co.

Great. Thanks so much.

Operator

Thank you. Next question comes from Brian Tanquilut of Jefferies. Your line is open.

Brian Gil Tanquilut – Jefferies LLC

Hey, Tim. Just to follow up on that last question from Bob on pricing and EBITDA per script. So how do you address investor concerns about what’s seemingly becoming a more competitive environment, with Prime and Optum emerging as more aggressive players? And tying that with EBITDA per script visibility that you just provided to the Street and to your clients today. So, if I’m a client sitting on the sidelines seeing this EBITDA per script, how do you calm those clients down and say that we’re not over-earning on your book? And how do you address investor concerns about that?

Timothy C. Wentworth – Express Scripts Holding Co.

So, first of all, even the core EBITDA per script we showed you, I need to point out, includes some significant services business that our – through our DFO (58:07) formulary business, similar to what we have with Catamaran. And so again, some of that backs out.

But I can tell you, clients, by and large – I don’t think I’ve ever had a consultant say to me, your EBITDA per script is too high compared to somebody else’s. They look at their clients’ pricing compared to the marketplace. They look at their clients’ pricing and outcomes based on commitments we make, risks we take, programs we enroll them in, drug trend results. That’s the stuff, quite frankly, that either causes you to win or lose a client.

Now that being said, from my perspective, we always have to continue to drive at our cost structure and so forth. And I think there was a study that came out from Dezante (58:44) just a couple months ago that showed a six to one return on PBM services to payers, if you looked at what they were paying all in. I can tell you that our clients are seeing that or better, and our job is going to be to continue to demonstrate our value. And as long as we demonstrate our value, I’m not concerned about what our EBITDA per script is.

Brian Gil Tanquilut – Jefferies LLC

No, I appreciate that. And just a follow-up for Eric. So if you’re committing 30% of operating cash to debt pay-down over the next three years, I mean the math just basically says we should expect a lower level of buybacks over that same period, right?

Eric R. Slusser – Express Scripts Holding Co.

Yes, based on that, it takes on average of about that 30% to get us down to around a two times leverage in 2020. So, that’s the math. It may be a little more or less in any one year, but on average, that’s what it will take. And the remainder, as I said in my prepared notes, subject to internal investment and M&A, the rest will be committed to share buybacks.

Brian Gil Tanquilut – Jefferies LLC

Hey. Eric, any levers you can pull to push the cash flow generation up a little bit near-term?

Eric R. Slusser – Express Scripts Holding Co.

Materially, probably not. We continue to work, from a working capital perspective, to maximize the working capital aspect. But absent that, it’s growth in the business, growth in EBITDA, that will be the main driver.

Brian Gil Tanquilut – Jefferies LLC

Got it. Appreciate it. Thanks, guys.

Timothy C. Wentworth – Express Scripts Holding Co.

Operator, we’ll take one more call, but I know we’re at the bottom of the hour.

Operator

Okay. Thank you. The next question comes from Anthony Vendetti of Maxim Group. Your line is open.

Anthony V. Vendetti – Maxim Group LLC

Thanks. I was just wondering if you could talk a little bit about the beginning of a contract with a new client. And if you want to talk about Anthem, that’d be helpful. But obviously in the beginning, there’s a lot of up-front costs, which you alluded to in your written comments on the release last night.

So I know that $2.2 billion is the adjusted EBITDA number for Anthem in 2016. But can you talk about the first couple of years? Was it negative in the first year? Or what was that number? And then, in the second year? And when did it officially become profitable for you?

Timothy C. Wentworth – Express Scripts Holding Co.

Well, so it underperformed right out of the chute in terms of the volume they delivered. I can tell you I wasn’t here at that time, so I can’t speak to the – some of the conversations that would have been had with them, but I know it underperformed. They began in effect for the first probably until after the Medco acquisition, this thing underperformed the financial assumptions that the board and the leadership team of this company committed to in order to write the $4.7 billion check, which turned out to be a very good investment for them and their stock.

Our investment looked a little more risky in those early years because of the poor volume and the poor growth. What I would tell you is, after getting the Medco deal done, it allowed us to rationalize our infrastructure aggressively, which we did. It also allowed us to go back out to the supply chain, and even in the non-tightly managed business gain additional leverage. And the way that their contract was written, we were able to gain share as rebates increased and so forth in a way that finally began to turn this thing around just in the last couple of years.

And so from that standpoint, again, and this is very different. Let me just, again, reemphasize. I can’t – there’s no other contract we have that’s remotely similar as it relates to those dynamics, because we typically, you know, from that standpoint, don’t give up front money at all. We don’t buy a functioning, or in this case a sanctioned pharmacy to operate it. We typically come in and provide services. So this was very, very different.

And so, again, the management team at the time at Anthem, again, I can’t speak for them, but I believe they didn’t see the generic discounts increasing as aggressively as they have in the market because of us and others doing our job. I believe they didn’t see brand inflation being as high as it was in the outer years. And so I believe that, you know, there’s certainly some sound bites that they thought they took some pretty good risk on this deal and they were going to be winners.

You know what? I think they were winners. We got them back in business. We gave them a great pharmacy product. We’re aligned like heck with them. We’ve taken great care of their members. We’ve done that without them enrolling in some of our most tightly-managed programs, some of those they are now more recently enrolling in, such as tightly-managed formularies. And in the end now, we’ve got a snapshot, but when you see the movie, you see that this thing, you know, required a lot of work on our part to get to the point where it is today. And obviously, I’d love nothing more than to have them call me back and give us the chance to service their patients over the long-term, but that’s not my decision to make.

Anthony V. Vendetti – Maxim Group LLC

It seems like certainly that would at least make sense for them to consider. Okay. Thank you very much.

Timothy C. Wentworth – Express Scripts Holding Co.

I want to thank everybody for your interest and for your support today. Obviously it’s been a long year and a bit. We’ve talked a lot about trying to improve our disclosure to you. Hopefully what you see today and moving forward is a real commitment to our shareholders to growing our core and to making you look really smart by being investors in our company. So thank you.

Operator

Thank you. That concludes today’s conference. Thank you all for participating. You may now disconnect.

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